Ghana’s debt restructuring program, aimed at tackling the country’s mounting debt crisis, has been marked by complex negotiations, particularly with external creditors.
The Institute for Fiscal Studies (IFS) has observed that while the country’s domestic debt restructuring was challenging, external debt restructuring proved to be even more protracted due to its complexity and the involvement of multiple stakeholders.This observation is in spite of the previous government’s touting of the restructuring exercise as successful.
Tracing Ghana’s Debt Crisis
According to the economic policy think tank, Ghana has experienced two major debt crises in the 21st century. The first, which culminated in 2001, was driven by an excessive accumulation of external debt during the 1980s and 1990s. The situation became so dire that Ghana had to seek relief under the Heavily Indebted Poor Countries (HIPC) Initiative, which provided debt forgiveness and saved the nation from financial collapse.
The second debt crisis, which surfaced in 2022, stemmed from both external and domestic debt accumulation over the previous two decades. While the rate of debt build-up intensified over the past decade, the crisis was triggered externally. In early 2022, Ghana lost access to the international bond market after its credit ratings were downgraded to junk status. This led to an urgent need for restructuring to restore fiscal stability.
Challenges of External Debt Restructuring
Unlike domestic debt restructuring, which involved internal negotiations with local bondholders and financial institutions, external debt restructuring posed greater difficulties. The involvement of multiple international creditors, including bondholders, bilateral lenders, and multilateral institutions, complicated the negotiation process. External creditors often demand stricter conditions and assurances of long-term economic reforms before agreeing to debt relief or restructuring terms.
Economist with the IFS, Dr Said Boakye pointed out that the delay in finalizing external debt restructuring meant that Ghana had to adopt stringent fiscal policies to maintain some level of stability, which included curbing government expenditure, increasing revenue mobilization, and seeking alternative sources of funding.
Lessons from Ghana’s Debt Crisis
One key takeaway from the crisis is the importance of sustainable debt management. The government must take proactive measures to prevent another excessive build-up of debt, particularly external debt. Ghana’s experience with debt forgiveness under HIPC and the struggles of recent years highlight the dangers of relying heavily on foreign borrowing.
Moreover, the last three years, during which Ghana has functioned without borrowing from the international bond market, offer critical lessons. The necessity of operating without external debt financing has pushed the government to adopt prudent fiscal management strategies, including reducing deficits and seeking non-debt financing alternatives.
Leveraging Natural Resources for Self-Reliance
A notable response to the crisis was the Bank of Ghana’s increased efforts to build international reserves through non-debt mechanisms, such as the Gold Purchase Program. This initiative demonstrated that Ghana’s natural resources could be leveraged to enhance financial self-reliance and stability. Moving forward, the government should intensify efforts to maximize revenue from the country’s rich resource base rather than returning to unsustainable external borrowing.
A Cautious Approach to International Borrowing
While access to the international bond market can provide needed capital for development projects, the IFS charged the government to resist the temptation to borrow excessively at the first opportunity. Instead, fiscal discipline and innovative financing strategies should be prioritized. The restructuring process has shown that debt crises can severely constrain a country’s economic growth and should be avoided at all costs.
