How can Africa’s continental free trade agreement be moved forward from talk to action? An eventful week in Ghana ended with new promises from ... African governments and state parties to speed up processes towards the full realisation of the world’s largest free trade area – AfCFTA.
The very next day, the leader of the opposition and former president John Dramani Mahama delivered a predictably scathing speech centred on his successor’s alleged economic mismanagement. Mahama’s National Democratic Congress has already appealed to the country’s supreme court to strike the bill down.
“Ghanaians have been subjected to excruciating hardships and deprivation resulting directly from the mismanagement of the economy by a government that lacks the humility to accept responsibility, and the capacity to appropriately diagnose the root causes of the challenges that have brought us here,” the former president said. “In the face of this self-inflicted economic catastrophe, this government against all sound advice has decided to introduce the E-Levy, a regressive tax that heaps more suffering on Ghanaians.”
Mahama had a point: In the first quarter of 2022, Ghana’s public debt hit GH¢380bn ($50bn). Debt service obligation has ballooned from ¢10bn ($1.3bn) in 2016 to around ¢50bn ($6.5bn) today. Total public debt increased to ¢351.8bn (about $47bn), the equivalent of 76.6% of GDP in December 2021, up from ¢291.6bn ($39bn) or 74% of GDP the year before.
Spiralling debt service costs in Ghana are set against a backdrop of burgeoning inflation (the highest in 13 years, at 19.4%) and rising unemployment (recorded at 13.4% in 2021). The introduction of the e-levy comes at a time when Ghanaians are already struggling.
Ghana, Mahama said, “is on the verge of bankruptcy.” Cutting public expenditures and hiking taxes may help support the national treasury. But to navigate the storm, Ghana will need a large cash injection relatively quickly.
So, are there any options open to the Akufo-Addo administration to shore up its reserves, continue to service the debt and slash the fiscal deficit?
Debt capital markets
While Nigeria, South Africa and Angola have all accessed the Eurobond market this year, a return to the international debt capital markets for Ghana is highly unlikely, according to analysts.
“Ghana cancelled plans to issue $1bn in Eurobonds in October last year in light of growing foreign investor aversion and partly due to the anticipated US interest rate hike making it more difficult for vulnerable countries to attract foreign investment,” says Murega Mungai, Trading Desk Manager at AZA Finance. “In any case, Ghana’s dollar yields have widened by ten per cent, so refinancing the country’s debt via Eurobonds would not be a viable option.”
Lucie Villa, the lead analyst for Ghana at Moody’s Investors Service, puts it bluntly: “Trading prices suggest that if Ghana wanted to issue on international markets it would need to pay an exorbitant price.”
Domestic capital markets
Given the cost of international debt, Ghana will most likely continue to issue local currency debt to be absorbed by the banks. “Unfortunately,” Mungai points out, “this will inevitably crowd out the private sector.”
There is also the option to issue local dollar-denominated debt. Ghana issued five-year dollar-denominated domestic treasury bonds last November and may look to do something similar in the coming months. But its success will depend on the terms, says Trixie Afua Bulley, head of global markets at Stanbic Bank Ghana.
“The tenor needs to be right,” says Bulley. “Five years may be too long. Two may be too short. Three years may be more attractive to banks that have dollar deposits to invest. If the price and timing are right, the government will find willing buyers.”
While Ghana entered an Extended Credit Facility (ECF) with the IMF back in 2015, the government is reluctant to return to the international financial institution for similar support.
“Ghana is in conversation with the IMF, but they have categorically denied that they are in looking for an arrangement like the one back in 2015,” says Bulley.
Nevertheless, there are other IMF programs that Ghana has previously benefitted from and could access down the line. In March 2021, Ghana accessed $1bn in Special Drawing Rights (SDRs), and earlier this year, the IMF approved the establishment of a Resilience and Sustainability Trust to support member countries.
The $50bn trust is due to become operational later this year and will use some of the $650bn in SDRs issued in August 2021 to help world economies build resilience in the post-pandemic environment.
But support via SDRs isn’t a given. “Sudan was blocked from accessing $150m of its SDRs following its change of government,” says Mungai. Ghana will need to adhere to strict IMF conditions if it hopes to leverage this benefit.
When the Heavily Indebted Poor Countries (HIPC) and the Multilateral Debt Relief Initiative (MDRI) programs were triggered in the 2000s, much of Africa’s debt was wiped away in one fell swoop.
But times have changed. China’s meteoric rise encouraged economic – and increasingly political and military – engagement in Africa. As the Asian behemoth used the continent to satiate its need for natural resources, Africa tapped China for infrastructure investment. Ghana is China’s 9th biggest African borrower, with $3.5bn in loans.
China has emerged as a major creditor outside the Paris Club, which has helped diversify Africa’s funding choices. But that has also raised concerns about a new form of economic exploitation of the continent.
“China is using the concept of the debt trap to establish their presence and expand their influence around the globe,” says Mungai. “They loan funds on infrastructure projects and if the country defaults on the repayment, China may seize the valuable assets of that country.”
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