Ghana’s public debt crisis: Lessons for the present and the future

A Research Paper by Dr. Richmond Atuahene (Banking Consultant), Isaac Kofi Agyei (Data & Research Analyst) and K.B Asante (Chartered Certified Accountant)

First, here are the research findings:

Research findings and discussion on the effect of the public debt crisis on Ghana's economy

The public debt crisis negatively impacted the banking sector and the economy at large. Banks and other financial institutions were major holders of government bonds which did impact negatively on their balance sheets and financial stability was put at risk as the government decided to restructure their assets of medium maturity with a long-term maturity period. Other channels may also be at work and feedback-loop effects may take place.

Furthermore, banking crises are usually resolved through the injection of fresh capital by the national governments through the Financial Stability Fund and thus the problems in the banking sector may end up as a further liability for the government. While a sovereign debt crisis led through multiple channels simultaneously – thus making the chronological reconstruction of the events – the outcome is a contraction in output, a loss in the number of employees, a weaker financial system, and, more generally, a decline in living standards.

Heavy public debt service obligations resulted in a large risk premium on interest rates, periodic bouts of financial market instability, and a crowding out of bank credit to the private sector, all of which had contributed to a very low potential growth rate. For Ghana’s domestic debt reduction to be successful, must be mainly driven by decisive and lasting (rather than timid and short-lived) fiscal consolidation efforts focused on the reduction of government expenditure, in particular, cuts in social benefits, government flagship programs and conscious reduction of public sector wages and compensation, without any fiscal consolidation.

To reduce public debt to 55% of GDP by 2028, it will also be necessary to continue the ambitious fiscal consolidation strategy and structural reforms set by the IMF, namely an adjustment of 5.1% of GDP over the 2023-2026 period. While we conclude that there was a reduction in the net present value of debt servicing costs does not mean that more money is available now for Ghana to spend. The reduction meant that future debt servicing costs were reduced compared to the current baseline during the next decades and, therefore, Ghana would have to spend less on financing its debt in the future.

First, domestic debt exchange in the medium to long term tends to reduce uncertainty and affects the market confidence in the country and its policies, thus plummeting future economic growth, however, debt reduction has reduced capital inflows which has weakened confidence in the government structural reforms and the new policies introduced recently. On the positive, the country’s successful completion could be an endorsement by the international community including the IMF, World Bank, and other international donors that the country is pursuing sound macroeconomic policies and structural reforms. The country’s default on the international capital market has prolonged the time that Ghana could facilitate early access to the international financial markets.

Finally, restructuring episodes have also triggered interest rate hikes, thereby increasing the cost of banks’ funding and affecting their income positions. Together, these factors impaired the financial position of domestic institutions to such a degree that financial stability has been threatened and pressures for bank recapitalization and official sector bailouts have increased.

A final observation is that debt restructuring in Ghana has had cross-border implications. Nigerian and South African banks and financial institutions were exposed to sovereign risks in Ghana that underwent restructuring transmitted the shock across borders, either directly by loss of value of government securities or indirectly through their exposure to the banking sector of that country.

Debt reduction has created fiscal space which means the availability of additional resources that can be used in desirable government spending (or tax reduction). The fiscal space is used to enhance medium-term growth and finance this growth from future fiscal revenue. In fact, there are different channels through which a county can create or enlarge its fiscal space.

As businesses including SMEs have struggled to access the funds they need to grow and hire workers, the unemployment rate in Ghana has dramatically increased. This lack of investment has also led to an increase in the cost of borrowing for the government and local businesses, making it more difficult for them to finance their operations and invest in growth. In terms of the effects on the domestic bond market and local financial institutions (banks, insurance, asset management companies & pension scheme agencies), domestic debt exchange had both direct and indirect effects. The direct effect was that the restructuring resulted in a loss of value for domestic bondholders. This has led to a decrease in demand for Ghana government bonds and a decrease in the overall value of the bond market.

This has led to a decrease in the availability of credit for local businesses as well as higher costs of credit and households, thus hindering economic recovery and growth. Ghana’s balance of payments is expected to continue to deteriorate further in 2024, on the back of continued capital outflows, and the continued Cedi depreciation because of a decline in inward remittances, low returns on extractive industries like gold, and poor cocoa syndication loans of US $ 800 million lowest recorded over the past two decades.

Reputational costs include market exclusion and increased borrowing costs for the country. creditors might refuse to purchase the debtor country’s bonds following debt restructuring. Future Creditors impose this punishment on the debtor country like Ghana. Creditors might purchase the debtor country’s bonds following debt restructuring but request a premium (i.e. a higher interest rate to compensate for the risk of future default or other restructuring).

The recent inability of the cocoa board and the government to pay some holders of cocoa bills who did not participate in the Cocoa Bills Exchange program showed how the government is bankrupt, and investors have lost confidence in the investment climate. The DDEP has had a significant impact on investor confidence in the fixed-income market in Ghana. The sudden loss of value for existing bondholders has led to concerns about the safety of government-issued securities and has shaken investor confidence.

Investors who previously considered government-issued securities as risk-free investments may now be more cautious and may require a more thorough assessment of risks before investing in fixed-income securities. The decline in investor confidence may also have broader implications for the fixed-income market in Ghana. Reduced demand for government-issued securities may lead to higher borrowing costs for the government, as they may need to offer higher coupon rates to attract investors. This could increase the cost of debt servicing for the government and impact the country's overall fiscal management. Additionally, lower investor confidence may also result in reduced liquidity in the fixed-income market, as investors may be hesitant to buy or sell securities, further affecting market dynamics.

Domestic debt exchange through debt reduction which included principal haircut and coupon rate reduction has triggered a decline in domestic investors’ confidence in governments’ creditworthiness and raised doubts about the sustainability of government finances. As the country has reduced the value of its bonds, the domestic banks have had a marginal reduction in the number of assets on their balance sheet and possibly insolvency.

Due to the growing interconnectedness of the country’s financial system, a bank failure couldn’t happen in a vacuum. Instead, there is the possibility that a series of bank failures could spiral into a more destructive ‘contagion’ or domino effect’. Ghana’s debt reduction has already affected capital spending and recurrent spending other than wages and transfers have been cut to levels that hamper potential growth and the provision of basic public services. On the revenue side, an increase in already high tax rates levied on narrow bases has contributed to a dramatic further deterioration in already low current tax collection rates.

The yield curve has inverted—meaning short-term interest rates moved higher than long-term rates—and could stay inverted through 2023 and 2024. This has signaled an imminent recession or slowdown in the Ghanaian economy. An inverted yield curve is when shorter-term notes pay higher effective yields than longer-term bonds. The yield curve is considered “normal” when longer-term bonds yield more than shorter-term ones. In the post-DDEP era, the government has been borrowing at the money market at the rate between 22% and 33.7% while the government bond coupon rate is quoted at 9.1% per annum. The inverted yield curve has been viewed as an indicator of a pending economic recession in the country.

When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor and that the yields offered by long-term fixed income will continue to fall. The existing bond market was considered a major prerequisite to sustainable debt dynamics as well as improved growth prospects by the financial sector and the wider public. However, the DDEP has not managed to lower signal rates during the post-DDEP era, as the market interest rates on short-term government bills have risen to historically high levels and thus created an inverted yield curve and remained unstable.

This would then threaten future economic growth and development. Indeed, the present economic challenges may compromise the ability of individuals and businesses to pay their loans which would heighten the impairment levels. According to the Bank of Ghana, MPC March report 2024 on the banking sector NPLs stood at 24 percent of total loans thereby creating systemic banking crises that could be highly disruptive events that could lead to sustained declines in economic activity, financial intermediation, and ultimately in welfare ( Laeven and Valencia, 2018).

Both the Ghana budget and its debt might seem well manageable in the coming years. However, the debt trap caused a long shadow, thus causing lingering challenges and risks. Future higher interest rates, budgetary pressure, and weak growth can lead to a higher debt-servicing burden and refinancing needs. Keeping up fiscal strength and, first and foremost, promoting growth, are the best ways for Greece to address these challenges.

According to Bloomberg Cocoa Board received the funding at an interest rate of almost 8% per annum. Ghana secured its annual loan to pay for cocoa purchases at the highest interest rate on record, following this year’s debt restructuring of the West African nation’s obligations that ruined investor appeal. International banks have pledged to lend industry regulator Ghana Cocoa Board $800 million for cocoa purchase from farmers at almost 8% per annum with the terms of the deal. It is the costliest syndicated facility the board has received since the annual loans started in 1992-93, the people said, asking not to be identified because the transaction isn’t yet public. The board, also known as the Cocoa Board, has previously obtained loans from investors at better rates than the government at an average rate of 2%.

In 2023, the negotiations have been complicated by the country’s debt restructuring that was needed to unlock a $3 billion government bailout from the International Monetary Fund. The country’s default for both domestic and external debt in 2022 has caused collateral damage on other institutions – contagion –changes the interpretation of default costs but does not change the answer; except for one key complication: it implies that there may be a second instrument – transfers across institutions – as an alternative to default. The recent inability of the government and the Cocoa Board to settle some of the holders who did not participate in the Ghana Cocoa Bill Exchange program has caused massive collateral damage to the credibility of both the government and the Cocoa Board.

12. The study has identified both direct and indirect channels through which a large country’s external debt has affected productive investment negatively. The debt overhang has reduced the incentive to invest in Ghana as a result of higher domestic real interest rates due to impaired access to the international capital market after the country defaulted on domestic and external debt in December 2022; and also, as a result of low profitability due to economic downturn in 2022 and the decreased in public investment that was complementary to private investment.

For 2019, the authorities project the financing shortfall for the sector to be at least US$1 billion (1.5 percent of GDP), which they plan to partially finance off-budget. Partial payment arrangements may be insufficient to stave off more formal approaches by IPPs to collect amounts due. Absent measures to address the sector’s financial problems, the accumulated cost to the government, including current arrears, could reach US$12.5 billion by 2023. The burden is so large that all earnings pay off existing debt rather than fund new investment projects, making the potential for defaulting higher. The findings confirmed that debt overhang has led to under-investment in the Ghanaian energy sector.

Debt overhang could be alleviated if the various creditors like WAPCo, Sunon Asogli Power Co. Ltd, Bui Power Authority, and the Government of Ghana manage to renegotiate their contracts and restructure the balance sheets. The debt overhang is also currently being experienced by Bui Power Authority because of the inability of the Electricity Company of Ghana to pay for power supplied and this could cause underinvestment by the various power generators in the country. ECG (and the central government) are counterparties to several take-or-pay contracts with independent power producers. The contracts require payment for contracted volumes of electricity even if the electricity is not consumed (take-or-pay charges).

When ECG expenses the charge, its equity is reduced, and its liabilities (accounts payable) increase. The reduction in equity lowers the value of the government’s investment in ECG. The actual payment of the claim by ECG or the government does not alter the public sector’s net worth. The unresolved external commercial debt including that of a euro-bond worth US$13.6 billion is still creating a debt overhang in the country. From the unresolved debt overhang of IPPs. the country could experience power outages popularly known in Ghana as ‘Dumsor’ could negatively impact the country’s economic recovery.

The higher interest rates on treasury bills also affect the country’s banking institutions thus creating an adverse selection problem. As interest rates rise more conservative, risk-averse borrowers shy away from the credit market. A larger proportion of the people applying for loans are thus those who are willing to take risky bets. The likelihood of default increases and so therefore does the banks’ proportion of non-performing loans.

Credit to the private sector has contracted in the third quarter of 2023 as Banks continued to deploy their resources towards treasury bills as opposed to the extension of credit facilities in response to the increased risks associated with lending due to the deteriorating macroeconomic conditions and the impact of the domestic debt exchange program thus confirming the crowding out hypothesis. This has threatened future economic growth and development. Indeed, the present economic challenges have compromised the ability of individuals and businesses to pay their loans which impacted negatively on the non-performing assets of the banking sector.

The recent Bank of Ghana report on the increases in the non-performing asset ratio from 15% in 2022 to 20% in 2023 confirmed the debt overhang hypothesis. Weaker economic activity has translated into higher non‐performing loans by both firms and households which could increase bank distress through balance sheet and liquidity effects. The 2022 currency depreciation has exacerbated non‐performing loan volumes through currency mismatches. From a citizen’s viewpoint, the numerous taxes introduced in the 2023 budget by the Government meant that high debt means higher future taxes and/or reduced social benefits – and when combined with reduced corporate activity – less employment.

The country’s banking system exhibited significant losses resulting in a share of nonperforming loans above 24 percent of total loans thus indicating that the sector was in crisis. Because of the way they affected balance sheets and bottom lines, debt overhangs have distressed entities including banking institutions in different ways. The decreased domestic investment has a rippling effect on the local economy. As businesses including SMEs have struggled to access cheaper funding to grow and expand their businesses and impeded the hiring of workers, the unemployment rate in Ghana has dramatically increased.

This lack of investment has also led to an increase in the cost of borrowing for the government and local businesses, making it more difficult for them to finance their operations and invest in growth. In post-DDEP, according to the Bank of Ghana MPC report (2024), banking sector loans and advances grew by a paltry 1.77% year-on-year to GH74.8 billion (+GH1.3 billion). Private sector credit also increased by 5% to GH68.8 billion (+GHS3.3 billion) but contracted by 14.7% to GH331.1 million in real terms.

According to recent reports, Ghana enacted legislation for the 2024 Budget on 29 December 2023, including the Value Added Tax (Amendment) Act, 2023 (Act 1107), the Excise Duty (Amendment) (No.2) Act, 2023 (Act 1108), the Stamp Duty (Amendment) Act, 2023 (Act 1109), the Exemptions (Amendment) Act, 2023 (Act 1110), and the Income Tax (Amendment) (No.2) Act, 2023 (Act 1111).

A VAT flat rate of 5% is introduced on the following, without a deduction for input tax: the supply of a (commercial) immovable property for rental purposes, other than for accommodation in a dwelling or a commercial rental establishment; and the supply of an immovable property including land by a real estate developer; A new penalty equal to 30% of the VAT amount due is introduced for appointed VAT withholding agents that fail to withhold and remit VAT by the 15th of the following month (7% withholding on standard-rated invoices); VAT exemptions are revised, including the VAT exemption is removed for imported textbooks, exercise books, newspapers, publications, and charts (locally produced remain exempt), as well as architectural plans and similar plans, drawings, scientific and technical works, periodicals, magazines, trade catalogs, price lists, greeting cards, almanacs, calendars, diaries and stationery, and other printed matters.

VAT zero-ratings are revised, including the VAT zero-rating for locally manufactured textiles by approved manufacturers the VAT zero-rating for locally manufactured textiles by approved manufacturers is extended to 31 December 2025; the VAT zero-rating for supplies of locally assembled vehicles under the Ghana Automotive Development Programme is extended to 31 December 2025; and The stamp duty rates are revised, including new fixed rates from GST 18 to GHS 896.30 and ad valorem rates of 0.25% to 0.5%; and the individual income tax brackets/rates are amended as follows: up to GHS 5,880 - 0%; over GHS 5,880 up to GHS 7,200 - 5%; over GHS 7,200 up to GHS 8,760 - 10%; over GHS 8,760 up to GHS 46,760 - 17.5%; over GHS 46,760 up to GHS 238,760 - 25%; over GHS 238,760 up to GHS 605,000 - 30%; over GHS 605,000 – 35; The measures of the amendment acts generally apply from 1 January 2024, government introduced taxation on lottery operations and winnings from lottery. The gross gaming revenue from lottery operations, including betting, gaming, and any game of chance is taxed at an income tax rate of 20%.

Payments in respect of winnings from the lottery are subject to a final withholding tax rate of 10%. vi) Increase in the upper limits of quantifiable motor vehicle benefits. The upper limit of motor vehicle benefits to be included in the employment tax computation has been increased as follows: Driver and vehicle with fuel - GHS1,500; Vehicle with fuel - GHS1,250; Vehicle only - GHS625; and Fuel only - GHS625. vii) Revision of the personal income tax bands and rates: The personal income tax bands and rates for individuals have been revised to align with the 2023 minimum daily wage. There is an introduction of an additional tax rate of 35% on income exceeding GHS600,000 per year.

The levy is applicable for the 2023, 2024, and 2025 years of assessment. It is payable quarterly and due on 31 March, 30 June, 30 September, and 31 December of the year. The above new taxes introduced by the government have affirmed the debt overhang hypothesis. Excessively high rates of tax exact a high cost in terms of lower private investment and growth. They reduce the incentive to invest because the after-tax returns to investors are lower. In addition, the cost of compliance with the administration of taxes can be high.

The new myriad of taxes introduced in the 2023 and 2024 budget statements has been impacting negatively on the private sector, especially the SMEs. The recent 21% value-added tax for residential customers of electricity is one of the nuisance taxes introduced in the 2024 government budget statement which imposed hardship for individuals and households in an already bad economic condition. Instead of the government improving electricity transmission losses by 30%, the government has decided to impose a 15% consumption tax this will likely affect the country’s growth targets as the move is expected to increase the the cost of operations of SMEs and slow down production and thus worsen the already bad unemployment situation in the country.

17. The country’s debt crisis has affected and discouraged private investments depending on how the government has raised the fiscal revenue necessary to finance local debt-service obligations (an inflation tax and excessive government expenditure that has contributed to increased domestic inflation that also discouraged private investment). These combined effects discouraged private investment and thus hurt national output growth. As part of domestic debt restructuring the country has experienced debt overhang which has led to the recent increase in taxes towards generating adequate revenue to settle domestic creditors, thus discouraging investments due to a sudden increase in recent taxes. Thus, an indebted country like Ghana retained only a fraction or nothing from domestic output and export revenue. This implied that the accumulation of debt has hampered economic prosperity through tax disincentives. Tax disincentive denoted debt overhang has impaired investments as potential investors foresee a possible tax increase on future income in a bid to repay the borrowed funds. Excessive taxes on production are hampering the growth and competitiveness of domestic businesses. Taxing production excessively has already affected local industries and worsened the already high unemployment situation in the country.

As such, the debt overhang theory posited that borrowed funds be well invested in productive sectors capable of generating adequate revenue for repaying the debt and financing domestic investments but that is not the case in Ghana because of higher unplanned government expenditures. In those developing economies such as Ghana with heavy indebtedness “debt overhang” was considered to have led to cause of distortion and slowing down of economic growth as the World Bank has revised Ghana’s gross domestic product growth in 2023 to 1.5% from earlier the 1.6%. Ghana’s economic growth has slowed down because it lost its pull on private investors. Additionally, servicing of debts has exhausted so much of Ghana’s revenue to the extent that the potential of returning to growth paths is abridged. The theory asserts that if there is a probability that Ghana’s future debt will be more than its repayment ability, then the anticipated cost of debt-servicing can depress the investment. However, the extent to which investment is discouraged by debt overhang depends on how the government generates resources to finance debt service obligations.

18. Debt overhang has bound the economy as is in a downturn since investment returns are low. As a result, high levels of debt have created multiple equilibria in which the profitability of investment varies with economic conditions. showed that debt overhang has distorted the level and composition of investment, with a severe problem of underinvestment for long-lived assets. A significant debt overhang effect is found, regardless of Ghana’s ability to issue additional secured debt. With the presence of debt overhang, the excess debt has acted as a distortionary tax, given that agents assume that a share of future output could be used to repay creditors and therefore decreased or postponed investment, thus hindering economic growth, debt on investment as the country faced with high default risk in future. The Ghana Investment Promotion Center (GIPC) has disclosed a financial deficit in its operations over the past two years. Foreign Direct Investment inflows to Ghana fell by 39% in 2022 to $ 1.472 billion, as greenfield projects remained flat while international project finance and Mergers and Acquisitions deals declined. Ghana also experienced a further decline in foreign direct investment as the Ghana Investment Promotion Centre (GIPC) recorded a 16 percent drop in investment projects in the first half of 2023.

19. The crowding-out effect in the public debt crisis experience seemed to be occurring as the government has been borrowing from the money market rate surged from 22% per annum in 2022 to a high of 33.7% per annum in 2023 but the one-year Treasury bill declined to 30% per annum which have affected the private sector seeking funds to expand as well as grow their businesses to expand the economy. As the government continued to borrow from the domestic market at higher prevailing rates between the pre-DDEP era of 22% per annum and 33.7% per annum post-DDEP period has caused a serious crowding out of the private sector which is said to be the engine of growth. This postulated that Ghana’s economic stability could be undermined by debt burden if debt service cost weighs down excessive public expenditures. This implied that public investments are crowding out as rising national debt obligations consume a large proportion of government revenue. The current situation where the government is currently borrowing from the short-term end of the money market through treasury bill rate has pushed from 22% last year to 33.7% in October 2023 thus crowding out the private sector to slow down the expansion and growth of Ghana’s economy.

