Ghana’s worsening debt market access means IMF relief needed: economists

By David Whitehouse
Posted on Thursday, 4 November 2021 12:46

Ghana's Nana Akufo-Addo
Nana Addo Dankwa Akufo-Addo, President of Ghana, speaks during the UN Climate Change Conference (COP26) in Glasgow, Scotland, Britain, November 2, 2021. REUTERS/Hannah McKay/Pool

The prospect of Ghana being locked out of international debt markets makes it urgent for the government to seek an IMF debt-relief programme before public finances deteriorate further, economists say.

The government, which sold $3bn of eurobonds in March, aimed to sell a further $1bn of debt on the international markets this year. It dropped those plans in October, citing market conditions.

The failure to access debt markets is “worrying, but not catastrophic,” says James Dzansi, an economist at the International Growth Centre in Accra. “It’s a signal to the government that it needs to explore other options.” The easiest and most prudent course would be to go to the IMF sooner rather than later, he says.

According to the IMF, Ghana’s public debt stands at 79% of the GDP. However, Dzansi argues that debt to GDP is the wrong metric to measure Ghana’s position. More relevant, he says, is the ratio of debt-service payments to fiscal income. Fitch predicts that general government interest expense will be almost 47% of revenue in 2022. Dzansi says the country is spending about twice as much on debt service as on capital expenditure. “That is not sustainable.”

This year, non-resident inflows into Ghana’s domestic debt have been heavily weighted towards short-term securities, and upcoming maturities in the fourth quarter are likely to see continued drawdown in Ghana’s foreign currency reserves, says Mark Bohlund, senior credit research analyst at REDD Intelligence in London.

Ghana will be able to meet its external debt obligations without too much trouble due to its March Eurobond sale and an allocation of IMF special drawing rights (SDRs), Bohlund says. However, the challenge in terms of debt sustainability is stark, he adds.

  • According to World Bank figures, Ghana had the highest external debt servicing cost as a percentage of exports of goods, services and primary income in 2020.
  • The government is expected to present its 2022 budget in mid-November and the sharp increase in its eurobond yields will challenge its financing assumptions, Bohlund says.
  • He expects action sooner rather than later. If Ghana remains closed out of the international financial market in the first half of 2022, there is “an increased likelihood the government may consider applying for a debt restructuring under the G20 Common Framework. This is somewhat earlier than our previous assumption that such an application could materialise in 2023-24.”

Electoral cycle

A four-year electoral cycle means that time is not on Ghana’s side. Ghana will hold its elections in 2024, and the polls normally lead to an increase in debt levels, notes Dzansi. It will be too late to go to the IMF after the election, he argues. “The problem will have become too big,” and Ghana’s negotiating position will be weaker than now, he says. The country must avoid going to the IMF “on its knees.”

Going sooner would have a short-term political cost, which the government may not be willing to pay, Dzansi says. “The issue is over-politicised,” but politicians need to realise that this is not in their interests, he says. “The more we delay, the more serious the issue becomes.”

The prospect of US monetary tightening means that Ghana may only have a short window of opportunity to act, Dzansi says. If US rates rise, that increase will be added to the premium that Ghana has to pay in order to borrow, he adds. Ghana currently has breathing space, amid signs that the Covid-19 pandemic is easing and the economy, both nationally and globally, is recovering, Dzansi says. Higher oil prices are also providing a lift, but that “does not mean Ghana should not go to the IMF.”

  • The interest that Ghana pays on its foreign debts is higher, compared with its African peers, Dzansi says.
  • The pace of fiscal consolidation is too slow, Dzansi says. “The benefits are small, relative to the size of the problem.” The country has a “huge fiscal overrun”, which can’t be fixed ahead of the election.
  • Further fiscal slippage in 2024 is “bound to happen” but an IMF programme would bring greater credibility to Ghana’s public finances, Dzansi says.
  • Conditionality of IMF help should not be a deterrent, Dzansi says. “The conditions will be worse if we go after the election. It’s better to do it now, even from a political point of view.”

Bottom line

Ghana’s politicians need to think strategically about debt outside the constraints of the short electoral cycle.

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