TWO years after a severe economic crisis forced Ghana into default, the country is witnessing a return to economic growth. However, the aftermath of a groundbreaking local debt restructuring is casting a shadow over its long-term recovery prospects.
The restructuring, which was the first of its kind in Africa, significantly weakened Ghana’s local bond market. This has left the government relying heavily on short-term, high-cost Treasury bills and private placements to fund its operations. Analysts fear that this dependence on expensive borrowing methods could undermine Ghana’s financial stability.
‘There’s little appetite to gamble on government debt, no matter how high the rates,’ Daniel Ankomah, Chief Investment Officer at SAS Investment Management told Reuters in Accra. He estimates it may take over a decade to restore market confidence fully.
Unprecedented debt strategy
Ghana’s restructuring was driven by a domestic debt burden that accounted for 81.7 percent of public debt service in 2022, according to the IMF. The economic fallout of the Covid-19 pandemic, compounded by global inflationary pressures and the Ukraine war, saw Ghana’s public debt balloon from 63 percent of GDP in 2019 to 92.7 percent by the end of 2022.
Unlike typical debt restructuring efforts that protect local investors, Ghana’s strategy targeted banks, pension funds, and individuals. The move reduced debt-servicing costs by an estimated $8bn between 2023 and 2026, but at a steep price: record losses of 37.7bn Ghanaian cedis (£2.4bn) for the banking sector in 2022 and significant impacts on pension fund liquidity and income.
The restructuring drew public protests, including one led by a former chief justice. ‘It completely killed confidence,’ said Thys Louw, an emerging markets portfolio manager at Ninety One, told Reuters, calling it a cautionary tale for other nations.
Challenges ahead
Although Ghana’s economy grew by nearly 7 percent in Q2 2023—its fastest rate in five years—and inflation is easing, serious challenges persist. Treasury bill yields range between 20 percent and 29 percent, while private placements reportedly exceed 29 percent, adding to debt costs.
Investors remain uneasy about the government’s opaque borrowing practices and the fiscal strain caused by debt servicing, which exceeds spending on education and health. Meanwhile, the looming December 2024 presidential election raises concerns about potentially excessive campaign-related spending.
A Ghanaian banker summarised the precarious situation, telling Reuters: ‘The factors that triggered the debt restructuring—rigid budgets and limited fiscal space—are still present.’
The road to recovery
The finance ministry remains optimistic, projecting a return to domestic bond markets by 2025. The IMF has endorsed Ghana’s temporary reliance on Treasury bills, expecting fiscal tightening and reduced financing needs to restore market confidence.
However, investors are cautious about Ghana’s ability to access international markets. ‘This economy needs the local market, especially for the next couple of years,’ said Louw. ‘People will be very cautious of lending dollars to Ghana through the Eurobond market for some time.’
Ghana’s recovery may be underway, but rebuilding trust in its financial system will be crucial to sustaining growth and securing long-term stability.
Credit: Reuters