As the government continued to waste resources through loose public expenditures such as the government flagship program as ‘one district, one factory’, the entire economy faced a resource shortage, thus preventing sufficient private-sector investment. As the crowding-out mechanism has triggered, private-sector capital accumulation has consequently become insufficient, which led to economic stagnation. The findings reveal that government borrowing from domestic banks results in more than a one-to-one crowding out of private credit in Ghana, implying then that government borrowing from banks is not the sole reason for crowding out private sector credit but that banks’ preference to invest excess liquidity in a low risk/high return investment by holding securities and treasury bills also add to this crowding out.

The theory of crowding out has suggested that as the government increased its spending, it has thus increased the demand for goods and services, which has led to the current higher interest rates and higher inflation in the country. A crowding-out has caused a rise in real interest rates in the post-DDEP era. By the crowding-out effect, a decrease in public investments had transmitted to a reduction in private investments due to the complementary of some private and public investments. In as much as extreme national debt can result in liquidity constrain by crowding out domestic investments in the debtor country; reliance on debt is a necessity for unindustrialized economies at their early stage of development since available financial resources at that phase could be inadequate to enhance the needed growth and development.

As increasing public financing needs push up government debt yields, this has further caused a net flow of funds out of the private sector into the public sector, and this has pushed up private interest rates. In shallow financial markets, especially where domestic firms have limited access to international finance, domestic debt issuance of treasury bills could lead to both swift and severe crowding out of private lending. In most developing countries like Ghana, only large, well-established firms have access to international finance, suggesting that the burden of crowding out fell heavily on small and medium-sized enterprises and rural borrowers.

The higher interest rates on treasury bills have also affected banking institutions in Ghana thus creating an adverse selection problem. As interest rates rise more conservative, risk-averse borrowers shy away from the credit market. A larger proportion of the people applying for loans are thus those who are willing to take risky bets. The likelihood of default increased and so therefore does the banks’ proportion of non-performing loans. The philosophy behind the crowding out effects concept assumes that government debts expend a greater part of the national savings meant for investment due to an increase in demand for savings while supply remains constant, the cost of money therefore increases to make it difficult for the private sector to source funds for production which is expected to be engine of growth. The long-term evidence showed that economic stability has collectively been undermined by indicators of debt burden.

In sum, the confirmation of the lazy bank hypothesis together with the growing government deficit financed mainly from the banking sector poses a few momentous challenges in Ghana with short-run and long-run ramifications. Besides the apparent adverse effect of the observed unsustainable government deficit, this paper has uncovered another serious channel coming from the financial sector, or more precisely the banking sector. As the government issues more debt instruments (ie Treasury Bills) to finance its deficit, banks tempted by the risk-free high return motive shift their portfolio away from risky private loans and opt for lazy behavior characterized by a shrinking overall credit tilted more and more toward government debt-instruments.

This behavior not only limits their exposure toward the private sector, hence reducing private investment, but also affects adversely investment and hence overall growth potential in the future. Also, from the banking sector perspective, although lending to the government has a positive impact on banks’ profitability, it distorts banks’ incentives and the process of financial deepening since banks earning relatively risk-free returns from the government have little incentive to develop the banking market. This double-edged sword is fatal to the stance of the economy, especially in a period of rather gradual economic recovery.

The report indicated that the severe economic crisis in 2022 characterized by soaring inflation rates had devastating consequences on food security and poverty in the country. According to the World Bank country’s “international poverty” rate was estimated at 27% in 2022, an increase of 2.2% points since 2021. Ghanaian households have been under pressure from rising prices in utilities, persistent depreciation of the local currency against all major trading currencies, high inflation, and slowing down economic activities. Poverty has been projected to worsen between 2023 and 2025, increasing to nearly 34% (international poverty line) by 2025, consistent with a muted outlook on growth in services and agriculture and rising prices which are outpacing the income growth of those at the bottom of the distribution.

Poverty has many dimensions and is characterized by low income, malnutrition, ill health, illiteracy, and insecurity, among others. The impact of the different factors could combine to keep households, and sometimes whole communities, in abject poverty. (World Bank report (2023 on Ghana’s poverty levels).

However, the Bank of Ghana’s ability to be able to continue its other functions, such as operating payment systems, providing emergency liquidity support for the banking system, or conducting its corresponding banking operations could be compromised. Depending on its ex-ante equity position, any losses on the central bank balance sheet that may result from the DDEP would have to be addressed, including through recapitalization (Liu, Y; Savastano, M & Zettelmeyer, J. 2021).

Another finding revealed the negative effect of the revised DDEP has shifted the massive previous NPV losses (GHS30.7 billion) of the banking sector to Bank of Ghana’s NPV losses of GHS 37.6 billion, in the revised DDEP which has thus reduced the central bank’s ability to (i) manage liquidity in the banking system through open market operations and emergency liquidity support ; (ii) define and implement collateral policy given the decline in the stock of available government securities; and (iii) hold government securities as counterpart to central bank liabilities, such as currency in circulation and commercial bank deposits with the central bank. In the case of the Bank of Ghana, a recapitalization of the central bank by the government (to compensate for the losses from haircuts on its holdings of government securities) may be unavoidable. Bank of Ghana’s liquidity facilities were designed to provide emergency support to banking institutions affected by DDEP and have been key elements of the financial safety net in the recent episode.

IMF country report (23/168) noted that the Bank of Ghana’s Balancece sheet has been impaired by the NPV losses of GHS 37.6 billion because of domestic debt restructuring, the Government and Bank of Ghana would have to assess the impact and develop plans for its recapitalization with IMF technical assistance support. It can be inferred from this study that the public debt crisis harmed economic stability in consonance with the debt overhang, crowding out, and debt reduction effects. In an environment of limited fiscal space by the government, the risk of crowding out of the private sector by the government is real.

They suggested that even if it can be inferred from this study that recent domestic debt restructuring hurts economic stability in consonance with the debt overhang and crowding-out effect structural adjustment programs are put in place by governments of these countries, adverse effects can still be felt on development of general economic performance. Therefore, to accelerate economic growth, developing countries like Ghana must adopt policies that are likely to result in a reduction in the debt burden, reduce the country’s debt overhang and crowding out, and also at least ensure that the rising debt burden does not reach an unsustainable level.

READ FULL REPORT BELOW

Abstract

The present paper examines the issue of Ghana’s public debt crisis, its underlying causes, and lessons for the present and the future. After providing a historical discussion, we show that the austerity of the last four years has been unsuccessful in stabilizing the debt while, at the same time, it has taken a heavy toll on the economy and society. The IMF country report (2022) showed that the public debt was unsustainable as the total public debt stock at the end of 2022 amounted to GH₵546.15 billion, which constituted 88.1% of GDP (105% of GDP with inclusion of key SOEs and allied debts) with debt service to revenue reaching 117% and clearly that public debt was unsustainable; therefore, that the government argued that a bold restructuring of the debt was needed for the Ghana economy to reignite its engine of growth. An insistence on the current policies is not justifiable either on pragmatic or moral or any other grounds. The experience of Ghana in the early HIPC/MDRI period provides some useful hints for the way forward. A solution to the public debt problem is a necessary but not sufficient condition for the solution of current Ghana’s public debt crisis.

Ghana’s high debt meant that a significant proportion of convertible currency was consumed by debt thereby limiting the countries to import goods and services in 2022/2023. Debt service also constituted a considerable share of the budget and so imposed significant constraints on domestic investment. In December 2022, the government defaulted on both domestic and external debt payments, and out of the debt crisis, the government and IMF called for debt sustainability through debt restructuring. The domestic debt exchange (DDE) program, where the stock of the Government of Ghana's debt was to be halved from 105 percent of GDP (including contingent liabilities) to 55 percent of GDP by 2028 was launched, starting with the domestic debt exchange. The result shows excessive public debt had negatively affected the confidence of local investors in the government bonds, and any restructuring of external debt has already caused reputational on the economy and has also depressed foreign direct investment and other foreign capital inflows into the country including international cocoa syndicated loans for 2023/2024.

Another area concern of the public debt is that 2024 happens to be an election year and where Ghana has been noted for some expenditure escalations during an election year. The government must ensure that there are no up-tick unbudgeted expenditures in the upcoming 2024 elections, which could derail the fiscal consolidation. Measures by the government should be tailored towards improving economic recovery by designing policies that will reduce the burden of debt accumulation and reduce the cost of public debt servicing through robust fiscal consolidation.

This could be done in the medium term by enshrining a debt limit or debt cap of 50% of GDP in Ghana’s 1992 constitution to put a brake on unproductive borrowing, improving domestic revenue mobilization, for example instituting adequate property taxes through digitalization, enhancing the debt management process and transparency; avoid excessive borrowing from both domestic and external sources; fiscal consolidation through aggressive public expenditure cuts, limiting public sector wages and compensation increases which constituted the biggest line of expenditures (GH₵44 billion and GH₵66 billion) in both 2023 and 2024 government budget statements respectively, and also the country must make a conscious effort to reduce the endemic corruption which impact on public debt and improving efficiency in funds utilization. A wider agenda that deals with the malaises of Ghana’s economy and the structural imbalance of the country is of vital importance.

Introduction/ Background

Ghana's economic and financial crisis of the last three years has been the most severe crisis that a developed economy has ever experienced in modern history, both in terms of output and employment loss as well as duration. In 2012, Ghana’s debt increased sharply from GH₵35.1 billion or 48.4% of GDP to GH₵122.6 billion or 73.3% of GDP in 2016, indicating an increase of GHC 87.5 million or 24.9 percentage points of GDP in four years. However, Ghana’s nominal debt has increased from GH₵122.6 billion or 73.3% of GDP to GH₵546 billion or 88.1% of GDP in 2022 and further increased to GH₵610 or 72.5% of GDP despite a comprehensive and painful domestic debt exchange program in September 2023.

The situation in Ghana is a testament to the catastrophic effect that excessive borrowing has exerted on an economy and the disastrous consequences on the social fabric as well as high poverty levels. One of the core issues in this contemporary Ghana tragedy has been public debt. When the crisis started in 2022 with a debt-to-GDP ratio of around 100%, it was interpreted by most economists and policymakers as a public debt crisis. The result of these efforts will be a slowdown of the increase in debt and a boost to growth and therefore a decrease in the debt-to-GDP ratio. Foreign debt accumulated rapidly with corresponding interest payments between 2019- 2022, as the country ran into economic difficulties and suspended payments on foreign debt on December 2022, private and public investment collapsed, with total investment to GDP by as much as 5 percentage points.

Ghana registered the largest fiscal deficits in the past decade, which reached its peak in 2020 with an unprecedented deficit of 15.2% of GDP, thus sharply increasing the country’s debt stock and debt service costs, thereby creating enormous budgetary difficulties, the government of Ghana naturally aimed at achieving fiscal consolidation in the original 2022 budget.

In early 2022, elevated fiscal deficits and public debt levels, together with the combined effects of the COVID-19 pandemic, Russia’s war in Ukraine, and global monetary policy tightening triggered a drop in international investor confidence in Ghana, resulting in a loss of international market access. This generated increasing pressures on domestic financing, with the government turning to monetary financing by the central bank, which fed into declining international reserves, currency depreciation, and accelerating inflation.

At the beginning of the year 2022, expectations were that the COVID-19 pandemic-induced pent-up demand would be released to boost growth, but the onset of the Russia-Ukraine war introduced new uncertainties, aggravating the existing pandemic-related supply bottlenecks, and challenging the recovery efforts. High inflation, amid tightening global financing conditions, led to a decline in the real incomes of households, a cost-of-living crisis, and weighed on growth.

In response to the heightened inflationary pressures, most central banks raised their monetary policy rates aggressively. The decisive policy actions resulted in the tightening of global financing conditions, with negative spillovers on capital flows to emerging markets and developing economies. (BOG Annual Report 2022). However, by the end of June 2022, Ghana’s economy entered a full-blown macroeconomic and financial crisis on the back of pre-existing imbalances and external shocks.

Large financing needs and tightening financing conditions exacerbated debt sustainability concerns, shutting off Ghana from the international market. Large capital outflows combined with monetary policy tightening in advanced economies put significant pressure on the exchange rate, together with monetary financing of the budget deficit, resulting in high inflation. These developments interrupted the post-COVID-19 recovery of the economy as GDP growth declined from 5.1% in 2021 to 3.1% in 2022 and further declined to 1.7% in 2023. The 2022 fiscal deficit was well above target at 11.8%.

Public debt rose from 79.6% in 2021 to over 88.1% of GDP in 2022, as debt service-to-revenue reached 117.6%. (IMF country report, 2022) According to BOG annual report (2022) opine that on the domestic front, economic growth slowed down to 3.1 percent in 2022 to 1.7% in 2023 from 5.1 percent in 2021, on the back of weakened aggregate demand and supply shocks arising from the lingering effects of the pandemic and geopolitical tensions. Sovereign credit downgrades by rating agencies over fiscal policy implementation and debt sustainability concerns led to a loss of access to the international capital market which, together with low domestic revenue mobilization, negatively impacted the government’s ability to finance the budget. This prompted the Bank of Ghana to intervene to close the widened financing gap to avert domestic debt default and a full-blown economic crisis.

Despite a healthy trade surplus in the previous year, the balance of payments recorded a deficit of US$3.64 billion on account of significant net outflows in the capital and financial accounts. This led to a drawdown of US$3.46 billion in Gross International Reserves from US$9.70 billion at end-December 2021 to US$6.24 billion at end-December 2022, providing 2.7 months of import cover. The significant drawdown in reserves triggered immense currency pressures and the Bank responded in an agile manner with the innovative Gold for Reserves and Gold for Oil programs, as well as a policy to purchase all foreign exchange arising from the voluntary repatriation of export proceeds of mining and oil and gas companies. The country’s stock of domestic debt at the end of December 2022 was GH¢194.39 billion (31.6% of GDP) compared to GH¢181.78 billion (39.5% of GDP) at the end of December 2021.

The increase in the domestic debt stock in 2022 was because of a GH¢11.75 billion increase in short-term securities, and a GH¢629.70 million increase in medium-term securities. Long-term securities, -, increased by GH¢222.50 million. Total public debt stock stood at GH¢545.32 billion inclusive of SOEs and allied debt in end-December 2022 (88.1 % of GDP), higher than the stock of GH¢351.79 billion in end-December 2021. (76.2% of GDP).

The interest payments on the public sector debt increased from GHC 32.53 billion in 2021 to GHC 37.45 billion in 2022 and it remained the single largest item in the 2022 Government annual budget statement. Foreign debt accumulated rapidly with corresponding interest payments between 2019- 2022, as the country ran into economic difficulties and suspended payments on foreign debt on December 2022, private and public investment collapsed, with total investment to GDP by as much as 5 percentage points.

Ghana registered large fiscal deficits in the past decade, which reached its peak in 2020 with an unprecedented deficit of 15.2% of GDP, thus sharply increasing the country’s debt stock and debt service costs, thereby creating enormous budgetary difficulties, the government of Ghana naturally aimed at achieving fiscal consolidation in the original 2022 budget. Heavy public debt service obligations resulted in a large risk premium on interest rates, periodic bouts of financial market instability, and a crowding out of bank credit to the private sector, all of which had contributed to a very low potential growth rate. It is a fact that heavy indebtedness has become the bane of most developing countries in the 21st century, and Ghana is no exception. Consistently, Ghana’s total debt stock has been on a rising trajectory, plunging the country into a debt trap and distress.

The total debt stock at the end of 2022 amounted to GH₵546.15 billion, which constitutes 88.1% of GDP (105% of GDP with the inclusion of key SOEs and allied debts), and it is projected to reach a staggering GH₵863.5 billion at the end of 2023 ( 2023 PwC Ghana Banking Survey Report). The country’s economic fundamentals had deteriorated to the extent that the traditional fiscal consolidation measures embodying expenditure restraint and revenue enhancement measures were inadequate and therefore restructuring had become fundamental to restoring fiscal sustainability.

The Ghanaian economy has witnessed poor revenue growth, and low export earnings from cocoa, gold, and oil because of over-dependence on international capital markets and low tax capacity over the past decade. The country’s debt stock as a result has increased considerably over the past decades – a trend generally connected with expansion in the size of government expenditures. Ghana’s economy entered a full-blown macroeconomic crisis in 2022 on the back of pre-existing imbalances and external shocks.

Large financing needs and tightening financing conditions exacerbated debt sustainability concerns, shutting off Ghana from the international market. Large capital outflows combined with monetary policy tightening in advanced economies put significant pressure on the exchange rate, together with monetary financing of the budget deficit, resulting in high inflation. These developments interrupted the post-COVID-19 recovery of the economy as GDP growth declined from 5.1% in 2021 to 3.1% in 2022 to 1.7% in 2023. World Bank (2022) found that the fiscal deficit widened slightly to 15.2% of GDP in 2020 but further improved to 12.1% of GDP in 2022 due to less spending. Public debt declined from 79.6% in 2021 to over 88.1% of GDP in 2022, as debt service-to-revenue reached 117.6%.

The country’s debt overhang sets in when the face value of debt reaches 60 percent of GDP or 200 percent of exports, or when the present value of debt reaches 40 percent of GDP or 140 percent of exports. The monetization of fiscal deficits and Bank of Ghana lending to government through ways and means advances have risen to GHS 50 billion in 2022, exceeding the threshold set by Bank of Ghana Act 2002 Act 612 as amended Act 2016 Act 918 Section (2) the total loans, advances, purchases of treasury bills shall not at any time exceeds 5% of the total revenue of the previous fiscal year.

These ways and means advances are temporary overdraft facilities provided to the Government of Ghana (GoG) to help with financial difficulties caused by a cash flow mismatch by bridging the gap between expenditure and revenue receipts. This level of borrowing from the Bank of Ghana to finance fiscal deficit was unsustainable, fueled inflation, and endangered growth.

In Ghana, deficit financing has led to borrowings from multinational finance institutions, such as the International Monetary Fund (IMF), the World Bank, the African Development Bank (ADB), and Euro-markets amongst others. Unfortunately, the rising national debt in Ghana began to outweigh the country’s revenue generation capacity and draw down on foreign reserves, hence stifling the much-needed public capital investments and economic productivity. Also, it has been reported that these borrowed funds are often mismanaged and misapplied, hence, were not used for economically productive activities, leading to debt burden, capital flight, and economic instability in the long run. Ghana has accumulated huge debt with the rising cost of debt service which has undermined economic stability as domestic investments are being crowded out by the rising cost of debt servicing.

Komlan and Essosinam (2022) opined that nations that adopt unsustainable fiscal policies have an ever-increasing debt-to-GDP ratio that violates their budgetary restraint. High debt levels resulted in high debt servicing, which has led to a low amount of money available for investment in infrastructure and other economic sectors. Ghana’s debt profile continued to increase in the face of expanding fiscal deficit and low revenue-generating capacity.

This was concerning because the country’s debt profile became more and more dominated by commercial debt. Weak fiscal and economic performance over extended periods led to an unsustainable fiscal situation for Ghana in 2022 which led to the domestic debt restructuring. One of the core issues in this contemporary Ghana trajectory has been rising public debt over four years. When the crisis officially started in 2022 with a debt-to-GDP ratio around 88.1%, it was interpreted by most economists and policymakers as a public debt crisis.

As a result, the austerity measures of the last three years including higher taxes have been imposed to address this problem. Fiscal consolidation, together with structural reforms, is supposed to generate large fiscal surpluses, reinvigorate investment, and enhance the competitiveness of the economy and thus net exports. The result of these efforts will be a slowdown of the increase in debt and a boost to growth and therefore a decrease in the debt-to-GDP ratio.

Austerity and structural reforms are thus imposed to a large extent in the name of the sustainability of debt. The goal of the present paper is to provide a comprehensive and well-rounded examination of the issue of Ghana's public debt and its role in the crisis. We start with a historical discussion of the accumulation of Ghana's public debt before 2016 and the reasons that led to the increase in the debt-to-GDP ratio over time.

A historical account of the Ghana public debt serves as a basis for the discussion of the role of the debt during the crisis. We make three main points. First, the imposition of austerity and “structural reforms” in the name of debt sustainability has pushed the economy into a debt-deflation trap: austerity leads to a fall in the GDP and thus an increase – ceteris paribus – of the fiscal deficit. These two effects lead to an increase in the debt-to-GDP ratio and make more austerity and more “structural reforms” necessary.

