In 2019, Ghana was marked by the IMF as being in a state of debt distress.

Shockingly, by 2022, the country had swiftly escalated from a distressed debt level to an unsustainable one.

The World Bank revealed that Ghana's external debt had surged from 8.2% in 2012 to an estimated 42% in 2021.

The energy sector had become a substantial fiscal burden, costing the government over a billion dollars annually due to consistent revenue shortfalls in comparison to expenditures.

This alarming situation raised concerns among investors and credit ratings agencies about Ghana's fiscal stability and the credibility of its medium-term fiscal plans.

Consequently, Fitch and Moody's downgraded the country's credit rating, heightening fears of losing access to international capital markets.

By April 2022, Ghana's debt had surged from $39.3 billion in 2019 to a staggering $54.5 billion. Inflation had exceeded the upper limit set by the central bank, exacerbated by factors such as fluctuating exchange rates and the Russia-Ukraine conflict.

To bridge the expanding fiscal gap, the Ghanaian government proposed reforms aimed at promoting fiscal and debt sustainability.

Despite facing opposition, the Parliament approved a 1.5 percent E-levy tax on digital transactions, anticipated to broaden the tax base and generate $1.1 billion in revenue in 2022. However, these efforts, as per the World Bank assessments, were insufficient to tackle Ghana's debt sustainability and the growing fiscal burden.

Revenue from the mining sector remained weak, and urgent government-support-needs continued to strain public finances.

By June 2022, the Ghanaian government acknowledged its inability to manage the widening fiscal deficit and sought assistance from the IMF. The IMF programme, spanning three years, came with a condition: Ghana had to diligently work towards creating fiscal space through a painful debt restructuring process at both the domestic and external levels.

Creating fiscal space: External level

At the external level, Ghana is grappling with severe economic challenges, primarily centred around its Balance of Payments (BoP) issues.

These problems have led to a depletion of the country’s international reserves and resulted in crises such as exchange rate fluctuations.

Historically, Ghana relied on the International Capital Market to borrow between $1 billion to $3 billion annually to bridge its BoP gap. However, the situation has deteriorated drastically.

The country had to undergo debt restructuring to qualify for a three-year Extended Credit Facility (ECF) programme aimed at providing BoP support.

The IMF estimates that Ghana needs around $15 billion between 2023 and 2026 to address its BoP challenges.

The IMF has pledged $3 billion, the World Bank $1.55 billion, with the remaining $10.5 billion expected to come from external debt restructuring. Securing the $10.5 billion debt relief from external creditors poses a significant challenge for Ghana.

The country received the first tranche of $600 million after an assurance from external creditors. However, access to the second tranche depends on passing the first review, contingent on concluding financing assurances with foreign creditors.

Ghana’s debt arrangement with foreign creditors is anticipated to release approximately $2.5 billion in 2023 alone, helping bridge the BoP deficit.

In various debt restructuring negotiations worldwide, countries grappling with debt issues, such as Ghana, Zambia and Sri Lanka, find themselves caught in the crossfire of geopolitical tensions. A significant battleground emerges as China and the IMF struggle fiercely to resolve debt crises.

This complex situation underscores the challenging landscape of global debt restructuring and the significant impact it can have on countries like Ghana.

Certainly, the situation where China holds all of Ghana’s collateralised loans positions it as a pivotal player at the negotiation table for debt treatment.

This factor is crucial in determining the financing assurances Ghana needs to secure its second IMF bailout package, amounting to $600 million.

Ghana stands at a critical economic juncture, where the success of its 17th IMF programme hinges on substantial debt relief, expenditure cuts and significant revenue mobilisation.

Creating fiscal space: Domestic level

Following a successful reduction of approximately $9 billion in domestic debt through a debt exchange program, Ghana's finance ministry is urging nearly all local bondholders to participate in another round of debt restructuring referred to as the 'DDEP REOPENING.' The government aims to restructure an additional $1.3 billion to lower the debt-to-GDP ratio to a sustainable level and create fiscal room at the local level. However, there is widespread resistance to entering new discussions on debt restructuring.

Various groups, including pensioner bondholders and individual bondholders' forums, have rejected the call to participate in the new exchange, insisting on complete exemption. Even the Ghana Association of Bankers has expressed their inability to withstand another debt treatment after sacrificing significant portions of their bonds in the initial exchange program.

The government has faced criticism from experts for its superficial and somewhat unilateral approach to the first debt restructuring, leading to the need for successive rounds of debt restructuring. Certain exemptions and allowing some bondholders to convert their existing bonds into treasury bills resulted in the government falling short of its initial restructuring target of $13 billion by about $4 billion.

The IMF views domestic debt restructuring akin to surgery: a measure to be taken only when necessary, avoiding it if it might cause more harm than good. The fund emphasizes the importance of countries conducting debt restructuring correctly the first time to prevent repeated efforts.

The IMF also warns nations to be transparent and comprehensive during debt restructuring, highlighting that some creditors might use their political influence to shield themselves from burden-sharing, shifting the adjustment burden to other creditors.

For Ghana to achieve sufficient fiscal space, both domestic and external debt restructuring must be thorough enough for the country to meet its medium-term targets, including bringing debt levels onto a sustainable path.

Despite a decrease in inflation, providing some relief for the Bank of Ghana's monetary policy rates, many economists and analysts believe it is premature to assume that the economy has fully recovered.

Ghana continues to grapple with mixed economic growth projections, and even after the IMF program, the country's debt-to-GDP ratio is anticipated to remain above 60%.