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[Article] Ghana’s monstrous debt: a flashback of pre-HIPC levels

Spotting his favourite white African kaftan with a Ghanaian flag pin adorning the pocket, Ghana’s Finance Minister, Ken Ofori-Atta, appeared before legislators in July presenting the mid-year budget review, he announced measures being instituted to shore up tax collection.

The government has been struggling for the past two years to meet its revenue collection targets, which has made it difficult to invest in infrastructure without resorting to expensive borrowing at home and abroad.

In April, the country, the world’s second-largest producer of cocoa, completed its 16th International Monetary Fund (IMF) financial bail-out package since it won independence from British rule in 1957.

In its parting message, the Fund advised the government to reform a loose tax regime, characterized by a wide range of tax exemptions that cost the country about 1.6 percent of GDP each year.

Poor domestic revenue mobilization, mounting public debt, a weak currency, and surging inflation were among the factors that had pushed the country to seek the Washington-based lender’s support in 2014.

The coming in of the Fund proved helpful as indicators like growth, which had fallen to a 21-year low in 2015, began to bounce back.

Growth climbed to 8.1 percent in 2017 and was a respectable 6.3 percent in 2018, leading the IMF to describe the gains made under the rescue programme as “significant”.

But beneath the success story is a monstrous public debt incurred through borrowing from both local and international money markets. While most of the funds were sourced apparently to finance infrastructure, a fair amount was used to refinance maturing loans.

Within a six-year period, the West African nation’s total public debt stock has doubled. The total amount owed to both foreign and local sources jumped from US$19.1 billion in 2012 to US$35.9 billion in 2018.

The rapid increase in the debt over a short period brings back stark memories of the early 2000s, when Ghana had to apply for debt forgiveness under the IMF/World Bank Highly Indebted Poor Country (HIPC) initiative.

The initiative was introduced in 1996 to ensure that no poor country faces a debt burden it cannot manage.

Like Ghana, more than 30 other countries in sub-Saharan Africa took advantage of the initiative, which offered to free up resources to be invested in areas that speed up the alleviation of poverty.

The HIPC initiative led to the cancellation of US$3.7 billion from the country’s public debt and reduced significantly the burden of debt servicing costs on government finances.

But 17 years down the line, the debt problem has resurfaced. Per the government’s 2019 budget statement, out of every US$1 dollar collected as revenue, about 26 cents is used to service debt.

Rising borrowing after debt cancellation is not peculiar to Ghana. According to the Overseas Development Institute (ODI), a think-tank, external debt and debt service costs are on the rise across sub-Saharan Africa.

ODI estimates that almost 40 percent of countries in the region are in danger of slipping into a major debt crisis. According to a World Bank report published last year, the number of countries at high risk of debt distress – 18 in all, including Ghana – has more than doubled since 2013, while eight countries are already in distress.

While Ghana’s debt to GDP of almost 60 percent may not have hit pre-HIPC levels, there is every indication that it will have to move beyond dependence on the export of commodities to escape the debt trap.

And none other than Mr. Ofori-Atta, whose government was elected on a pledge to manage the public finances more prudently, knows that the debt problem must be addressed now, rather than later.