The swirling of the Ghana economy in this vicious cycle has grave social and political consequences. This discussion of the experience of the last three years shows that Ghana’s public debt is unsustainable; therefore, we argue that a bold restructuring of the debt is needed for the Ghana economy to reignite its engine of growth. Ghana’s debt sustainability will depend upon four ingredients- primary balances; real growth devoid of higher inflation; real interest rates as well as reasonable debt levels. Higher primary balances excess of government revenue and expenditure excluding interest payments and growth help to achieve debt sustainability, but unfortunately, higher interest payments and higher debt levels are making debt sustainability more challenging. An insistence on the current policies is not justifiable on pragmatic, moral, or any other grounds.

Theoretical Underpinning: Debt Sustainability and Fiscal Stability.

Osei (2000) argued that there is no gainsaying that sustained economic growth is possible only within a sound macroeconomic framework. In such a framework, fiscal policy plays a key role; sound fiscal policy is crucial to macroeconomic stability. Essentially, there is a link between public debt sustainability and fiscal stability, especially in a situation like Ghana's, where both external and domestic debt are evenly distributed as public sector debt. The theoretical underpinning of the link between both external and domestic debt and fiscal behavior is quite straightforward.

There are four ways of financing a public sector deficit: printing money, running down foreign exchange reserves, borrowing abroad, and borrowing domestically. Each of these forms of finance resulted in major macroeconomic imbalances and economic crisis in 2022: the Bank of Ghana had to fall back on its buffers and policy space to provide the needed additional support through the purchase of GH₵10 billion of the Government’s Covid-19 bonds, which helped to close the exceptional financing gap but led to higher inflation in 2023; the lack of access to the market for new financing immediately triggered a liquidity crisis, spilling over into a balance of payments crisis as the country had to continue to honor debt service obligations and energy payments using of foreign reserves that led to the exchange crises; excessive foreign borrowing led to external debt crises in 2022 and the excessive domestic borrowing from the local bond and money markets led to higher real interest rates which propelled crowding out of the private sector. Of course, there were links between and among these problems.

For example, high transfers because of a debt crisis caused government domestic borrowing to increase. This increase reduced credit that otherwise would be available to the private sector, thereby putting pressure on domestic interest rates.

Even where interest rates are controlled, domestic borrowing led to credit rationing and crowding out of private sector investment. The straw that broke back the economy in 2022 was a result of sovereign spreads on Ghana bonds widening, and credit rating agencies further downgraded Ghana’s sovereign debt rating, which effectively blocked Ghana’s access to the international capital markets (Addison, 2023). The arithmetic of the relationship between public debt and fiscal behavior is as follows. The increase in the sum of domestic and external debt is equal to the government budget deficit, net of money creation. If only the government borrowed abroad, then the decrease in the government's external debt would be equal to the current account balance. Therefore, the current account balance is the sum of the increase in domestic government debt, the budget surplus, and money creation (IMF 2000).

Historical Perspective of Ghana’s Public Debt Crisis

Before discussing the role of Ghana's sovereign debt during the current crisis, it is worth making a short historical discussion of its path over the past ten years. Besides its historical interest, this discussion is necessary to understand the crisis and the future challenges of the Ghana economy. A more detailed exposition was provided in Atuahene (2022). The theoretical discussion of the link between public debt and fiscal behavior was quite straightforward. There were four ways of financing a public sector deficit: printing money, running down foreign exchange reserves, borrowing abroad, and borrowing domestically. Each of these forms of finance resulted in a major macroeconomic imbalance in 2022. In addition, the Bank of Ghana had to fall back on its buffers and policy space to provide the needed additional support through the purchase of GH₵10 billion of the Government’s Covid-19 bonds, which helped to close the exceptional financing gap led to higher inflation in 2022; the drawdown of foreign reserves in settlement of interest and principal on Eurobond holders led to exchange crises; excessive foreign borrowing led to external debt crises in 2022; and over domestic borrowing led higher real interest rates that propelled the crowding out of the private sector.

In addition to, four ways that contributed to the current public debt crisis, sovereign spreads on Ghana bonds widened, and credit rating agencies further downgraded Ghana’s sovereign debt rating, which effectively blocked Ghana’s access to the international capital markets in 2022. According to Ministry of Finance data Ghana’s total public debt in 2012 stood at GHC 35.9 billion (US$19.2 billion) thus represented 47.8% of GDP after rebasing in 2010 but increased significantly to GHC 53.1 billion (US$24.4 billion) or 56.8% of GDP in 2013.

In 2014, Ghana’s public debt rose to GH₵79.5 billion (US$ 24.7 billion) or 70.2% of GDP and further increased significantly to GHC 100.2 billion (US$ 26.4 billion) in 2015 thus representing 72.2% of GDP. By the end of December 2016, the public debt stock stood at GHC 122.2 billion (US$ 29.3 billion) thus representing a debt/ GDP ratio of 72.5%. Ghana’s public debt stock stood at GH₵146.6 billion (US$ 32.3 billion) at the end of 2017, up from the 2016 figure of GH₵122.3 billion (US$ 29.3 billion).

The total public debt as a percentage of GDP declined from 73.2% in 2016 to 69.8 % of GDP in 2017. Ghana’s public debt stock as of the end of December 2018 was GH₵173.1 billion (US$ 35.9 billion) representing 57.9% of the rebased GDP. According to the Ministry of Finance and Economic Planning Annual Debt Review (03/2019), a large part of the 2018 public debt stock additions of GHC 11.1 billion resulted from the banking sector bail-out program of the government. The cost incurred by the government to clean up the banking sector impairments resulted in the public debt increasing by 3.2% of the rebased GDP. Excluding the bail-out costs, however, the stock of public debt amounted to GH₵163.4 billion (US$ 33.9 billion) thus representing 57.9% of rebased GDP as of the end of December 2018. At the end of December 2018, the stock of external debt was GH₵86.2 billion (US$17.9 billion) representing 28.9% of GDP while the domestic debt stood at GHC 86.78 billion which represented 28.9% of GDP. By the end of June 2019, the stock of public debt rose to 59.2% of GDP (GHC 204 billion compared with December 2018 representing 57.9% of rebased GDP.

Thereafter, domestic debt increased very sharply, reaching GH₵86.2 billion in 2018 and then to GH₵94.8 billion at the end of May 2019. This indicates that domestic debt increased by GH₵4.1 billion between 2000 and 2008, GH₵13.6 billion between 2008 and the end of 2018 later increased to GHC 94.8 billion at the end of May 2019. Total domestic debt stood at GH₵86.889.3 billion at the end of December 2018, indicating an increase of GH₵6.0 billion by the end of March 2019. Ghana’s debt stock as of the end of December,2018 stood at GH₵173,068.7 billion (US$ 35,858 billion) comprising external and domestic debt of GHC 86,169 billion (US$ 17.868 billion) and GH₵86.9 billion (US$18.020 billion) respectively.

This represented 57.9% of the debt/GDP ratio. External and domestic debt accounted for approximately 49.7% and 50.3% respectively. The Cedi recorded a cumulative depreciation of 8.4% against US$ as of the end of December 2018 and this impacted negatively on external debt. The total public debt stock has increased from GH₵173 billion at the end of December 2018 to GH₵198 billion at the end of March 2019 further increased to GH₵204 billion at the end of June 2019.

The external debt stock increased from GH₵86.2 billion in December 2018 to GH₵115 billion at the end of June 2019. Similarly, the domestic debt component has also increased from GH₵86.9 billion at the end of December 2018 to GH₵99.8 billion at the end of March 2019 but declined to GH₵94.6 billion. Ghana’s total public debt rose to 54.8% of the GDP (GH₵198.0 billion) at the end of March 2019 compared with 57.9% of the GDP at the end of December 2018 but increased further to GH₵204 billion or 59.2% of GDP in June 2019.

Of the total public debt stock of GH₵198 billion, GH₵11.0 billion or (3.2% of GDP) represented bonds issued to support the banking sector cleanup. As a percentage of the GDP, the external debt has declined marginally from 29.6% in 2018 to 26.3 % at the end of March 2019, while domestic debt increased from 29.3% in December 2018 to 31.2% at the end of March 2019. The stock of public debt rose to 59.2% of GDP (GH₵204 billion) at the end of June 2019. Of the total debt stock, domestic debt was GH₵94.6 billion (27.5% of GDP) while external debt was GH₵105. 4 billion (30.6 % of GDP) and the end of June 2019. The accumulation of public debt has been a direct result of the gap between unplanned expenditures and revenues, which has widened due to the inelasticity of debt servicing and infrastructural needs, deteriorating terms of trade, and the failure to improve and enhance revenue collection over the long period. Ghana’s public debt stock stood at GH₵173.1 billion (US$35.9 billion) at the end of December 2018.

This was made up of GH₵86.2 billion or (US$ 17.9 billion) of external debt and GH₵86.9 billion or (US$ 18 billion) of domestic debt Also, persistent currency depreciation over the period contributed to the stock of Ghana’s public debt of GH₵204 billion (US$ 38.7 billion) at the end of June 2019. According the Ministry of Finance and Economic Planning (29/07/ 2019) opined that the total public debt has increased from GH₵200 billion (58.1% of GDP) at the end of May 2019 increased further to GHC 204 billion (US$ 38.7 billion) at the end of June 2019 representing 59.2% of GDP nearing the high distress threshold of 60% set by the IMF/World Bank. The share of the external debt stock increased from 50.2% at the end of December 2018 to 52.8% at the end of June 2019 mainly driven by the issuance of Eurobonds of US$ 3 billion in March 2019. The IMF also disbursed an amount of SDR132.84 million (US$184.30 million) in March 2019 after their 7^TH and 8^th reviews of the Extended Credit Facility Program. On account of these two major inflows, a net amount of US$2.9 billion, equivalent to approximately GH₵14.8 billion was added to the debt stock.

The increase in the external debt stock amounted to GH₵23.8 billion between December 2018 and June 2019 reflecting a volume transaction of GHC 14.8 billion and exchange rate depreciation of GHC 9 billion (MOF, Mid-year Fiscal Policy 29/07/2019). Ghana’s public debt stock increased from GH¢218.2 billion (US$39.4 billion) in 2019, representing 62.4 percent of GDP, to GH¢291.6 billion (US$50.8 billion) in 2020, representing 76.1 percent of GDP. The increase resulted mainly from increased fiscal deficit and primary balance deficit, exchange rate depreciation, disbursement of existing loans, and contracting of new loans. Ghana’s public debt as of end-December 2021 was GH¢351.7 billion (US$58.6 billion), comprising external debt of GH¢170.billion (US$28.3 billion) and domestic debt of GH¢181.8 billion (US$30.3 billion), respectively. The domestic debt stock compared to the external witnessed a relatively higher nominal increase, attributable to net issuances of domestic instruments to pay down the cost incurred from the crystallization of contingent liabilities in the energy sector and the financial sector bailout, while the external debt rose mainly on account of disbursements due on new and existing loans, the Eurobond issuance in March 2021, and fluctuations in the exchange rate over the period under review.

In 2022 due to high inflation, interest rates, and portfolio reversals, issuances of Government securities remained under pressure, highlighted by weak demand, and various undersubscriptions during the year The total debt stock at the end of 2022 amounted to GH₵546.15 billion, which constitutes 88.1% of GDP (105% of GDP with inclusion of key SOEs and allied debts) (Pwc 2023 banking survey). The depreciation of the cedi alone accounted for GH¢67.1 billion (equivalent to 88.7%) of the increase in the debt stock at the end of December 2022 (Ministry of Finance, 2013-2022). billion), respectively.

The domestic debt stock compared to the external witnessed a relatively higher nominal increase, attributable to net issuances of domestic instruments to pay down the cost incurred from the crystallization of contingent liabilities in the energy sector and the financial sector bailout, while the external debt rose mainly on account of disbursements due on new and existing loans, the Eurobond issuance in March 2021, and fluctuations in the exchange rate over the period under review.

In 2022 due to high inflation, interest rates, and portfolio reversals, issuances of Government securities remained under pressure, highlighted by weak demand, and various undersubscriptions during the year. The stock of public debt increased from GH¢351billion (US$58.6 billion) in 2021 to GH¢546.3 billion (US$52.3 billion) as of end-December 2022, representing an increase of 23.7 percent.

The depreciation of the cedi alone accounted for GH¢67.1 billion (equivalent to 88. %) of the increase in the debt stock at the end of December 2022 (Ministry of Finance, 2013-2022.). The increase in the debt-to-GDP ratio of 88%.7 led to the realization that Ghana's debt was not sustainable. According to the Bank of Ghana at the end of March 2023, gross public debt stood at GH₵569.35 billion (US$51.67 billion), representing 71.1 percent of GDP, a slight decrease of 20 basis points from 71.3 percent recorded at the end of December-2022.

The Current Public Debt Crisis and its Causes

The underlying causes of the public debt crisis are the continued dependence on commodity exports, political inexpediency, corruption, persistent fiscal deficits, huge energy sector debt as well as borrowing and lending not being responsible enough, meaning that new debts do not generate sufficient revenue to enable them to be repaid. Ghana's severe debt situation is the combined effect of several factors. The crucial factor is the country's inability to generate sufficient foreign exchange through export earnings. Consequently, the country's current account deficit, which has continued to widen, has been hard to sustain for balance of payments stability. The country was unable to generate sufficient foreign exchange through exports because of its long-standing dependence on a few export commodities (cocoa and gold), the international prices of which have been subject to wide fluctuation.

Ghana’s debt has been rising again because of a range of factors, from the after-effects of the COVID-19 2019 global pandemic crisis and the commodity pricing slowdown to low domestic savings rates and infrastructure investment promises made by democratically elected governments over the past decade. The sharp deterioration in terms of trade, higher interest rate changes on non-concessional loans, huge currency depreciation, and higher fiscal deficits are often mentioned as some of the major causes of the rapid growth of the domestic debt crisis in Ghana over the past decade. Debt has already placed a significant burden on Ghana’s economy and society, and the country has fallen back into a debt trap, with economic stagnation possible increases in poverty rates, and failure to implement the Sustainable Development Goals.

First, one of the major factors that have contributed to Ghana’s public debt crisis was the unproductive use of borrowed funds in financing consumption instead of productive and economically viable projects. This factor behind Ghana’s public debt crisis was due to the low rate of return on investment to which borrowed funds are applied. When capital inflows finance productive investments with rates of domestic and external return that are higher than the cost of borrowing, debt service should normally be met from the increased future stream of foreign exchange earnings and still leave a considerable net benefit for the recipient economy. Funds have not been used judiciously. Ghana with huge infrastructural deficits, borrowed funds to supplement its small domestic revenue but invested in unproductive and uneconomic viable ventures.

The huge borrowing was expected to generate higher returns on capital compared to that of some emerging economies. Productive debts are used in construction, such as dualized and tolled roads, railways, power stations, and irrigation projects, which contribute to the productive capacity of the economy, they denote productive debts. In this way, productive debts provide a constant flow of income to the state. The state generally pays the interest and principal debt amount from these projects’ revenues. If the debts are used in the area such as paying public sector wages and compensation, social services, etc., which do not contribute to the productive capacity of the economy, they denote unproductive debts. However, borrowed funds have not been invested in productive and commercially viable ventures capable of generating enough economic returns that could have been used to service the debt and eventually pay back the debt. Using part of Eurobond proceeds in financing major projects like Cocoa farm roads, the government should principally look to the cash flows and earnings of the Cocoa sales as the source of funds for repayment for principal and interest payment but if borrowed funds are used in funding social project like funding the Free SHS then the repayment created debt crises.

Furthermore, such projects should pass a sensitivity analysis test that quantifies the effect on the project (and in the case of a project loan, the effect specifically on cash flow available for debt service and loan repayment. In preparation for the international capital market, the first task of the government was to identify a portfolio of projects that are viable for commercial funding with enough economic rate of service return the underlying debt. Projects selected for funding were not commercially viable but sometimes for political expediency and also project yields did not have a high economic rate of service return the underlying debt. The decision on how to use borrowed funds is important to ensuring debt sustainability. At all costs, funds raised by issuing debt should be invested in projects that have a high private or social return. When borrowing in foreign currencies, the country should take great care to ensure that future export revenues will be sufficient to service the additional debt. Debt accumulation is unlikely to be sustainable if domestic or foreign borrowing is used to finance public or private consumption with no effect on long-term growth. Most of the selected projects were desirable but did not meet the criteria for access to commercial funding. However, the first debut sovereign bond in 2008 met the project criteria for sourcing external funding as it was not properly appraised and evaluated.

Eurobond proceeds must be used judiciously to support projects that generate more future export revenues to service the debt. Furthermore, sovereign bond or Eurobond proceeds should not be thinly spread as done recently. Eurobond proceeds of US$ 1 billion were thinly shared among the Ministry of Energy and Petroleum, Ministry of Food and Agriculture, Ministry of Roads and Highways, Ministry of Railways Development, Ministry of Water Resources, Works and Housing, Ministry of Education Ministry of Health. Some of the detailed allocations under the Eurobonds looked very frivolous and flimsy, for example, the allocation of GHC50 million for the construction of greenhouses and capacity building training centers while not supporting the growth of oil palm and cashew sectors and also spent a whooping GHC45 million for supplying and installation of integrated e-learning laboratories for senior high schools in Ghana while we still have some primary schools in our villages and cottages operating under trees and dilapidated structures ( Report of the Finance Committee, Parliament of Ghana, 03/2018). The government should have sought concessional funding for projects like coastal protection green housing projects and capacity building instead of funding these projects with expensive commercial debt.

The decision on how to use borrowed funds is important to ensuring debt sustainability. At all costs, funds raised by issuing debt should be invested in projects that have a high private or social return. Debt accumulation is unlikely to be sustainable if loans are used to finance public or private consumption, with no effect on long-term growth. The fact is that development cannot be justified by high and unsustainable public debt. The country’s debt can only be reined in through sustained fiscal prudence to help reduce borrowing. It is important therefore that loans contracted are used to develop the economy to enable it to ‘grow out of debt.’ It would be a fatal mistake to use loans to fund recurrent spending or refinance debts that were used to fund recurrent spending that did not have a direct bearing on growth. But there are conditions under which even debt used to finance productive investment could turn out to be unsustainable. This happens if the ex-post returns on a project end up being lower than the interest and principal debt repayments and should therefore be guided against very carefully. Borrowing from the local bond market at 19.1% to finance social projects at 0% returns has caused domestic debt crises over the past six years.

Second, another factor that has contributed to the country’s public debt crisis has been the continuous high fiscal deficits driven by unproductive public spending influenced by vague political promises made during political campaigns. According to Bawumia (2010), the global food and fuel price increases in 2007-2008 adversely impacted most Sub-Saharan African countries, including Ghana. In the context of these global shocks and the 2008 elections, public sector spending increased substantially, raising the fiscal deficit from 7.6% of GDP in 2006 to 14.5% of GDP in 2008 to a further record high of 15.2% of GDP in 2020. Contributing to the strong fiscal expansion were high energy-related subsidies, increased infrastructure investment, higher wages and salaries, and a rise in social mitigation expenditures to dampen the effects of the global price shocks.

Over the past decade, the government's primary deficits have been arising thus increasing the burden of debt because the governments had little resources to service interest on public debt. Fiscal deficits had worsened not only because of the plunge in export revenues but also because of the need to increase social spending and safety nets over the period. In Ghana, the lack of fiscal discipline is identified as a cause of the ballooned public debt. For example, Ghana has been accumulating relatively large primary fiscal deficits over the past two decades, amplified every time the country was approaching elections. According to various IMF Country reports recorded a high budget deficit over the past decade, for example, 9.3 % of GDP in 2016; 6.3% in 2017; 7% of GDP in 2019; 15.2% in 2020 9.4% in 2021; 12.4%in 2022. In 2020, Ghana was hit hard by the Covid-19 pandemic which accelerated a fiscal deficit of 15.2% of the GDP that included energy and financial sector costs with a further 2.1% of GDP in additional spending financed through the accumulation of domestic arrears (IMF, 21/221).

Ghana’s continuous high fiscal deficit was driven partly by unproductive public spending that was not efficient in supporting equitable development. However, around the 2008, 2012, 2016, and 2020 elections, fiscal slippages and unduly spending led to deep holes in the budget and unfavorable debt issuances. For example, the fiscal slippage in 2008 was the result of government subsidies of utilities, election year wage and salary increases, and increased capital investment from proceeds of Ghana’s sovereign bonds to deal with the energy crisis (Bawumia, 2010). At the root of Ghana’s fiscal deficits was out-of-control government spending, largely to pay salaries and compensation for an overgrown civil service (Adams,2015). In the 2024 government budget statement the biggest single item was wages and compensation constituted GHC63 billion or 27% followed by interest payments of GHC 55billion.

The Ministry of Data for the period 2021-2024 confirmed the huge interest payments that adversely affected the economy as increased persistently over the years from GH₵13.28 billion in 2017, representing an increase of 444.3% during the period. Interest payments increased further to GH₵14.9 billion in 2018, which will represent an increase of GH₵12.46 billion or 510.1% from the end of 2012. Interest payments on the public debt increased further to GHC 25.4 billion or 5.5% of GDP in 2021. Interest Payments for the period amounted to GH¢37.5 billion (5.4 percent of GDP) in 2022 thus reflecting the higher cost of borrowing and the adverse impact of the currency depreciation on external interest. In 2023, interest payments on public debt increased to GHC44 billion or 5.7 of GDP while Interest payment on public debt in 2024 stood at GHC 55.9 billion or 5.3 of GDP.

Fiscal slippages were due to bad public finance management in Ghana. As a result of this weak fiscal discipline, decline in commodity prices, and high investment needs, the Ghanaian public finances have been under serious pressure over the years. A major factor that has contributed to the debt problem is the levels of fiscal deficits over the past decade, borrowing to finance the deficits, and the terms of borrowing. Among all these factors the most important is probably the fiscal deficit as it drives the level of borrowing and even the terms that can be obtained for such borrowing. Ghana opted for major development programs and highly expansionary fiscal policies during the oil findings in the late 2000s, acquiring external debt as spending increases outpaced the rise in tax receipts.

These spending policies continued for some time after the post-collapse in commodity prices (cocoa, gold, and oil). Ghana also used external borrowing to maintain consumption in the face of falling export earnings. The growing fiscal deficits also reduced the ability of governments to make debt-service payments as they led to declines in the growth of real national income, inflationary pressures, and depreciation of Cedi against major trading currencies. Private savings, which could have been an alternative to foreign borrowing, were also discouraged by policies designed to keep domestic interest rates low. This resulted frequently in negative real interest rates and disintermediation in the financial sector.

Third, the rising Ghana’s public debt has limited the economy and has been hampered by a low tax collection system which accounted for only 13%. tax to country’s GDP ratio which is the lowest among our peers in the sub-region. Weak domestic revenue mobilization has become Ghana’s key fiscal challenge and risk, the root cause of fiscal imbalances, and the biggest single threat to the government’s development objectives. Total tax revenue collections in 2019 totaled GH¢45.6 billion, implying a tax-to-GDP ratio of 13% (IFS, 2021). The tax-to-GDP ratio in Ghana increased by 1.0 percentage points from 13% in 2020 to 14.1% in 2021 (IFS,2022) opine that Ghana’s tax rate of 13% is lower than Africa’s average tax-to-GDP rate of 16.5%.

Tax evasion, tax avoidance, and tax exemptions are some reasons that have accounted for the low tax-to-GDP ratio in Ghana. The defining feature of tax systems across Ghana is their inability to collect a significant share of revenue through income taxation of individuals and corporations. Ghana overwhelmingly collects far less direct tax because of the huge informal economy than developed countries, both as a share of total taxation and as a share of GDP. Also, the higher debt affected the revenue mobilization in several important ways. Revenue mobilization was directly affected by debt constraining the economic environment in a way that led to low economic growth. Low economic growth meant less tax to collect. These were some of the channels that debt affected tax collection in the country.

Domestic government debt crowds out the private sector by limiting the funds available to borrow. This has constrained the private sector’s ability to grow the economy, create jobs, and generate revenues that could be taxed. Debt also increases the risk of fiscal crises by creating an unstable macroeconomic environment. External debt repayments put pressure on the exchange rate contributing to its deterioration and making imports more expensive thereby contributing to higher inflation in 2022. This, in turn, has contributed to lower growth. Further, debt has created a crowding-out effect, where the government’s high-interest payments and repayments consume a significant portion of the government's revenue, leaving less room for the country’s self-financed public investment. This has created a greater incentive to borrow to finance public investment and thus, beginning the cycle again.

Fourth, one key factor that has contributed current debt crisis in Ghana has been the endemic corruption prevailing in the public sector, as huge fiscal revenue continues to be lost, impeding the ability of the government to invest in public social spending using domestic revenue. Corruption is a serious barrier to effective resource mobilization and allocation, and diverts resources away from activities that are vital for poverty eradication and economic and sustainable development The 2022 Auditor General’s report shows that irregularities in the public sector in 2021 amounted to about GH¢17.5 billion. Similarly, the Auditor General’s COVID-19 expenditure report shows that US$81 million worth of vaccines paid for by the state were never delivered, among other infractions.

Over the years there has been a growing interest in the relationship between public debt and corruption globally. Studies have looked at this relationship and out of these studies the main finding has been that corruption increases public debt and that a larger shadow economy reduces tax revenues and thus increases public debt, similarly, higher government expenditure enhances the effects of corruption on government debt. Transparency International defines corruption as the abuse of entrusted power for private gain. The World Bank defines corruption as the abuse of public office for private gain. Corruption and unsustainable public debt are twin governance challenges confronting Ghana’s public finance management system.

Corruption in Ghana has resulted in a marked increase in levels of fiscal deficit and domestic indebtedness as the central government bailed out and took over the debts of several parastatals. Corruption has increased public debt, and a larger shadow economy has reduced tax revenues and thus increased public debt. Similarly, higher government expenditure enhances the effects of corruption on government debt. In Ghana, corruption and unsustainable public debt are twin governance challenges confronting the public finance management system. Corruption often leads to adverse influences on the economy.

It is one of the main constraints facing companies in developing economies (World Bank, 2021). Gupta et al. (2002) highlight that corruption increases income and wealth inequality and poverty in several developing countries like Ghana. It enhances the transaction costs of private investors, which leads to a decline in profit and investment. Widespread corruption tarnishes a country’s international reputation and reduces its attractiveness for foreign investment, public debt, tourism, and development assistance. It undermines Ghana’s standing in global indices that measure corruption levels, such as the Corruption Perceptions Index, and can hinder international cooperation and partnerships. Corruption hampers economic growth and development. It distorts market mechanisms, undermines fair competition, and diverts resources away from productive sectors.

It creates barriers to investment, reduces investor confidence, and deters both domestic and foreign direct investment. Corruption also leads to inefficient allocation of resources, loss of public funds, reduced government revenue, and increased domestic debt. The effect of corruption on public debt is increased by government expenditure, the shadow economy, and military expenditure and they found out that the effect of corruption on public debt is compounded by increased government expenditure and increased size of the shadow economy. In another related study by Cooray, Dzhumashev, and Schneider (2017) confirmed that increased corruption and a larger shadow economy lead to an increase in public debt. More so they did find that a larger shadow economy reduces tax revenues and thus increases public debt, similarly, higher government expenditure enhances the effects of corruption on government debt. Theoretical literature shows that there is a link between corruption and government debt through a regime-based approach and they found that public debt appears to respond faster to a high corruption regime compared to a low corruption regime.

The fifth factor that has brought about Ghana’s public debt crisis has been the many years of unfavorable terms of trade. The widening external debt to current account receipts ratio has been a major feature over the past decade. Strong public spending growth combined with rapid credit expansion and rising oil import costs contributed to a widening of the external current account deficit from 9.9% of GDP in 2006 to 19.3% of GDP in 2008. While Ghana’s external indebtedness has increased in recent years, the current account receipts have decreased since 2011. According to IMF Country reports (2011-2022) the current account recorded negative ratios of GDP (-9.3% in 2011; -11.7% in 2012; -11.9% in 2013; -9.6% in 2014; -8.3% in 2015; -7.2% in 2016 and -5.5% in 2017; -3.1% of GDP in 2018; -2.78 in 2019; -3.2%; in 2020; -2.8% in 2021 and -2.1% in 2022). The decline in export receipts contributed significantly to the public debt crisis of the 2000s. The significant drop in export receipt from cocoa, gold, and oil, combined with a strong US$ (i.e. the value of the dollar increased relative to the value of other currencies) and high global interest rates, depleted foreign exchange reserves that Ghana relied upon for international financial transactions.

Ghana consequently began to feel the strain of having to borrow to refinance the maturing 2008 Eurobond of US$ 750 million in 2019. The interest payment of the huge foreign debt has recently compounded the depreciation of the cedi against the major trading currencies and massive capital flight. The persistent current account deficits not only depleted gross official foreign reserves but also involved an accumulation of external debts. The terms of trade have shifted against Ghana over the past decades. Revenues from commodity taxation did not rise as fast, and previous governments used foreign borrowings to meet the cost of projects. When commodity prices declined, expenditures were not reduced commensurately, but governments resorted to additional borrowing to maintain expenditure levels. This policy would have been appropriate had the decline in the terms of trade been temporary but the deterioration of the terms of trade had persisted through the 2000s. As the country still dominantly consists of a commodity-based economy, the drop-in receipts from cocoa, gold, and oil have been mainly due to a decline in commodity prices. Oil discovery and volatility in commodity prices have been another cause of Ghana’s debt problem.

According to some analysts, Ghana’s post-HIPC/MDRI debt crisis was a result of the gradual increase in borrowing off the back of the discovery of oil and volatility in world commodity prices. In early 2013, the price of gold fell significantly, as did the price of oil from the start of 2014. More money was therefore borrowed following the fall in the price of oil and other commodities to deal with the impact of the commodity price crash while the relative size of the debt also grew because of the fall in the value of the cedi against the dollar. At the same time, the rapid economic growth in the 2010-2016 periods, driven by the coming on stream of oil production in the country has led to an increased willingness and desire of various institutions to lend to the country, with a corresponding willingness to borrow (Jones, 2016). Secondly, on the revenue side, Ghana has been seriously affected by the decline or collapse of commodity prices on the international market over the past decade.

Ghana as a major exporter of cocoa, gold, and oil has experienced a significant decrease in fiscal revenues, yet the lion’s share of export receipts did not build up sufficient buffers during the boom period to deal with shocks. A continued and sustained decline in commodity prices jeopardized the debt sustainability position of this commodity-dependent nation since drop-in commodity prices reduce export earnings and therefore increase the debt service to export earnings ratio. Consequently, the country’s debt increased astronomically during the last decade. A combination of commodities price falls and loans not being used judiciously enough to ensure that they could be repaid also contributed to pushing the country back into the debt crisis. Apart from the decline in terms of trade, most of the existing mining agreements signed by past and present governments with foreign mining companies had raised questions of unfairness, lack of transparency, and equitability. A clear example, from 2014 to 2022, mining companies have extracted a total value of gold worth US$43 billion, out of which Ghana received only US$6.4 billion just about 14.8%. The various governments have helped those mining companies to ripple the country of its valuable resources all in the name of foreign direct investments.

Sixth, one major factor that has contributed to the current public debt crisis has been the energy sector debt since 2014. Ghana’s energy sector debt has been a major contributor to her current public debt crisis. According to the IMF country’s energy sector arrears stood at US$1.6 billion about 2.3% of GDP at the end of 2022. It pointed out that energy sector payables increased due to low recoveries in the sector, tight financing conditions, and pending negotiations with independent power producers (IPPs). According to the IMF country report (23/168) found that shortfalls in the energy sector have been significant due to below-cost-recovery tariffs, large distribution losses, and excess capacity amid take-or-pay contracts have all contributed to the debt crisis.

According to Osei-Appiah and Lewis Arthur (2022) in Ghana’s electricity supply system, system losses refer to the amounts of electricity injected into the transmission and distribution grids but not paid for by users. The difference between energy input (purchases), and the energy collected (sales), therefore, constitutes losses. These system losses are categorized into technical and non-technical (commercial). Technical losses occur because of power dissipation in electricity system components such as transmission and distribution lines, transformers, and measurement systems. Commercial losses, on the other hand, are caused by external actions consisting primarily of electricity theft, non-payment for consumption, and errors in accounting and record-keeping. The Institute of Statistical, Social, and Economic Research (ISSER) appraises that the economic cost of these losses ranges between $320 and $920 million annually.

The 2010 Wholesale Power Reliability Report adduced that unreliable and inadequate electricity supply cost Ghana between 2% - 6% of its gross domestic product (GDP). also approximates the cost of the losses to 1% of GDP. The total system transmission losses recorded over the period were 884 GWh which was 4.72% of total energy transmitted (17887 GWh) in 2017. In 2018 on the other hand. The network recorded total transmission losses of 707 GWh or 4.43%. The 2019 transmission represented a 19.4% increase over that of 2018. The deficiencies in the sector characterized by the tariff systems and management issues coupled with expensive power purchases by the state in addition to the transmission losses, poor revenue mobilization, wastage, and losses in power distribution were the major problems in the energy sector driving Ghana’s into her current debt crisis. The mismatch between the production cost of the Independent Power Producers (IPPs) vis-à-vis how much consumers paid led to an upsurge of debts since the Government could not make financial commitments to them (IPPs).

The Power Purchasing Agreements (PPAs) signed were expensive (World Bank, Laporte, 2023). In addition to the exorbitant power purchases the country was paying for energy it does not use due to the ‘’take or pay contracts. According to the Fitch Ranks, the energy sector is the biggest driver of the national debt as the West African Country currently owes independent power producers to the tune of $1.58 billion. The economy is on the verge of collapse and a legacy of take-or-pay contracts saddled our economy with annual excess capacity charges of close to $1 billion. These were contracts to supply energy to Ghana way more than our requirements, but we were obligated to pay for the power whether we used it or not. Excess electricity take-or-pay charges. ECG (and the central government) are counterparties to several take-or-pay contracts with independent power producers.

The contracts require payment for contracted volumes of electricity even if the electricity is not consumed (take-or-pay charges). When ECG expenses the charge, its equity is reduced, and its liabilities (accounts payable) increase. The reduction in equity lowers the value of the government’s investment in ECG. The actual payment of the claim by ECG or the government does not alter the public sector’s net worth. The debt overhang has forced the government at times to borrow from international capital to settle part of the legacy debt. The government has been trying to renegotiate and restructure the Power Purchase Agreements (PPAs) with six (6) operational Independent Power Producers (IPPs), namely, Karpower, Cenpower, Early Power, Twin City Energy (formerly Amandi), AKSA Energy, and CENIT Energy but it has achieved little success to ensure that power is affordable and available for industrial, commercial, and residential use. The government has been trying to ensure commercial agreements with each of the IPPs to convert power plants to tolling structures, and switch to the use of natural gas to power the plants and to ensure sustainable power.

The Ministries of Energy and Finance must collaborate with the World Bank to work closely to reduce future legacy debt which has been an albatross on the country’s meager finances. Total savings of millions of dollars are expected when all agreements are finalized and executed. To avoid the debt overhang in the energy sector, the government must renegotiate with N-Gas to reduce the take-or-pay and other financial obligations on the gas supply agreement with VRA concluded and this is expected to lessen the take-or-pay burden on the Government. The energy debt has become a debt overhang. To reduce the debt overhang, the government must agree with the IPPs to restructure the huge indebtedness owed by the government. Power supply challenges (including instability, low voltage, and blackouts), known as ‘Dumsor’, have plagued Ghana for years, and remain significant concerns for both industrial and residential customers. Ghana has had several periods of power shortfalls, particularly in 2012-2015 and 2023-2024. The reasons have been given as losses in the distribution system, a tariff structure that makes it difficult for electricity producers to recover their costs, and the non-payment of electricity bills by consumers especially Ministries, Departments, and Agencies (MDAs).

Seventh, one most important single contributors to the current domestic debt crisis has been the financial sector clean-up to the tune of almost GHS 26.05 billion in 2017-2019. In line with the above, the Bank of Ghana (BoG) as the resolution authority for banks and specialized deposit-taking institutions (SDIs) revoked between 2017 and 2019 the licenses of four hundred and twenty (420) financial institutions in an exercise dubbed the banking sector clean-up. Among the 420 institutions were nine (9) Banks, twenty-three (23) Savings and Loans /Finance Houses Companies, three-hundred and forty-seven (347) Microfinance Companies, thirty-nine (39) Microcredit Companies, one (1) Remittance Company, and One (1) Leasing Company. The total assets taken over for the 420 defunct institutions amounted to GHȻ26.05 billion (7.45% percent of GDP). The Government of Ghana spent GHȻ18.99 billion (5.49% of GDP) to fund the repayment of the deposits of affected depositors’ including the establishment of a bridge bank (Consolidated Bank Ghana Limited). The banking sector clean-up was aimed at ensuring the orderly exit of insolvent institutions to protect depositors’ funds and also ensure the safety and soundness of the banking sector which was in a state of distress (GH-MOF FSD-315018-CS-INDV, 2022).

Eighth, another contributing factor to the current public debt crisis has been the government's flagship programs over the past six years. The government flagship programs have enjoyed budgetary allocation worth GH¢33 billion in a span of three years (2020-2023) and added to the country’s domestic debt crisis. According to IMF Country Report on Ghana (23/168) Ghana spent close to 4 percent of GDP on secondary education with good results in terms of enrollment but poor learning outcomes. The flagship program Free Senior High School (SHS), which covers the full cost of secondary education, has helped increase enrollment but is poorly targeted. Key identified areas of potential improvement in education spending include strengthening primary education resources, better teacher training, and stronger performance-based funding practices.

The flagship programs captured in the report include Free SHS, Planting for Food and Jobs (PFJ), One-district, One-factory (1D1F), Infrastructure for Poverty Eradication Program (IPEP), Ghana School Feeding Program, Railways Development, Agenda 111 and Coastal Fish Landing Sites. For education, it said Ghana spends close to 4% of GDP on education with good results in terms of enrollment but poor learning outcomes. It pointed out that the flagship program Free Senior High School (FSHS), which covers the full cost of secondary education, has helped increase enrollment but is poorly targeted. The challenges associated with the implementation of the policy were financial constraints, infrastructure deficit, inadequate and delayed release of food items, lack of teaching and learning materials, inadequate contact hours, and poor implementation of the policy and the double-track system.

The challenges associated with the implementation of the policy were financial constraints, infrastructure deficit, inadequate and delayed release of food items, lack of teaching and learning materials, inadequate contact hours, and poor implementation of the policy and the double-track system. The government must comprehensively review the FSHS policy and consider cost-sharing with parents and caregivers to sustain the policy. The accumulated debt is part of past excesses of the Ghana government's flagship programs and, the corruption of the Ghana political system, the dysfunctional public sector, the high rate of tax evasion, tax exemption, and persistent fiscal deficits.

Ninth, failure on the part of previous and present governments to improve revenue by generating more revenue from the extractive sector through renegotiating some mining contract leases. The country has not benefitted from the extractive industry like Gold. Gold total production in 2022 was US$6.6 billion which was surrendered portion to Ghana’s Balance of Payment which was credited to the Bank of Ghana Nostro Account only US$ 865 million equivalent to only 13.1%. From the period between 2014 to 2022 Ghana has exported US$ 43 billion worth of Gold, and the country has only received a meager US$ 6.4 billion accounting for only 14.8%. The country was just being ripped off our endowed God resources. This means that the private and foreign producers in the mining sector, have exploited publicly endowed resources from God, and took US$36.6 billion.

According to IFS reports 2021-2023, they have been arguing that the government to adopt the Botswana Model used in their pricing strategy with Anglo-American De Beers. In fact, on the contrary, the government of Botswana, for instance, can take in as revenue about 52% of the total value of minerals produced in Botswana and about 95% of the supernormal profit accrued to mineral production in Botswana. The government of Botswana earns that much through active participation in the mining sector. The government of Ghana should, therefore, take lessons from this and generate more revenue and foreign exchange from the country’s extractive sector to help create more fiscal space and successfully consolidate the country’s fiscal position. Extractive sector revenues should not be allowed to go into private pockets while the government wallows in borrowing (IFS, 2022).

So, it is laughable when we talk a securing a good lithium deal. In conclusion, Ghana's public debt crisis has been caused by a combination of factors. The debt was accumulated over many years as successive governments borrowed heavily to finance public spending and social programs. Another factor was the country's weak economy, which was hit hard by the COVID-19 pandemic and Russia and Ukraine. The crisis led to a sharp decline in economic growth, rising inflation, persistent depreciation of the local currency, and falling tax revenues. Ghana also suffered from a lack of competitiveness, with high labor costs and low productivity.

Why was a restructuring of Ghana's debt necessary?

While there is no universally accepted definition, a sovereign debt restructuring can be defined as an exchange of outstanding sovereign debt instruments, such as loans or bonds, for new debt instruments or cash through a formal process. Sovereign debt here refers to debt issued or guaranteed by the government of a sovereign state. One can generally distinguish two main elements in a debt restructuring: debt rescheduling, defined as a lengthening of maturities of the old debt, possibly involving lower interest rates; and debt reduction, defined as a reduction in the face (nominal) value of the old instruments.

The above discussion makes clear that the reason for the need for a bold debt restructuring not cancellation of the Ghana debt is, first and foremost, the simple fact that it could not be repaid under any plausible assumptions. As a result, the extension of the current policies that target high fiscal surpluses in the name of debt sustainability will lead to a deepening of the recession – or a prolonged period of stagnation – with all the consequences that the Ghana economy and society have experienced all these years. Moreover, because the unsustainability of the debt is obvious to everyone except for the public sector of the country, the debt overhang has created uncertainty that prohibits a recovery in investment activity on behalf of the private sector.

Finally, precious resources that could be used to put an end to the depression of the last four years and lead to a recovery are sacrificed for the servicing of this unsustainable stock of debt. We saw that since the beginning of the crisis, Ghana’s international lenders including the IMF and World Bank argued that the public-debt-to-GDP ratio could not be sustained through a combination of consecutive years of public surpluses together with a very strong positive reaction in the foreign sector and investment that would lead to a high growth rate. The need for the restructuring of Ghana's debt is usually opposed on moral(mistic) grounds. The usual argument of the advocates of austerity goes as follows: The accumulated debt is part of past excesses of the Ghana government and the Ghana people, the corruption of the Ghana political system, the dysfunctional public sector with higher wages and compensation, and the high rate of tax evasion. Thus, the Ghanaians have to endure a prolonged period of austerity and pay for it.

This argument certainly has some merit. There is indeed a corruption and tax exemption problem in Ghana. It is also true that the public sector is dysfunctional and that Ghana governments at certain points in the past have been imprudent and spent excessively. Ghana’s public debt rose from 79.6% in 2021 to over 88.1% of GDP in 2022, as debt service-to-revenue reached 117.6%. The situation of the public finances was unsustainable, with debt reaching 88.1% of GDP and nearly half of the budgetary resources in 2022 dedicated solely to interest payments. The present value (PV) of Public and publicly guaranteed (PPG) debt to GDP ratio as of November 2022 stood at 100.34%. The government has set a PV of PPG debt to GDP ratio of 55% by the end of 2028 to achieve debt sustainability. Ghana formally announced its debt restructuring program at the start of December 2022 as a prerequisite to access IMF funding, required of any country whose debt is deemed unsustainable. To help restore macroeconomic stability, Ghana has secured a three-year IMF Extended Credit Facility (ECF) program of about $3 billion and has embarked on a comprehensive debt restructuring.

The authorities have committed to a front-loaded fiscal consolidation while pursuing a tighter monetary policy, complemented by structural reforms in the areas of tax policy, revenue administration, and public financial management, as well as steps to address weaknesses in the energy and cocoa sectors. Ghana can make a case for debt relief as it carries out its internal reforms. Creditors could grant debt reduction on a wider scale to reduce the debt stock and reduce repayments. Without effective debt restructuring, reduction, or forgiveness, Ghana risks falling into a debt trap with debt overhang where economic policies focus solely on servicing unproductive debt repayments to creditors and propping up an unfair global financial system. The government launched a comprehensive debt restructuring to address severe financing constraints and unsustainable public debt.

The government has completed a Domestic Debt Exchange Program (DDEP), implemented an external debt repayment standstill, and sought official debt restructuring under the G20 Common Debt Treatment Framework. Under the framework of, “debt reprofiling” describes a transaction in which maturities of debt are extended for a prescribed period without attempting to reduce the principal of, or in some cases even the interest rate on, the extended debts. The classic example of sovereign debt reprofiling is Uruguay (May 2003) when the maturity dates of 18 series of Republic of Uruguay bonds issued in the international markets were extended by a period of five years. On the external debt restructuring, Ghana has just managed to reach a deal to restructure $5.4 billion of loans with its official creditors, the finance ministry said on 12th January 2024, a milestone in the country's quest for debt relief as it charts its way out of the worst economic crisis in a generation.

The Paris Club has developed procedures for the collective rescheduling of official bilateral debt since the 1950s when Argentina approached bilateral creditors. The Ghana government agreement with bilateral lenders of US$1.8 billion, China US$1.7 billion, and Paris Club US$1.9 billion to restructure the external debt of US$5.4 billion and debt restructuring for Ghana reached by the Official Creditors’ Committee under the G20 Common Framework. IMF debt treatment involves debt rescheduling” in which maturities of bilateral debt are extended for a prescribed period without attempting to reduce the principal of, or in some cases even the interest rate on, the extended debts.

The commercial debt including Eurobond holders of US$ 13.6 billion could adopt debt rescheduling. Rescheduling refers to the formal deferment of debt-service payments and the application of new and extended maturities to the deferred amount. This may be conducted: (1) through the exchange of an existing debt instrument for a new one, as in refinancing or debt exchanges; or (2) through a change of the terms and conditions of the existing contracts (this is often simply referred to as rescheduling, as opposed to refinancing).

Rescheduling may not result in a reduction in the present value of debt, as calculated by discounting the old and new payment schedules by a common interest rate. The debt relief would not result in (i) a reduction in the present value of these debt-service obligations but a deferral of the payments due, thus providing smaller near-term debt-service obligations (this can be measured, in most cases, by an increase in the duration of these obligations; that is, payments become weighted more toward the latter part of the debt instrument’s lifetime. These efforts could result in the slowdown of the increase in debt and a boost to growth and therefore a decrease in the debt-to-GDP ratio to 55% in 2028.

Ghana’s Domestic Debt Exchange Program (DDEP). (Debt Reduction)

Theoretical literature by Picarelli (2018) argues that the choice between these two restructuring strategies is usually driven by whether a country is experiencing a solvency or a liquidity crisis. Debt rescheduling is generally used to help solvent but illiquid countries that are temporarily unable to roll over their debt; Debt reduction is used instead in the case of insolvent countries that are permanently unable to pay back their debt. Deciding whether Ghana's restructuring of domestic debt was the right decision hence involves two questions.

First, had Ghana reached the threshold level of distress and high debt which would justify a debt restructuring purely from a domestic standpoint, abstracting from contagion? Secondly, in light of the collateral damage that the Ghana restructuring was likely to inflict on other institutions operating within the economic space – and arguably did– was there a better alternative? Ghana's government decided to adopt the Domestic debt exchange to help protect the economy and enhance the country’s capacity to service the public debts effectively.

The debt sustainability analysis demonstrated unequivocally that Ghana’s public debt was unsustainable, and that the Government would not be able to fully service its debt down the road if no action was taken. Indeed, debt servicing absorbed more than 50% of the total revenue and almost 70% of tax revenues, while the total public debt stock, including that of state-owned enterprises and all, exceeded 100% of GDP. This was the reason why the government adopted the DDEP to help to restore the capacity to service the debt (MOF/05/12/2022). Public debt increased to 88.1 percent of GDP by end-2022, almost evenly split between external (42.4 percent of GDP) and domestic (45.7 percent of GDP), with the latter generating over 80 percent of overall debt service in 2022 due to high-interest rates and short average maturity. The situation of the public finances was unsustainable, with debt inclusive of the SOEs reaching 100% of GDP and nearly half of the budgetary resources in December 2022 dedicated solely to interest payments.

On the domestic front, the government launched a debt exchange program in early December, opting for a voluntary approach, seeking to swap outstanding medium- and long-term domestic bonds for lower-coupon and longer-maturity bonds. The exchange, which covered about 65 percent of total outstanding domestic bonds (and excluded bonds held by pension funds to protect pensioners’ savings), received about 85 percent participation (IMF Country Report, 23/168).

According to the Bank of Ghana’s financial data public debt rose to GH¢435.5 billion as of December 2022 representing 88.1% of Gross Domestic Product with external debt stood at GHS 240 billion while the domestic debt also stood at GHS 194.8 billion. However,the total public debt rose to GHC610 billion at the end of December 2023, with domestic debt at GHC257.9 billion and external debt at GHC350.3 billion at 72.5% of GDP. The persistent high fiscal deficit in the country has been partly attributed to the excessive government spending that was not productive and failed to effectively promote equitable development. During the period the central bank financed the government by ballooning deficits directly or by offering short‐term refinancing to banks by investing the liquidity in government securities.

Regardless, this practice has exposed the economy to recent inflation and currency depreciation. Large external shocks in recent years have exacerbated Ghana’s pre-existing fiscal and debt vulnerabilities, resulting in a loss of international market access, increasingly constrained domestic financing, and reliance on the monetary financing of the government. Decreasing international reserves, Cedi depreciation, rising inflation, and plummeting domestic investor confidence, eventually triggered an acute crisis. The authorities have taken bold steps to tackle these deep challenges, including by accelerating fiscal adjustment. In Ghana’s shallow financial market, especially where firms have limited access to international finance, domestic debt exchange could lead to swift and severe crowding out of private lending.

This raised the cost of private capital and created an adverse selection problem for banking institutions as more conservative risk-averse borrowers shy away from the credit market. The revised- DDEP has marginally affected both the profitability and solvency of the financial sector given its sizeable exposure to the public sector debt. However, the revised domestic debt exchange implemented has moderately affected the ability of domestic banks and businesses to grow and could result in a decrease in overall economic output. Additionally, restructuring including a “haircut”, has led to a further loss of confidence in the government's ability to repay its debts and in the country's economy.

Both domestic and external debt became an issue when debt service payments became unaffordable compared to state revenue and other spending requirements. Ghana’s higher levels of debt repayments have resulted in:

• damage to economic growth as other spending is crowded out,

• constraints on the ability of governments to spend counter-cyclically,

• reduced resources for current spending needs, and also created debt overhang.

As to address the above challenges, the country decided to adopt debt treatment from the Paris Club takes two forms: rescheduling: i. Postponing debt service repayments, ii. reduction in debt service obligations: This occurs during a set period as flow treatment (debt service payments) or at a set date for stock treatment (treating the original loan and interest/arrears). Ghana adopted domestic debt exchange in December 2022 as the country’s debt reduction methodology. In the case of Ghana, debt exchange was one of the methodologies for debt reduction because the country was insolvent, i.e. permanently inability to honor debt obligations. In practice, sovereign debt resolution often includes a mixture of fiscal adjustment and additional funding coupled with a reduction of the outstanding debt, extending the maturity of the debt from 3.8 years to 8.3 years and cutting the coupon rate from 19.1% per annum to 9.1%.

According to the Minister of Finance, the overall domestic bonds ¢203 billion were exchanged, which has resulted in debt service savings of ¢61.7 billion over 2023 (Joy business/17/10/2023) but domestic debt has increased by GHC54.3 billion to GHC259.7 billion as at end of December 2023. The Ministry of Finance posited the under-listed domestic debt exchange program. Debt reduction might produce positive consequences by reducing the uncertainty level. Indeed, a large amount of outstanding debt creates uncertainty about the government’s future policies, since the debt servicing obligation will need to be met. As a result, economic agents will be inclined to postpone their investment decisions. Creditors would suffer a reduction in the market value of creditor exposure toward the debtor country, as high uncertainty might imply an increase in default risk. In this context, a debt reduction measure would help to restore normal conditions in the financial markets (i.e. markets do not like uncertainty).

The Original DDEP without the Pension. Cocoa bills, Domestic debt denominated bonds, Bank of Ghana non-marketable securities. The government launched on December 5, 2022, a DDEP covering all medium- and long-term debt issued in local currency by the Government of Ghana, Daakye, and ESLA. Government-issued T-bills have been excluded from the DDEP perimeter. The initial exchange did not yet include domestic debt denominated in U.S. dollars and Cocoa bills issued by the Cocoa board. Throughout discussions with bondholders, the government also agreed that pension funds (representing about 20 of the debt eligible for the exchange) would not be expected to participate in the exchange. The original DDE settled on February 21, 2023. In total, 85 percent of the face value of bonds held by investors other than pension funds was exchanged in the DDE, equivalent to 28 percent of all outstanding domestic debt (which includes, among others, non-marketable debt, verified arrears, and Cocoa bills). The government offered most bondholders a set of new bonds at fixed exchange proportions with a combined average maturity of 8.3 years and coupons up to 10 percent (with part of the coupons capitalized rather than paid in cash in 2023 and 2024).

At a 16-18 percent discount rate, the final terms of the DDE imply an average NPV reduction of about 30 percent for these bondholders. Individual bondholders1/ were offered an exchange into shorter-term debt with higher coupons. Crucially, the completed original DDE has also produced very large cash debt relief for the government of almost GHS 50 billion in 2023, relieving pressure on the domestic financing market (IMF, 23/168).

Detailed the Final Breakdown of Revised Restructured Domestic Debt (Debt Reduction)

The revised DDEP included Treasury bonds, ESLA, Daakye bonds; US$742m restructured from dollar-denominated local bonds with average coupon rate and maturity period being 3% (previously 5.3%) and 1.5 years (4.5 years); GHS 7.7bn restructured from Cocoa bills with the coupon rate and maturity period being 13% (previously above 30%) and 4.4 years (previously 0.7 months); GHS 70.9bn principal haircut on the non-marketable debt instrument of the Bank of Ghana with the current coupon rate and maturity period 10% and 15 years respectively but excluded the pension bonds (MoF, 09/2023)

The breakdown of the GHS 203bn restructured domestic debt is as follows:

GHS 87bn restructured from Treasury bonds, ESLA, and Daakye bonds excluding pension funds. The average coupon rate and maturity period of the restructured bonds currently stands at 9.1 (previously 19.1%) and 8.3 years (previously 13.8 years)
GHS 29.6bn restructured Pension Fund holdings in Treasury bonds, ESLA, and Daakye bonds excluding pension funds. The coupon rate and average maturity period remain the same at 20% and 4 years respectively.
US$742m restructured from dollar-denominated local bonds with average coupon rate and maturity period being 3% (previously 5.3%) and 1.5 years (4.5 years).
GHS 7.7bn restructured from Cocoa bills with the coupon rate and maturity period being 13% (previously above 30%) and 4.4 years (previously 0.7 months)
GHS 70.9bn principal haircut on the non-marketable debt instrument of the Bank of Ghana with the current coupon rate and maturity period of 10% and 15 years respectively.

Data Analysis Using the NPV Discount Rate is 16% (Debt Reduction)

Detailed Cumulative Savings of GHS 61.7 billion on Government Bonds valued at GHS 203 billion on the DDEP implementation.

The Government issuer of Treasury bonds (Daakye and ESLA) valued at GHS 87 billion would save approximately GHS12.4 billion (14%) after the DDEP while making savings of GHS 7.2 billion on US $ Dominated local bonds valued at US$742 million. The Government saved GHS 4.5 billion (58.4%) on the Cocoa bills valued at GHS7.7 billion while the government made savings of GHS37.6 billion (53%) on the Bank of Ghana’s marketable and non-marketable bonds valued at GHS 70.9 billion. On the Pension fund bonds valued at GHS29.6 billion, the government made no savings (0%) on the DDEP because of their complete exemption from the program. The government made total savings of GHS 61.7 billion on the Government bonds valued at GHS 203 billion. The revised DDEP marginally impacted the banking sector, while NPV losses of the Bank of Ghana impacted negatively and significantly on their assets, while Cocoa bills suffered negatively likewise US$ dominated local bonds with the pension suffering no haircut at all.

The largest holders of domestic debt in the country included domestic banks, the Bank of Ghana, non-bank financial institutions, private individuals, pension funds, insurance companies, rural and community banks, and foreign investors. Investor losses ranged from 14% to 58.4%, with an average haircut of 30% based on comparing the market value of the new debt with the net present value of the old debt evaluated at the sovereign yield immediately following the debt exchange.

The NPV haircuts—defined by comparing the present value of new instruments received with that of old instruments tendered, both evaluated at yields prevailing immediately after the debt exchange—varied substantially across the debt restructurings studied. The DDEP has offered important lessons for other countries in similar situations. With hindsight, the revised DDEP led to a stronger reduction in debt in NPV terms of GHS61.7 billion against the Original DDEP fiscal savings of GHS 50 billion. The “toughest” restructuring was Argentina’s 2005 exchange with an average haircut of almost 75%, followed by the Russian GKO exchange (50-70%), with Ghana’s milder haircut of 30% while the mildest was Uruguay’s international bond exchange, with a haircut close to 10%.

The revised DDEP has shifted the loss burden from the banking sector to the Bank of Ghana which took a hit of DDEP loss of GHS 37.6 billion followed by the Cocoa bills which also took a hit of DDEP loss of GHS 5.4. billion also affected some banks that were part of the institutional investors. The interest rate of 13% was significantly lower than the average rate of 30% that cocoa bill holders enjoyed. This reduction has led to some banks having to significantly write down the value of their cocoa bills as well as a significant reduction in their interest income.

Those banks suffered from GoG bonds as well as cocoa bills ‘double whammy’. The debt exchange became a burden for domestic investors who have already been hit by a significant loss in real returns due to decades of high inflation and sharp depreciation of the Ghana Cedi against the major trading currencies. Addison (23/12/23) found that the initial debt restructuring scenarios had to be tweaked several times between the initial announcement and the final scenarios. On the domestic side, households, institutions, pension funds, and Banks somewhat saw less punitive treatment than initially designed. Given that the debt threshold remained unchanged, the Bank of Ghana had to therefore step in as the “loss absorber” with a more punitive treatment (50% haircut) than initially designed, leading to a large loss at the Bank of Ghana, driving it into negative equity at the end of 2022. This is not to justify the losses but to indicate that the policy choices made by the Bank during those difficult times were for the greater good of the economy.

However, the revised DDEP freed the banking sector from huge recapitalization and shifted losses to the central bank. The ability of the Bank of Ghana to operate with negative equity does not imply fiscal risks are reduced when crisis interventions were undertaken on the Bank of Ghana’s balance sheet. As the losses from the Bank of Ghana’s non-core operations were large enough that generate an overall net operating loss, they may be financed through equity buffers (where sufficient) or with government transfers, both of which imply fiscal costs. Alternatively, the Bank of Ghana may operate with negative equity but finance itself through the issuance of additional Bank of Ghana debt. However, this outcome could also lead to fiscal costs - for example, if it jeopardizes the central bank’s ability to achieve its core policy mandates (so-called policy insolvency). Ghana’s public debt as of the end of December 2023 stood at GHC610 billion representing 72.5% of GDP, despite the successful completion of the domestic debt exchange program, the country’s year-to-date public debt level soared by GHC163.7 billion.

As part of the revised DDEP policy intervention conducted on the Bank of Ghana’s balance sheet, there were strong arguments for the fiscal authority, the Ministry of Finance to directly bear any associated financial risks. Governments faced incentives to let the Bank of Ghana bear the risks and costs from its domestic debt exchange policy interventions, partly due to the NPV losses in the original DDEP impact on the banking sector from GHS37.3 billion to the revised NPV losses of GHS7.3 billion where the differences were passed onto the Bank of Ghana. However when associated losses were eventuated, these impacted the Bank of Ghana’s profitability and balance sheets, and in turn, could jeopardize the conduct of monetary policy and undermine macro and fiscal stability. The restructuring of the country’s domestic debt had marginally impacted individual households, whether through direct ownership of debt or investments in mutual and insurance companies as the tenor has been reduced from 13.8 years to 8.3 years with a coupon rate from 19.1% to 9.1% where the pension funds suffered no nominal NPV losses.

The revised DDEP has affected the access to bank credit and the cost of borrowing for Ghanaian businesses and households, which could have further distributional consequences. Ghana’s debt restructuring achieved a reduction in the debt but led to a contraction in consumption, driven by the effects of the austerity measures put in place e.g. cuts in public spending and a decrease in social welfare benefits like Leap. This resulted in a decrease in living standards for many individuals, as well as increased poverty and unemployment. It also affected the ability of domestic banks and businesses to grow, resulting in a decrease in overall economic output.

Additionally, restructuring including a “haircut”, has led to a further loss of confidence in the government’s ability to repay its debts and in the country’s economy. The channels of crowding-out, debt overhang, and debt reduction impacted negatively on the Ghanaian economy. The public debt crisis caused the Ghanaian financial sector to deleverage. in doing so, banks cut off credit to the non-financial sector — the now infamous “credit crunch.” Because credit is a fundamental ingredient in the smooth operation of asset markets, the crunch adversely affected the value of all types of tangible business capital. The steep drops in the value of assets owned by the bank and non-bank financial sectors also lowered the sector’s net worth and raised the frequency of business failures. Ghana’s bigger debt servicing burdens have reduced available fiscal space for development and stabilization and growing sovereign debt financing also has crowded out domestic investment.

For the first time in 30 years of international syndicated loan facilities, Ghana’s credit rating is so broken that the global banks don’t want to participate in international syndicated loan facilities. The presence of collateral damage in Ghana post-DDEP has affected the country’s international trade finance and payment system. Domestic debt restructuring has caused a reputational spillover that has depressed Foreign Direct Investment and other foreign capital inflows into the country including international cocoa-syndicated loans for 2023. The domestic debt exchange has negatively impacted on 2023 international syndicated loan of US$800 million as a result of reputational spillover with international financiers (The Thomson Reuters;07/11/2023). The growing loss of market confidence caused the Cocoa Board to raise funding earlier than expected. Cocoa Board's worsening financial position including the restructuring of the cocoa bills and the prevailing economic challenges heightened fears of debt default. Ghana’s credibility and financial standing are now being questioned by international financial institutions. This has caused collateral damage to the country’s credibility and financial reputation.

On the external debt restructuring, Ghana has just managed to reach a deal to restructure $5.4 billion of loans with its official creditors, the finance ministry said on 12th January 2024, a milestone in the country's quest for debt relief as it charts its way out of the worst economic crisis in a generation. The agreement with bilateral lenders of US$1.8 billion, China US$1.7 billion, and Paris Club of US$1.9 billion to restructure the external debt of US$5.4 billion and debt restructuring for Ghana reached by the Official Creditors’ Committee under the G20 Common Framework.

This agreement, which is consistent with the Joint WB-IMF Debt Sustainability Framework, represents a critical milestone toward restoring debt sustainability in this country (World Bank country report 18/01/2024) while the country is yet to reach any restructuring agreement with Commercial creditors including the Eurobond holders of US$13.6 billion. Ghana’s agreement on the terms of debt restructuring with Eurobond holders will represent a critical milestone towards restoring debt sustainability and early completion of negotiation with commercial creditors would bring a final resolution to Ghana’s public debt crisis. This will help Ghana to attract new investment, accelerate economic growth, generate jobs, and reduce poverty.

However, any rescheduling of commercial debt without debt reduction like written-off will compound repayment for future generations. Ghana’s public debt has become a burden on the future generation because more taxes are necessary to regain the same disposable income earned at the advent of the issuance. The nation reached an agreement with its bilateral creditors in January and is expected to agree on terms of restructuring with the commercial creditors by the end of the second half of 2024 but nobody can predict the quantum of debt relief that could the country enjoy.

Findings and Discussion on the effect of the public debt crisis on the Ghanaian economy.

1. Ghana’s public debt crisis has affected the economy through multiple channels. First, the public debt crisis, especially the sovereign debt default in December 2022, led to the exclusion of the country from international capital markets with its adverse effects on international trade finance and payment system as well as foreign direct investment. The public debt crisis negatively impacted the banking sector and the economy at large. Banks and other financial institutions were major holders of government bonds which did impact negatively on their balance sheets and financial stability was put at risk as the government decided to restructure their assets of medium maturity with a long-term maturity period. Other channels may also be at work and feedback-loop effects may take place.

Sovereign debt crises were also accompanied by a currency crisis and caused a deterioration in businesses’ and households’ confidence. Furthermore, measures of fiscal consolidation that were typically taken to restore confidence in the long-run sustainability of public debt led to short-run negative effects on the economy, and thus unintentionally exacerbated the crisis. Furthermore, banking crises are usually resolved through the injection of fresh capital by the national governments through the Financial Stability Fund and thus the problems in the banking sector may end up as a further liability for the government. While a sovereign debt crisis led through multiple channels simultaneously – thus making the chronological reconstruction of the events – the outcome is a contraction in output, a loss in the number of employees, a weaker financial system, and, more generally, a decline in living standards.

2. Despite the domestic debt reduction in the form of debt exchange, the Ghanaian economy has slowed down and restrained economic growth and development through two channels including—"debt overhang,” and “crowding out” which has also increased crisis risk thus making the economy vulnerable to abrupt changes in market sentiment, jeopardizing both stability and future economic growth. The results of this study also found that domestic debt reduction through domestic exchange has continued to hamper economic growth. Heavy public debt service obligations resulted in a large risk premium on interest rates, periodic bouts of financial market instability, and a crowding out of bank credit to the private sector, all of which had contributed to a very low potential growth rate. For Ghana’s domestic debt reduction to be successful, must be mainly driven by decisive and lasting (rather than timid and short-lived) fiscal consolidation efforts focused on the reduction of government expenditure, in particular, cuts in social benefits, government flagship programs and conscious reduction of public sector wages and compensation, without any fiscal consolidation.

3. Ghana must ensure that there is robust real GDP growth in terms of lower inflation in the next five years to increase the likelihood of a major debt reduction so that it could help the country “grow their way out” of indebtedness”. Third, high debt servicing costs play a disciplinary role strengthened by market forces and require the government to set up credible plans to stop and reverse the increasing debt ratios. Debt reduction has increased uncertainty and reduced investor confidence in the Ghanaian economy and its policies which could also reduce economic growth. Debt restructuring will be a prerequisite but not enough to restore its sustainability. To reduce public debt to 55% of GDP by 2028, it will also be necessary to continue the ambitious fiscal consolidation strategy and structural reforms set by the IMF, namely an adjustment of 5.1% of GDP over the 2023-2026 period. While we conclude that there was a reduction in the net present value of debt servicing costs does not mean that more money is available now for Ghana to spend. The reduction meant that future debt servicing costs were reduced compared to the current baseline during the next decades and, therefore, Ghana would have to spend less on financing its debt in the future.

The World Bank recently noted that Ghana remained stuck in a debt trap with no hope of escaping anytime soon. However, the country is still in a debt trap with Eurobond holders’ values of US$ 13.6 billion which could be best described as a debt overhang. First, domestic debt exchange in the medium to long term tends to reduce uncertainty and affects the market confidence in the country and its policies, thus plummeting future economic growth, however, debt reduction has reduced capital inflows which has weakened confidence in the government structural reforms and the new policies introduced recently. On the positive, the country’s successful completion could be an endorsement by the international community including the IMF, World Bank, and other international donors that the country is pursuing sound macroeconomic policies and structural reforms. The country’s default on the international capital market has prolonged the time that Ghana could facilitate early access to the international financial markets.

4. The country’s sovereign restructuring episode has harmed the financial sector of the country for several reasons. First, the asset side of banks’ balance sheets has taken a direct hit from the loss of value of the restructured assets, such as sovereign bonds. Second, on the liability side, banks have experienced the interruption of interbank credit lines. These issues have negatively affected their ability to mobilize resources at times of stress. Finally, restructuring episodes have also triggered interest rate hikes, thereby increasing the cost of banks’ funding and affecting their income positions. Together, these factors impaired the financial position of domestic institutions to such a degree that financial stability has been threatened and pressures for bank recapitalization and official sector bailouts have increased. A final observation is that debt restructuring in Ghana has had cross-border implications. Nigerian and South African banks and financial institutions were exposed to sovereign risks in Ghana that underwent restructuring transmitted the shock across borders, either directly by loss of value of government securities or indirectly through their exposure to the banking sector of that country.

5. The successful debt reduction operation has not appreciably reduced the level of the country’s cost of debt servicing, thereby increasing the “fiscal space” available to Ghana. Crucially, the completed DDEP has also produced a very large cash debt relief for the government of almost GHS 61.7 billion in 2023, relieving pressure on the domestic financing market, but despite the domestic debt exchange, domestic debt has increased by GHC 54.3 billion to GHC 259.7 billion in December 2023. Debt reduction has created fiscal space which means the availability of additional resources that can be used in desirable government spending (or tax reduction). The fiscal space is used to enhance medium-term growth and finance this growth from future fiscal revenue. In fact, there are different channels through which a county can create or enlarge its fiscal space.

6. Also, despite the successful implementation of the domestic debt exchange, one negative effect of domestic debt reduction has caused investors to lose confidence in the country's secondary bond market and the ability to repay its debt on time. This has led to a decrease in domestic investment and an increase in the cost of borrowing for the government and local businesses. The decreased domestic investment has a ripple effect on the local economy. As businesses including SMEs have struggled to access the funds they need to grow and hire workers, the unemployment rate in Ghana has dramatically increased. This lack of investment has also led to an increase in the cost of borrowing for the government and local businesses, making it more difficult for them to finance their operations and invest in growth. In terms of the effects on the domestic bond market and local financial institutions (banks, insurance, asset management companies & pension scheme agencies), domestic debt exchange had both direct and indirect effects. The direct effect was that the restructuring resulted in a loss of value for domestic bondholders. This has led to a decrease in demand for Ghana government bonds and a decrease in the overall value of the bond market.

The indirect effect was that the restructured domestic debt has affected the stability of local financial institutions, especially in the area of liquidity and solvency. If the government was unable to manage its domestic debt exchange process properly, the economy would suffer as a result, local banks would face increased risks and potentially experience financial difficulties. This has led to a decrease in the availability of credit for local businesses as well as higher costs of credit and households, thus hindering economic recovery and growth. Ghana’s balance of payments is expected to continue to deteriorate further in 2024, on the back of continued capital outflows, and the continued Cedi depreciation because of a decline in inward remittances, low returns on extractive industries like gold, and poor cocoa syndication loans of US $ 800 million lowest recorded over the past two decades.

7. Debt reduction has caused considerable reputational damage, market exclusions, higher borrowing costs, sanctions, and trade embargo, (sovereign assets outside the country) are examples of costs that a debtor country might suffer in case of default. The country has not had access to international capital markets for at least four years thus affecting foreign direct investment. Most correspondent banks of the Ghanaian banks overseas withdrew their credit lines when the country was downgraded by the credit rating agencies as well and the country defaulted in the payment of external debt in December 2022. Reputational costs include market exclusion and increased borrowing costs for the country. creditors might refuse to purchase the debtor country’s bonds following debt restructuring. Future Creditors impose this punishment on the debtor country like Ghana. Creditors might purchase the debtor country’s bonds following debt restructuring but request a premium (i.e. a higher interest rate to compensate for the risk of future default or other restructuring). The recent inability of the cocoa board and the government to pay some holders of cocoa bills who did not participate in the Cocoa Bills Exchange program showed how the government is bankrupt, and investors have lost confidence in the investment climate. The DDEP has had a significant impact on investor confidence in the fixed-income market in Ghana. The sudden loss of value for existing bondholders has led to concerns about the safety of government-issued securities and has shaken investor confidence.

8. The domestic debt exchange (debt reduction) impacted negatively domestic banks and non-banking financial institutions on solvency, regulatory capital requirements, and their loanable funds and adversely affected the economic and financial livelihood of Ghanaians, especially the pensioners, poor and vulnerable in the society whose incomes have been whittled away by the higher inflation. Domestic debt exchange through debt reduction which included principal haircut and coupon rate reduction has triggered a decline in domestic investors’ confidence in governments’ creditworthiness and raised doubts about the sustainability of government finances. As the country has reduced the value of its bonds, the domestic banks have had a marginal reduction in the number of assets on their balance sheet and possibly insolvency.

9. The domestic debt reduction has also created a situation known as an inverted yield curve. An inverted yield curve occurred as short-term interest rates on Treasury bills were being quoted between 22% and 33.7% per annum exceeding long-term rates on Government bonds’ coupon rate of 9.1% or 8.51% per annum. The term yield curve refers to the relationship between the short- and long-term interest rates of fixed-income securities issued by the Ghana Government Treasury. The yield curve has inverted—meaning short-term interest rates moved higher than long-term rates—and could stay inverted through 2023 and 2024. This has signaled an imminent recession or slowdown in the Ghanaian economy. An inverted yield curve is when shorter-term notes pay higher effective yields than longer-term bonds. The yield curve is considered “normal” when longer-term bonds yield more than shorter-term ones. In the post-DDEP era, the government has been borrowing at the money market at the rate between 22% and 33.7% while the government bond coupon rate is quoted at 9.1% per annum. The inverted yield curve has been viewed as an indicator of a pending economic recession in the country. When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor and that the yields offered by long-term fixed income will continue to fall. The existing bond market was considered a major prerequisite to sustainable debt dynamics as well as improved growth prospects by the financial sector and the wider public. However, the DDEP has not managed to lower signal rates during the post-DDEP era, as the market interest rates on short-term government bills have risen to historically high levels and thus created an inverted yield curve and remained unstable.

10. Domestic debt reduction could have lasting effects on the country’s economic growth, and confidence in the domestic market and the financial sector. Following the domestic debt exchange, universal banks with large exposures to government bonds have experienced a deterioration in their balance sheets, thus reducing the supply of loans to firms via a traditional bank lending channel (Gennaioli et al. (2014) and Acharya et al. (2014b). Furthermore, the weakened financial sector has impaired financial intermediation thus leading to a hesitance of financial institutions to provide funds to individuals and businesses as well as poor low savings culture. This would then threaten future economic growth and development. Indeed, the present economic challenges may compromise the ability of individuals and businesses to pay their loans which would heighten the impairment levels. According to the Bank of Ghana, MPC March report 2024 on the banking sector NPLs stood at 24 percent of total loans thereby creating systemic banking crises that could be highly disruptive events that could lead to sustained declines in economic activity, financial intermediation, and ultimately in welfare ( Laeven and Valencia, 2018). Both the Ghana budget and its debt might seem well manageable in the coming years. However, the debt trap caused a long shadow, thus causing lingering challenges and risks. Future higher interest rates, budgetary pressure, and weak growth can lead to a higher debt-servicing burden and refinancing needs. Keeping up fiscal strength and, first and foremost, promoting growth, are the best ways for Greece to address these challenges.

11. The debt reduction has caused serious collateral damage as well as a loss of market confidence in the Ghanaian economy. Debt exchange has caused reputational damage as Cocoa Board Market Ltd was unable to raise financing for the 2023/2024 cocoa season purchase in September/October 2023. Ghana’s cocoa output target of 830,000 metric tonnes was delayed as the International Financiers' Cocoa Board rated it as a higher-risk institution and Ghana as a higher-risk country for which international financiers demanded a higher premium. Ghana signed the costliest syndication loan ever for cocoa because of the country’s debt crisis. According to Bloomberg Cocoa Board received the funding at an interest rate of almost 8% per annum. Ghana secured its annual loan to pay for cocoa purchases at the highest interest rate on record, following this year’s debt restructuring of the West African nation’s obligations that ruined investor appeal. International banks have pledged to lend industry regulator Ghana Cocoa Board $800 million for cocoa purchase from farmers at almost 8% per annum with the terms of the deal. It is the costliest syndicated facility the board has received since the annual loans started in 1992-93, the people said, asking not to be identified because the transaction isn’t yet public. The board, also known as the Cocoa Board, has previously obtained loans from investors at better rates than the government at an average rate of 2%.

13. Ghana is still experiencing debt overhang as the country’s debt burden in the power sector is so large that in post domestic debt restructuring era, the power sector providers cannot take on additional debt to finance future projects or pay off the existing debt to the power generation companies in the energy sector. The domestic debt reduction has not addressed the debt overhang for the power sector arrears or the legacy debt. According to IMF Country Report No. (19/367) posited that power sector arrears were about US$2.7 billion in late 2018, of which US$800 million was owed to private fuel suppliers and independent power plants (IPPs). For 2019, the authorities project the financing shortfall for the sector to be at least US$1 billion (1.5 percent of GDP), which they plan to partially finance off-budget. Partial payment arrangements may be insufficient to stave off more formal approaches by IPPs to collect amounts due. Absent measures to address the sector’s financial problems, the accumulated cost to the government, including current arrears, could reach US$12.5 billion by 2023. The burden is so large that all earnings pay off existing debt rather than fund new investment projects, making the potential for defaulting higher. The findings confirmed that debt overhang has led to under-investment in the Ghanaian energy sector.

For example, most of the firms in the energy sector are in financial distress and it is difficult to pay off their suppliers or raise funds for new investments because the proceeds from these new investments mostly serve to increase the value of the existing debt instead of new investments. Debt overhang has caused under-investment problems in the energy sector that could impact negatively on future production and supply of electricity to the entire country. Debt overhang could be alleviated if the various creditors like WAPCo, Sunon Asogli Power Co. Ltd, Bui Power Authority, and the Government of Ghana manage to renegotiate their contracts and restructure the balance sheets. The debt overhang is also currently being experienced by Bui Power Authority because of the inability of the Electricity Company of Ghana to pay for power supplied and this could cause underinvestment by the various power generators in the country. ECG (and the central government) are counterparties to several take-or-pay contracts with independent power producers. The contracts require payment for contracted volumes of electricity even if the electricity is not consumed (take-or-pay charges). When ECG expenses the charge, its equity is reduced, and its liabilities (accounts payable) increase. The reduction in equity lowers the value of the government’s investment in ECG. The actual payment of the claim by ECG or the government does not alter the public sector’s net worth. The unresolved external commercial debt including that of a euro-bond worth US$13.6 billion is still creating a debt overhang in the country. From the unresolved debt overhang of IPPs. the country could experience power outages popularly known in Ghana as ‘Dumsor’ could negatively impact the country’s economic recovery.

14. Another negative effect of debt overhang is that it has caused investors to lose confidence in the government's inability to repay its local bonds on time. This has led to a decrease in local investment and an increase in the cost of borrowing for the government and local businesses with yearly treasury bill rates increasing from 22% to 33.7% post-DDEP era. The higher interest rates on treasury bills also affect the country’s banking institutions thus creating an adverse selection problem. As interest rates rise more conservative, risk-averse borrowers shy away from the credit market. A larger proportion of the people applying for loans are thus those who are willing to take risky bets. The likelihood of default increases and so therefore does the banks’ proportion of non-performing loans.

The domestic debt exchange has resulted in the government regularly mopping liquidity from the banking sector by purchasing considerable volumes of Treasury bills at increasingly high-interest rates. The domestic debt exchange has also weakened the financial sector through impaired financial intermediation that led to a hesitance of financial institutions to provide funds to individuals and businesses. Credit to the private sector has contracted in the third quarter of 2023 as Banks continued to deploy their resources towards treasury bills as opposed to the extension of credit facilities in response to the increased risks associated with lending due to the deteriorating macroeconomic conditions and the impact of the domestic debt exchange program thus confirming the crowding out hypothesis. This has threatened future economic growth and development. Indeed, the present economic challenges have compromised the ability of individuals and businesses to pay their loans which impacted negatively on the non-performing assets of the banking sector. The recent Bank of Ghana report on the increases in the non-performing asset ratio from 15% in 2022 to 20% in 2023 confirmed the debt overhang hypothesis. Weaker economic activity has translated into higher non‐performing loans by both firms and households which could increase bank distress through balance sheet and liquidity effects. The 2022 currency depreciation has exacerbated non‐performing loan volumes through currency mismatches. From a citizen’s viewpoint, the numerous taxes introduced in the 2023 budget by the Government meant that high debt means higher future taxes and/or reduced social benefits – and when combined with reduced corporate activity – less employment.

15 . The country’s debt overhang has also led to stagnant growth and a degradation of living standards from reduced funds to spending in critical areas such as healthcare, education, and social care like Leap. The debt overhang had resulted in the non-payment of some road contractors as well as food suppliers to the National Food Buffer Stock Company that have resulted in higher non-performing assets of the banking sector. The country’s banking system exhibited significant losses resulting in a share of nonperforming loans above 24 percent of total loans thus indicating that the sector was in crisis. Because of the way they affected balance sheets and bottom lines, debt overhangs have distressed entities including banking institutions in different ways. The decreased domestic investment has a rippling effect on the local economy. As businesses including SMEs have struggled to access cheaper funding to grow and expand their businesses and impeded the hiring of workers, the unemployment rate in Ghana has dramatically increased.

16. As part of the country’s debt crisis, the government has introduced a myriad of taxes in 2023 and 2024 to address revenue shortfalls. Currently, Ghana with a small open economy has 27 tax handles. The country has been overburdened with nuisance taxes. The debt overhang has led to an increase in taxes towards generating adequate revenue to settle both foreign and domestic creditors, thus discouraging investments due to a sudden increase in taxes. According to recent reports, Ghana enacted legislation for the 2024 Budget on 29 December 2023, including the Value Added Tax (Amendment) Act, 2023 (Act 1107), the Excise Duty (Amendment) (No.2) Act, 2023 (Act 1108), the Stamp Duty (Amendment) Act, 2023 (Act 1109), the Exemptions (Amendment) Act, 2023 (Act 1110), and the Income Tax (Amendment) (No.2) Act, 2023 (Act 1111).A VAT flat rate of 5% is introduced on the following, without a deduction for input tax: the supply of a (commercial) immovable property for rental purposes, other than for accommodation in a dwelling or a commercial rental establishment; and the supply of an immovable property including land by a real estate developer; A new penalty equal to 30% of the VAT amount due is introduced for appointed VAT withholding agents that fail to withhold and remit VAT by the 15th of the following month (7% withholding on standard-rated invoices); VAT exemptions are revised, including the VAT exemption is removed for imported textbooks, exercise books, newspapers, publications, and charts (locally produced remain exempt), as well as architectural plans and similar plans, drawings, scientific and technical works, periodicals, magazines, trade catalogs, price lists, greeting cards, almanacs, calendars, diaries and stationery, and other printed matters.

A new penalty equal to 30% of the VAT amount due is introduced for appointed VAT withholding agents that fail to withhold and remit VAT by the 15th of the following month (7% withholding on standard-rated invoices); VAT exemptions are revised, including the VAT exemption is removed for imported textbooks, exercise books, newspapers, publications, and charts (locally produced remain exempt), as well as architectural plans and similar plans, drawings, scientific and technical works, periodicals, magazines, trade catalogs, price lists, greeting cards, almanacs, calendars, diaries and stationery, and other printed matters. VAT zero-ratings are revised, including the VAT zero-rating for locally manufactured textiles by approved manufacturers the VAT zero-rating for locally manufactured textiles by approved manufacturers is extended to 31 December 2025; the VAT zero-rating for supplies of locally assembled vehicles under the Ghana Automotive Development Programme is extended to 31 December 2025; and The stamp duty rates are revised, including new fixed rates from GST 18 to GHS 896.30 and ad valorem rates of 0.25% to 0.5%; and the individual income tax brackets/rates are amended as follows: up to GHS 5,880 - 0%; over GHS 5,880 up to GHS 7,200 - 5%; over GHS 7,200 up to GHS 8,760 - 10%; over GHS 8,760 up to GHS 46,760 - 17.5%; over GHS 46,760 up to GHS 238,760 - 25%; over GHS 238,760 up to GHS 605,000 - 30%; over GHS 605,000 – 35; The measures of the amendment acts generally apply from 1 January 2024, government introduced taxation on lottery operations and winnings from lottery. The gross gaming revenue from lottery operations, including betting, gaming, and any game of chance is taxed at an income tax rate of 20%.

Growth and Sustainability Levy, 2023 (Act 1095) Act 1095 repeals the National Fiscal Stabilization Levy, 2013 (Act 862) and introduces the Growth and Sustainability Levy (GSL or levy). The GSL is payable by entities categorized into three groups as follows: Category A- Existing National Fiscal Stabilization Levy entities plus six additional sectors: 5% of profit before tax; Category B- Mining companies and upstream oil and gas companies: 1% of gross production); and Category C- All other entities not falling within Category A or Category B: 2.5% of profit before tax. The levy is applicable for the 2023, 2024, and 2025 years of assessment. It is payable quarterly and due on 31 March, 30 June, 30 September, and 31 December of the year. The above new taxes introduced by the government have affirmed the debt overhang hypothesis. Excessively high rates of tax exact a high cost in terms of lower private investment and growth. They reduce the incentive to invest because the after-tax returns to investors are lower. In addition, the cost of compliance with the administration of taxes can be high.

The literature shows that lower rates of tax can increase investment and growth. Higher rates of tax have decreased business entry and the growth of established firms, with the medium-sized firms hit hardest, as the small ones can trade informally, and the large ones avoid taxes, which have also resulted in the existence of some multinationals in nearby countries. As well as reducing tax rates, policies that broaden the tax base, simplify the tax structure, improve administration, and give greater autonomy to tax agencies help to reduce this constraint. The new myriad of taxes introduced in the 2023 and 2024 budget statements has been impacting negatively on the private sector, especially the SMEs. The recent 21% value-added tax for residential customers of electricity is one of the nuisance taxes introduced in the 2024 government budget statement which imposed hardship for individuals and households in an already bad economic condition. Instead of the government improving electricity transmission losses by 30%, the government has decided to impose a 15% consumption tax this will likely affect the country’s growth targets as the move is expected to increase the the cost of operations of SMEs and slow down production and thus worsen the already bad unemployment situation in the country.

20. This study concludes, that the government budget deficit has crowded out private investment through its effect on interest rates. Recent trends in domestic credit showed the lazy banking hypothesis where the bulk of commercial bank lending has been to the Government treasury papers, instead of private sector credit has largely been lethargic. The deceleration in private sector growth which commenced in 2022, was initially associated with the increase in unemployment and reduced household income due to the recession. At the same time, the Government’s expansionary spending led to a surge in credit to the government to finance the deficit. This paper sets out to determine if the sustained increase in banking sector financing to the Government has impacted commercial banks’ capacity to lend to the private sector. The theory of crowding out has suggested that as the government increased its spending, it has thus increased the demand for goods and services, which has led to the current higher interest rates and higher inflation in the country. A crowding-out has caused a rise in real interest rates in the post-DDEP era. By the crowding-out effect, a decrease in public investments had transmitted to a reduction in private investments due to the complementary of some private and public investments. In as much as extreme national debt can result in liquidity constrain by crowding out domestic investments in the debtor country; reliance on debt is a necessity for unindustrialized economies at their early stage of development since available financial resources at that phase could be inadequate to enhance the needed growth and development.

The crowding out could also impact negatively economic growth as it slowed down because Ghana has lost its pull on private investors while servicing of debts exhausts up so much of the indebted country’s revenue to the extent that the potential of returning to growth paths is abridged. The most severe negative effects of domestic debt are, however, also channeled through the financial sector. The crowding-out effect of domestic debt on private investment is a serious concern. Bank credit to the private sector has been empirically proven to be a contributor to economic growth. However, when governments borrow domestically, they use up domestic private savings that would otherwise have been available for private-sector lending. As increasing public financing needs push up government debt yields, this has further caused a net flow of funds out of the private sector into the public sector, and this has pushed up private interest rates. In shallow financial markets, especially where domestic firms have limited access to international finance, domestic debt issuance of treasury bills could lead to both swift and severe crowding out of private lending. In most developing countries like Ghana, only large, well-established firms have access to international finance, suggesting that the burden of crowding out fell heavily on small and medium-sized enterprises and rural borrowers.

In the short run, shortages of foreign exchange reserves, revenue inadequacy, and unstable exchange rates had adverse and significant impacts on the real GDP growth rate. Thus, it was concluded that excessive borrowing on the money market by the government has deprived Ghana of the revenue and reserves required to fund domestic investments and enhance economic stability. In sum, the confirmation of the lazy bank hypothesis together with the growing government deficit financed mainly from the banking sector poses a few momentous challenges in Ghana with short-run and long-run ramifications. Besides the apparent adverse effect of the observed unsustainable government deficit, this paper has uncovered another serious channel coming from the financial sector, or more precisely the banking sector. As the government issues more debt instruments (ie Treasury Bills) to finance its deficit, banks tempted by the risk-free high return motive shift their portfolio away from risky private loans and opt for lazy behavior characterized by a shrinking overall credit tilted more and more toward government debt-instruments.

21. The social implications of the public debt crisis, meanwhile, have been exceptionally severe. Ghana has suffered from a rapid increase in poverty; there has been a decline in quality primary health care; quality primary and secondary education have faced cuts in resources. The contraction of output has also led to a collapse of small and medium enterprises, while at the same time, taxation on SMEs has increased substantially. A report released by the World Bank has revealed that high inflation rates in 2022 pushed an overwhelming 850,000 Ghanaians into poverty. The report indicated that the severe economic crisis in 2022 characterized by soaring inflation rates had devastating consequences on food security and poverty in the country. According to the World Bank country’s “international poverty” rate was estimated at 27% in 2022, an increase of 2.2% points since 2021. Ghanaian households have been under pressure from rising prices in utilities, persistent depreciation of the local currency against all major trading currencies, high inflation, and slowing down economic activities. Poverty has been projected to worsen between 2023 and 2025, increasing to nearly 34% (international poverty line) by 2025, consistent with a muted outlook on growth in services and agriculture and rising prices which are outpacing the income growth of those at the bottom of the distribution.

22. The domestic debt reduction has impacted negatively on the Bank of Ghana’s balance sheet and its solvency as it took the biggest hit of NPV losses of GHS 37.6 billion. The NPV losses of GHS 37.6 billion in the revised domestic debt exchange on the Bank of Ghana could impact negatively on the functioning of the central bank. The Bank of Ghana may be able to continue its monetary policy and regulatory functions despite the debt restructuring. However, the Bank of Ghana’s ability to be able to continue its other functions, such as operating payment systems, providing emergency liquidity support for the banking system, or conducting its corresponding banking operations could be compromised. Depending on its ex-ante equity position, any losses on the central bank balance sheet that may result from the DDEP would have to be addressed, including through recapitalization (Liu, Y; Savastano, M & Zettelmeyer, J. 2021).

A liquidity backstop served as a lifeline for banking institutions that might lose access to market or deposit funding. It could be especially useful for a banking system with a high degree of interconnectedness and for financial institutions that otherwise do not have access to the Bank of Ghana window for liquidity support. Collateral eligibility requirements for Repos might need to be reviewed, especially as banks faced marginal haircuts on government bonds typically used as collateral for central bank operations. In countries such as Ghana where the financial market is not well developed, however, the size and scope of liquidity backstop facilities would be limited. IMF country report (23/168) noted that the Bank of Ghana’s Balancece sheet has been impaired by the NPV losses of GHS 37.6 billion because of domestic debt restructuring, the Government and Bank of Ghana would have to assess the impact and develop plans for its recapitalization with IMF technical assistance support. It can be inferred from this study that the public debt crisis harmed economic stability in consonance with the debt overhang, crowding out, and debt reduction effects. In an environment of limited fiscal space by the government, the risk of crowding out of the private sector by the government is real.

The recent evidence on the money market (upswing of the Treasury bill rates from 22% in 2022 to 33.7% in late 2023) has validated the crowding out hypothesis. This might lead to lower projected economic growth, further leading to lower tax collection. Thus, policymakers should ensure that public debt is used to finance high-income generating investments capable of attracting adequate revenue required to amortize the debt and create future streams of revenue that would help reduce the national debt and enhance future economic growth. They suggested that even if it can be inferred from this study that recent domestic debt restructuring hurts economic stability in consonance with the debt overhang and crowding-out effect structural adjustment programs are put in place by governments of these countries, adverse effects can still be felt on development of general economic performance. Therefore, to accelerate economic growth, developing countries like Ghana must adopt policies that are likely to result in a reduction in the debt burden, reduce the country’s debt overhang and crowding out, and also at least ensure that the rising debt burden does not reach an unsustainable level.

Conclusion.

The financial and economic crisis of the last two years has highlighted the need for further policy actions both at the domestic and international levels to generate economic growth rates in Ghana capable of preserving debt sustainability as well as meeting the MDGs. In this regard, it is important to distinguish between short-term actions aimed at minimizing the impact of the current crisis, and longer-term policies that would need to be implemented to increase the robustness of the global economy and reduce global imbalances. Ghana’s sovereign debt crisis is expected to have far-reaching implications for the economy, well-being of Ghanaians, poverty, future generations as well as reputational damage to the country. Overconsumption financed by excessing borrowing, persistent government budget deficits, current account deficits, energy energy-related debt as the main sources of the current dramatic situation of the economy. The downturn in the economy has been fueled by an extremely large and inefficient public service sector with huge wages and compensation bills over the past five years.

From this study, one can conclude that Ghana is on the path of being trapped under a perpetual debt unsustainability trajectory like Greece and Argentina where external debt is restructured every other three years with the help of the IMF. Ghana’s debt restructuring is a necessary but not sufficient condition for the solution to the crisis in Ghana and the rest of African countries like Zambia reeling under debt. Another necessary condition is that the restructuring must be accompanied by robust fiscal consolidation including government expenditure cuts and other austerity measures. Ghana needs a cancellation or significant write-down of its public debt. The insistence on full repayment of its debt is not justified on either pragmatic or moral grounds. Moreover, as the past has shown, these situations can have dangerous political repercussions.

Based on the previous discussion, we can make some brief points about the Ghana public debt problem, as well as the Zambia and the African public debt crisis. However, the issue at hand is much more complicated than this. First, as we mentioned above, and the experience of the last three years has proven, the full repayment of Ghana’s public debt is not pragmatic. The debt cannot be repaid under any plausible circumstances, and the longer we ignore this reality, the worse it will be for the Ghanaian economy. Also from this study, knowing well that prudent use of public debt makes debt service to public borrowing easier for a nation; this study, well researched, has made its findings and policy recommendations. Therefore, the study believes that if the policy recommendations are adequately implemented, it will go a long way in solving public debt crises and hence, improve private domestic investment growth in the Ghanaian economy. Furthermore, if the policy recommendations are implemented would go a long way to address debt overhang and crowding out effects and help to address the challenges in the country’s debt reduction program.

Economic recovery from the public debt crisis has been slowed down, through the channels of debt overhang; crowding out, and debt reduction problems accompanied by a financial crisis lower the country’s net worth. if the country has been carrying debt, the loss of net worth brought Ghana closer to default which has impacted negatively on the country’s reputation and credibility. To address the public debt crisis the government must adopt ambitious structural fiscal reforms bolstering domestic revenues, improving spending efficiency, strengthening public financial and debt management, preserving financial sector stability, enhancing governance and transparency, and helping create an environment more conducive to private sector investment.

It can be inferred from this study that the public debt burden has harmed economic stability in consonance with the debt overhang, crowding out, and debt reduction theories. It was believed that, if DDEP was accompanied by a comprehensive fiscal reform strategy, a debt reduction would preserve Ghana’s reputation and be beneficial for the economy and all stakeholders, but debt reduction has contributed to the poverty level as individuals lost part of their investment. Furthermore, in the absence of a credible plan to address the debt overhang, the country’s ability to service its debt obligations would remain in serious doubt going forward and the risk of financial instability would remain high. Debt overhang occurred when there was a significant probability that Ghana could go bankrupt soon. The debt overhang has reduced the incentives of new domestic investors to invest in business capital because, in the event of default, part of the return on new investment accrues to existing creditors.

The debt overhang has also led deterioration of the fiscal outlook which has resulted in fiscal measures such as tax increases and government spending cuts which have reduced economic activity, thus lowering household and firm incomes. This has led to a deeper reduction in tax revenues and further undermined the fiscal position. Debt overhang also has decreased the country’s incentives to invest its current revenue in financial assets because these assets are easier to liquidate when business conditions deteriorate, and bankruptcy becomes more likely. On both counts, the rate of investment in social infrastructure has been adversely affected. Thus, debt overhang has been one of the potential explanations for why domestic firms have been reluctant to expand capacity in this recovery. The macroeconomic consequence of this reluctance to invest is a slow recovery. In conclusion, it has been suggested that a restructuring can allow to exit from a default but, to be growth improving, it must address the debt overhang problem and then it might imply larger haircuts.

Post-domestic debt exchange (debt reduction) experience has shown that crowding out has led to higher interest rates on banking credit facilities that have slowed down economic growth. As the government has aggressively borrowed funds from the money market (Treasury Bills market) to finance its spending, it has been competing with private borrowers for available funds. According to reports, the government has cumulatively as of 20 November 2023, issued GHS 128.93 billion on the money market, surpassing the GHS 119.77 billion target (GCB Capital, 11/20/2023). This competition between government, banking institutions, and private sectors has driven up interest rates (i.e. higher treasury bill rates), which has made it more expensive for businesses to borrow money for both working capital and expansion. Crowding-out has occurred when increased government borrowing reduces investment spending. Higher interest rates also reduced consumer spending, as people chose to save their money instead of spending it.

In the medium term, crowding out could also reduce private investment. When interest rates rise, businesses may choose to delay or cancel their investment plans. This could lead to lower levels of economic growth and fewer job opportunities. Crowding out has led to higher inflation. Driven by the observed growing persistent budget deficit and the heavy reliance on debt- financing from the banking sector, this study sets out to test the lazy banking hypothesis for Ghana. According to this hypothesis, government borrowing crowds out private investment through its dampening effect on private credit. As the government spent more money, it increased the demand for goods and services. As the supply of goods and services did not increase to meet this demand, prices rose, leading to higher inflation over the past two years. Crowding out could also reduce the long-term economic growth rate to 1.5% of GDP in 2023.

According to the World Bank. Ghana’s economic growth will remain depressed in 2024 at 2.8% of GDP but the economy is expected to recover to its potential growth by 2025. Bretton Wood institution posited that the economic growth rate would be held back by high and persistent inflation, lower credit because of elevated interest rates, and weakness in the energy sector. According to the World Bank report (2023), these drivers would operate through a slowdown in the growth of household consumption and investment. As the government spends money on projects that do not generate a return on investment, such as social welfare programs, it may divert resources away from more productive uses.

This could lead to lower levels of economic growth over the long term. As the government issues more treasury bills to finance its deficit, banks shift their portfolio away from risky private loans and opt for lazy behavior characterized by a shrinking overall credit tilted more and more toward government debt instruments. According to the Bank of Ghana Monetary Policy Committee January 2024 noted that with a tight monetary policy stance and increased risk aversion of banks due to rising credit risks, private sector credit expansion broadly remained sluggish in the year. In December 2023, the pace of growth in private sector credit declined to 10.7 percent, compared with 31.8 percent annual growth in December 2022. In real terms, credit to the private sector contracted by 10.2 percent relative to a 14.5 percent contraction, recorded over the same comparative period. To the extent that a slow recovery engenders pessimism, it exacerbates the crowding out and debt overhang problems in the post-DDEP period. It could be inferred from this study that domestic debt exchange has hurt economic stability in consonance with the debt overhang, and crowding-out effects. Thus, policymakers should ensure that public debt is used to finance high-income generating investments capable of attracting adequate revenue required to amortize the debt and create future streams of revenue that would help reduce national debt and enhance future economic growth. First, major debt reductions must be mainly driven by decisive and lasting (rather than timid and short-lived) fiscal consolidation efforts focused on reducing government expenditure, in particular, cuts in social benefits and public wage spending.

Revenue-based consolidations seem to tend to be less successful. Second, real robust GDP growth also increases the likelihood of a major debt reduction because it helps Ghana to “grow their way out" of indebtedness. Here, the literature also points to a positive feedback effect with decisive expenditure-based fiscal consolidation because this type of consolidation appears to foster growth, in times of severe fiscal imbalances. Third, high debt servicing costs exert a disciplinary effect via market forces and require governments to set up credible plans to stop and reverse the increase in debt ratios. Ghana’s domestic debt exchange (debt reduction) was both unavoidable and partially successful in the sense of being a bit orderly, reasonably quick, and providing significant government savings of GHC 61.7 billion at the expense of bondholders. One of the benefits of debt reduction is that it has reduced the cost of debt servicing, thus increasing the “fiscal space” available to the government. The successful debt exchange operation has appreciably reduced the level of the country’s indebtedness. Positive market developments since the launch of the revised debt exchange have also played an important role in helping to contain potential financial sector spillovers.

Bank deposits remained stable and liquidity pressures in the SDIs sector did not emerge as predicted by the original DDEP. At the same time, it has been subjected to a battery of criticisms such as lack of transparency and openness, bad faith efforts for a collaborative process to restore debt sustainability, partiality, and unfair treatment across various creditors. Ghana’s domestic debt exchange was bedeviled with a poor and untimely flow of information, lack of transparency, bad faith actions, and unfair treatment of some domestic creditors. Most importantly, it was too little, too late, or both; hence failing to restore Ghana’s debt sustainability. The question is whether this reflected avoidable policy mistakes or unavoidable trade-offs – in the sense that Ghana and its domestic creditors faced difficult choices, and did their best given what was feasible.

Policy Recommendations.

i. Ghana should always avoid excessive borrowing from both domestic and external sources. Excessive borrowing by the public sector should not be driven by political or electoral considerations and by the fact that politicians may decide to maximize their welfare rather than that of their constituencies. Innovative debt instruments can limit the risk of a debt crisis at any level of debt. However, for any set of debt instruments, the risk of a debt crisis can be reduced by borrowing less. This suggests that the first step towards achieving debt sustainability is to borrow for the right reason and not borrow too much during "good times." This does not mean that countries like Ghana should not borrow, but rather that they should not over-borrow. Borrowing for the right reason means that debt should only be used to finance projects that generate returns that are higher than the interest rate charged on the loan. Moreover, foreign currency borrowing should be limited to projects that can either directly or indirectly generate the foreign currency necessary to service the debt, for example, the World Bank's recent loan of US$ 200 million to Ghana’s Cocoa Board Ltd to rehabilitate cocoa farms destroyed by the cocoa swollen shoot virus, which caused a drop in farm yields, rehabilitating aging farms. A way to maintain prudent debt levels is to complement macro-level debt sustainability analysis with a careful evaluation of the sustainability of each project. Before borrowing abroad, a country should evaluate a project by asking the following three questions: (i) Will the project have a social return that is higher than the cost of funds? (ii) Will the project generate the amount of foreign currency necessary to service the debt? (iii) Will the resource flows match the payment schedule of the debt contract? Only projects with positive answers to the above three questions should be financed with standard external debt contracts.

It is likely that in lower-middle-income countries like Ghana, several high social return projects like FSHS do not satisfy the second and third requirements, in which case such projects should be financed with grants and concessional loans. Review all the social intervention programs and policy initiatives to help reduce government spending: The government needs to reduce budgetary pressures arising from the various social intervention programs and policy initiatives (such as Free SHS, Agenda 111, YouStart, Ghana CARES, etc.) by scaling-down some of them and eliminating those that can be eliminated through a comprehensive review. Such bold policy changes will enhance the government’s fiscal consolidation efforts and help to lift Ghana out of its present crushing fiscal situation, which is driving the macroeconomic instability.

ii. To prevent future public debt crises and also support recommendation one, Ghana must ensure the 1992 Constitution is amended and enshrined with a debt limit or debt cap of Debt to GPD ratio of 50%. The public debt limit is defined as the maximum level of debt beyond which the government cannot roll the debt over. It depends on the growth and interest rate, and the previously observed capacity of governments to react to rising debt. The public debt limit is defined as the maximum level of debt beyond which the government cannot roll the debt over. It depends on the growth and interest rate, and the previously observed capacity of governments to react to rising debt.

The concept of a debt limit is closely associated with fiscal sustainability. It represents the explicit stock implications to the flow variables that are used to calibrate fiscal sustainability. There are at least three ways debt limits can be defined: First, a debt limit can be the debt ratio to which the economy converges in the steady state (e.g., Blanchard, 1990; Blanchard and others, 1990). Second, it could be the level of debt that the economy can service or carry without generating debt distress and requiring debt restructuring. Third, a debt limit could be the optimal level of debt given an economy’s policy objectives, stage of development, and policy environment.

iii. The domestic debt exchange (debt reduction) must be underpinned by strong fiscal consolidation, to be necessary to reverse the adverse fiscal dynamics and reduce the debt overhang and crowding out that had plagued Ghana for the past decade through conscious government expenditure cuts and reductions in the public sector wages and compensation accounting for 27% of 2024 budget statement. These significant efforts will reduce fiscal dominance which would be aimed at encouraging private sector investment to catalyze the underlying conditions for robust economic growth. The experiences of many of the countries that have undertaken some form of debt restructuring suggest that the transformation to a virtuous cycle of sustained macroeconomic improvement hinged strongly on a substantially improved external environment which facilitated an export‐led recovery. Russia (1999, 2000) and Ecuador (2000), for example, benefited from the dramatic rise in oil prices following their restructuring. Similarly, Uruguay (2003) and Argentina (2001) had significant positive terms of trade windfalls arising from commodity prices with average growth rates of about 8.0 percent between 2004 and 2008. Ukraine’s post‐crisis recovery was primarily driven by a rapid expansion in exports to Russia the x‐axes in the graphs depict quarters, where quarter coincides with the debt exchanges and China as well as buoyant international liquidity conditions in 1999. However, the global conditions to reinforce a meaningful post‐restructuring recovery did not exist at the end of both debt transactions for Ghana, especially given its very narrow export base in the areas of gold and cocoa. Notwithstanding the absence of a favorable external economic climate, a depreciated but stable real exchange rate is a critical component of Ghana’s economic program which will increase the profitability of the tradable sector. This boost in competitiveness is expected to catalyze strong GDP growth, reduce unemployment, and strengthen the current account which should result in a more sustainable reduction in Ghana’s debt‐to‐GDP.

v. To address future public debt crises the government must ensure that public sector wages and compensation should be curtailed or reduced as public sector wages and compensation are a major drag on fiscal consolidation. Fiscal consolidation, together with structural reforms, is supposed to generate large fiscal surpluses, reinvigorate investment, and enhance the competitiveness of the economy and thus net exports. The result of these efforts will be a slowdown of the increase in debt and a boost to growth and therefore a decrease in the debt-to-GDP ratio. Ghana’s government employment is defined as the number of people on the government payroll, which in the case of Ghana includes the Civil Service, Ghana Education Service, the Judiciary, the law enforcement agencies, the Article 71 employees, the Foreign Missions, and Sub vented Agencies. public sector wages have been rising both in nominal and real terms. The government must make conscious efforts to reduce the compensation of public sector employees as a ratio of total revenue and grants: Ghana’s public sector wages and compensation had raised major concerns for previous governments owing to its fiscal and macroeconomic implications. Despite its comparatively large size contributing significantly to the ‘choke’ on the country’s fiscal position as demonstrated above, controlling compensation of employees for fiscal consolidation is very difficult to do because of its inflexible nature due to the power of public sector trade unions.

The compensation of employees amounted to GHC27.1 billion or 4.9% of GDP in 2022 but increased further to GHC 44.9 billion or 5.2% of GDP in 2023 and increased further to GHC66 billion or 6.1% of GDP in 2024. The 23% recent increases in public sector wages in the 2024 budget showed the country was not key in implementing fiscal consolidation as compensation of employees constituted GHC 66 billion or 6.1% of GDP bigger than the interest payment of GHC 56 billion or 5.3% of GDP while capital expenditure stood at dismal GHC28.7 billion or 2.7% of GDP (Ministry of Finance, 2024 budget and economy policy). Yet, for the consolidation process to achieve significant results, the government has to confront this challenge head-on and reduce the compensation bill as a ratio of total revenue and grants to match the average for the country’s peers. This can be done by ensuring that the growth rate in the compensation bill falls below the growth rate in total revenue and grants over a period, which will naturally lead to a gradual reduction in the ratio of the compensation bill to total revenue and grants. Through a consultative process with public sector workers and other stakeholders, this reduced ratio should be set as a ceiling, beyond which Ghana’s compensation bill ratio cannot rise. To succeed in this regard, the political and governing class should lead by example by displaying modesty in terms of how they spend state resources on themselves, particularly regarding Article 71 Emoluments.

Instead, the sense of additional fiscal space created by the lower interest bill gave way to more pressures on the public wage front in the recent 23% wage increases for the public sector in 2024, building permanent pressures into the fiscal outlook and weakening the overall/net impact of the debt exchange in the medium term. Another critical aspect that may have gotten worse around the timing of domestic debt exchange (having been exacerbated by the global commodity prices of gold, cocoa, and oil and its implications on the domestic economy) that could jeopardize its achievement and debt sustainability, in general, is the contingent liabilities. All in all, there is an urgent need to implement policies that would help restore debt sustainability and investor confidence, as well as safeguard the stability of the financial sector. A multi-year credible fiscal adjustment framework would be required to put the debt ratio on a downward trajectory.

In contrast to consolidation attempts in the past, this effort would have to be underpinned by efforts that would aim to substantially strengthen expenditure management including reduction of the government size and expand the scope of public liability management to include state-owned enterprises, which have in the past had a significant drain on public resources, mostly taking place off-budget. Ghana’s debt overhang is likely to be a key factor behind the weak economic growth and financial market volatility and until/unless addressed would remain a drag on economic progress for years to come. If public sector wages were to rise more closely in line with productivity improvements in the rest of the economy, there would be more space for the private formal sector to increase employment.

v. For Ghana to address the future country’s public debt crisis, debt overhang and crowding out, and painful debt reduction, the country would require strategic economic diversification: The country must be serious in the promotion of economic diversification by reducing over-reliance on cocoa and mineral sector of the Ghanaian economy in the areas of unprocessed raw materials. This can be Arch entrepreneurship and the development of new industries, encouraging innovation and entrepreneurship, and investing in education and skills training to create a versatile and adaptable workforce.

The government and private sector (PPP) develop strategies to make conscious efforts to diversify the economy from mono-agriculture to polyculture to boost foreign exchange reserves as well as promote the stability of the Cedi against major trading currencies like UK pound sterling, US$, and Euro. To address the debt overhang, debt reduction, and crowding out the government requires comprehensive strategies to adopt economic diversification from the current existing monoculture (Cocoa is the mainstay of the Ghanaian Economy). Ghana must broaden its agricultural industry away from mainly cocoa to be one of the world’s biggest maize and rice producers in Sub-Saharan Africa. Growth comes through structural change – a shift of economic activities from low to higher productivity areas that would help to overcome to overcome Ghana’s economic concentration and challenges related to job creation (M. Geiger. World Bank, 2019). Ghana’s over-reliance on the Cocoa sector makes it vulnerable to fluctuations in global commodity prices. Therefore, the new strategy should seek to boost GDP growth by diversifying the economy and promoting the non-cocoa sector such as rice, maize, tomatoes, and onions and aggressively promoting other non-traditional export products.

vi. Debt reduction will only be more successful if fiscal adjustment is combined with accommodative monetary policy. Lower interest rates stimulate investment and can help spur growth if credible fiscal consolidation aims at reducing solvency risks. Fiscal consolidation will also be more successful when private investment returns through the positive effect on growth. There are two channels through which the fiscal policy mix affects the probability of successful fiscal adjustment. First, fiscal adjustments based on an appropriate combination of expenditure cuts and revenue increases allow the country to sustain persistent fiscal consolidations and larger debt reductions. This reflects the scope for large fiscal savings from the adoption of fiscal measures that improve the composition of the budget. Second, an appropriately balanced fiscal policy mix can boost output growth and help lower credit risk premia, thereby reducing the interest rate-growth differential component of debt dynamics. (IMF 2010 Working paper WP//10/232).

vii. The government must maintain fiscal discipline which is essential as lower public debt levels would reduce government bond yields with (other things being equal) positive spillovers on the borrowing costs of the private sector. In addition, governments should aim to strengthen the management of public finances, increase debt transparency, and support the deepening of domestic capital markets and market-based capital allocation. Is crowding out of private sector credit inhibiting Ghana’s growth? and review incentives to hold public debt. Development finance institutions can support these efforts by providing technical assistance and catalyzing private sector resources to fund investments with a high social or economic impact, e.g. in the health or education sectors, related to climate change mitigation/adaptation or addressing development bottlenecks.

viii. In a nutshell, Ghanaian governments need to control their excessive appetite for debt by eliminating large budget deficit positions due to high expenditure levels. Reduced government appetite for debt will give room for institutional investors to widen the range of possible assets they can hold in their portfolios and not limit their investment choices to sovereign debt instruments alone. Such actions can, in turn, contribute to the orderly issuance of government securities in a manner that does not necessarily crowd out the private sector. Proper coordination between the Government Debt Management Office and the stock exchange will enable government issuances to complement corporate issuances, especially in the formulation of a proper yield curve. Government fiscal actions can also be complemented with appropriate monetary policy actions. Regulations and rules requiring institutional investors to invest a certain percentage of their assets under management in government securities also need to be revisited.

viii. The government must improve revenue performance by generating more revenue from the extractive sector through renegotiations with existing mining companies based on Botswana’s model with Anglo-American De Beers. On the foreign exchange and revenue mobilization challenges, the government has to think outside the box and find ways to raise more revenue to bring the country in line with its peers in terms of total revenue to GDP ratio, while making sure that the private sector is not overburdened (IFS 2022). This will help create some fiscal space and improve the country’s fiscal outcomes and thus help address the degrading macro environment. The government in its digitization drive to improve revenue collection from the property tax, wants to reemphasize that the government should pay attention to revenue generation from the country’s extractive sector. As we have stated several times, the extractive sector holds a lot of prospects in terms of revenue generation. This is because, comparatively, too little revenue that is far below the country’s potential is raised by the government from the country’s extractive sector. For instance, from 2014 to 2022, US$43 billion worth of gold was produced in Ghana. Out of this, only US$6.4 billion, representing only 14.8% of the total value produced, was paid as revenue to the government of Ghana. This means that the mining producers in the mining sector, exploiting publicly endowed resources from God, took US$36.6 billion, representing as large as 85.2% of the total value of minerals produced during the period. The surrender value of 14.8% is averagely relatively low compared to the Botswana revised agreement of 30% for rough diamonds from Anglo-American De Beers.

The new pact increases the number of diamonds that state-owned Okavango Diamond Company (ODC) can sell from Debswana, the mining company jointly owned by De Beers and the Botswana government. The new framework in July 2023 calls for ODC’s share of Debswana’s production to immediately jump to 30%, increase to 40% in four years, and hit 50% by the contract’s final year, in 2033. Yet, it is a common understanding that governments are supposed to receive the entire super normal profits (profits above normal profit) from their extractive sectors. In fact, on the contrary, the government of Botswana, for instance, can take in as revenue about 52% of the total value of minerals produced in Botswana and about 95% of the supernormal profit accrued to mineral production in Botswana. The government of Botswana earns that much through active participation in the mining sector. Some of these agreements signed as part of foreign direct investment are just rippling the Ghanaian economy.

Ghana government must adopt the renegotiation contract approach used by Anglo-American De-Beers and the Botswana government on rough diamonds. The agreement also gave Botswana an increased 30% of diamond production for sale via the state-owned Okavango Diamond Company, progressively increasing to 50% in the final year of the contract. The government of Ghana should, therefore, take lessons from this and generate more revenue from the country’s extractive sector to help create more fiscal space and successfully consolidate the country’s fiscal position. Extractive sector revenues should not be allowed to go into private pockets while the government wallows in borrowing.

ix. To reverse Ghana’s public debt crisis will require a credible and sustained fiscal consolidation, underpinned by strong revenue mobilization and prioritization of government expenditure in favor of capital and social spending. Paying serious attention to domestic revenue mobilization should therefore be the number one priority of the government. The government with a digitalized property address system in the country can generate billions in property taxes to support domestic revenue mobilization. A revenue mobilization strategy that seeks to strengthen revenue administration, improve tax compliance, help combat abuses and corruption, and increase the fiscal space for public investment and social spending is what is urgently needed. There is a need for a strong revenue mobilization effort, including a broadening of the revenue base to include the informal sector, reviewing the housing and property industry fiscal regime, removing exemptions, plugging leakages, and strengthening the machinery for tax collection and administration. The collection, use, and accountability of internally generated funds by public institutions and agencies should be given serious attention (IFS, 2022).

x. For Ghana to address any future public debt crisis, the government should make corruption a very unattractive venture, by establishing an independent institution like the Auditor General with a constitutional mandate to deal with financial and economic crimes, corruption, and money laundering. Systemic corruption and the prevalence of money laundering are major obstacles to stability and economic development in Ghana. Without the establishment of an independent institution with a constitutional mandate, Ghana cannot address the canker or the menace of corruption, economic and financial crimes, and money laundering as the existing institutions are of a quasi-independent nature. This new independent institution could be on the level of the Nigeria Economic and Financial Crime Commission, which secured a total of 3785 including politicians (Three Thousand Seven Hundred and Eighty-five) convictions across all its Commands in 2022. The figure, which emerged from a review of the Commission’s performance in the outgone year, shows a 70.5% improvement over its record for 2021(2220). It also represents a 98.93% success rate in prosecution given that the Commission lost only 41 cases, representing 1.07% within the period. EFCC has dealt with numerous high-profile cases of money laundering that have emerged in Nigeria over the years. These cases highlight the extent of the problem and the need for robust measures to combat money laundering effectively.

In 2022, a Nigerian governor was involved in a case of fraud and misuse of public funds.
In 2021, Nigerian influencer Ramon Abbas, also known as Hushpuppi, pleaded guilty to money laundering in a US court. He was known for posting photos of his lavish lifestyle on Instagram and was considered one of the "most high-profile money launderers in the world
In a 2017 case, a man named Alade Atoyebi and one other person were arraigned before the trial Court on a 54-count charge wherein they were accused of the offense of money laundering

This study has recommended until the establishment of an independent institution with constitutional mandates to deal with endemic corruption, money laundering; procurement frauds and crimes; misappropriation of funds; obtaining money by pretense, and fraudulent banking the country cannot reduce these issues in the public sector. The current institutions like the Office of Prosecutor and Economic and Organized Crime might not be able to deal with issues as most culprits because of politically exposed persons. This independent institution must maintain a liaison with the office of the Attorney-General Office, the CID of Ghana Police Service, the Ghana Customs Authority, the Ghana Revenue Authority, the Immigration and Prison Service Board, the Bank of Ghana, and the Financial Intelligence Centre. the Ghana Deposit Insurance Corporation, the National Drug Law Enforcement Agency, all government security and law enforcement agencies, and other financial supervisory institutions involved in the eradication of corruption, money laundering, and other economic and financial crimes.

The independent institution must be empowered to prevent, investigate, and prosecute economic and financial crimes, corruption, and money laundering and also be charged with the responsibility of enforcing the provisions of other laws and regulations relating to economic and financial crimes. To address the corruption, money laundering, and all other financial and economic crimes; (i) there is an urgent need to streamline existing rules and regulations (ii) build a meritocratic and well-paid public service devoid of current political parties’ foot soldiers and cronyism; (iii) promote transparency in public employment, procurement, and services; the country should enable citizen voice and government accountability without fear or favor. With the Right to Information Act 2019 Act 989, bureaucracy and layers of red tape not only frustrate citizens hoping to receive government services but also create rent-seeking opportunities for those who function as gatekeepers (World Bank 2018). A straightforward and predictable regulatory and legal environment can not only promote efficiency and productivity but can also reduce the room for discretionary and arbitrary decision-making and exercise of power.

The country must make the compensation of public officials competitive and promoting meritocracy in the ranks of the public /civil service could increase the incentives for honest and dedicated work. In 1998, Rwanda conducted major civil service reforms, including reductions in public employment (such as eliminating ghost workers), increases in wages, and mandatory declarations of assets, with remarkable results (IMF 2019). Throughout their development history, Hong Kong and Singapore have been among the most notable cases of how meritocracy underpins the efforts to build a professional civil service technically competent, open to constant improvement, and resistant to corruption (Oehlers 2005) Transparency in government transactions—including employment, procurement, public works, and services—remains one of the most powerful drivers of good governance and an important deterrent to corruption (World Bank 2018). To the extent that information and communication technologies (ICTs) are not subject to manipulation, they can become useful and cost-effective tools to promote transparency.

In Indonesia, for example, civil service employment was often tainted by cronyism and nepotism. However, that changed substantially when the civil service agency implemented a computer-assisted testing system in 2013, with real-time reporting on civil service exam results outside the testing centers and monitoring by the public. E-procurement systems have also become a vital tool for creating greater transparency and more competition in the contentious area of government contracting. The government must enable citizen voice and government accountability. Democratic mechanisms, checks and balances between government powers especially the executive and legislature, and a free press are critical elements to deter, detect, and penalize corruption. While the election process itself has generated corruption (such as vote-buying and patronage), having fair and competitive elections is one way for citizens to impose accountability on politicians and public officials. The recent experience in Malaysia is an example of how democratic forces can be used against corruption. In 2018, against all odds, Malaysians voted in a new administration whose main mandate was to dismantle and penalize the corruption that had overtaken the 1MDB national development fund at the highest spheres of government. Unfortunately, worsening corruption, the prevalence of money laundering, procurement fraud, and financial and economic crimes have been evidenced in Ghana over the past decade and these have impacted negatively on the country’s public debt as well as the economic development.

DISCLAIMER: The Views, Comments, Opinions, Contributions and Statements made by Readers and Contributors on this platform do not necessarily represent the views or policy of Multimedia Group Limited.

Tags:

DDEP

Economy

Ghana