Ghana is learning the hard way why oil can be a blessing and a curse. The onset of commercial crude production helped to turn the West African nation into one of the continent’s top investment destinations, but also prompted successive governments to borrow to the hilt. Skittish investors offloaded Ghana’s bonds and currency, the cedi, amid doubts over the country’s solvency.
The concern proved to be well-founded: In late 2022, the government caught bondholders by surprise by unilaterally suspending interest payments on its external debt ahead of restructuring talks aimed at pinning down a $3 billion loan from the International Monetary Fund. That funding was finally approved in May.
- Why was Ghana so popular among investors?
The first sub-Saharan African nation to gain independence after colonial rule, Ghana has been a bastion of stability in a region plagued by civil unrest and coups. Peaceful elections have been held regularly since the 1990s, power has changed hands between rival parties and presidents, and there is an independent judiciary and a vibrant parliament.
The world’s second-biggest grower of cocoa and Africa’s No. 2 gold producer, Ghana began exporting oil in late 2010. The following year, gross domestic product leaped by almost 14%. The economy has expanded every year since then, albeit at a more modest pace, with the government’s embrace of a free-market system helping to lure foreign capital and financing.
- So what went wrong?
The government abandoned fiscal discipline and opened the spending taps in anticipation of an oil windfall. But energy revenue wasn’t enough to cover a succession of expensive flagship projects, and it borrowed more to plug the gap. Overspending was particularly rife in election years. President Nana Akufo-Addo’s administration has scrapped fees for senior high school students.
In 2021, the government spent $1 billion on refinancing loans owed by private power producers, a move that was intended to reduce the state’s electricity bills. A plan to strengthen a banking industry weakened by bad loans has cost more than 25 billion cedis ($2.4 billion), and an estimated 8 billion cedis more is needed to complete the process. Covid-19 dealt a further blow to the state’s already stretched finances. After selling eurobonds for each of the previous nine years, Ghana was shut out of international capital markets in 2022 as investors lost faith in its ability to service its loans.
- What precipitated the debt restructuring?
State debt ballooned, with the IMF estimating that it equated to 105% of GDP in 2022. When the country could no longer tap international markets, the government resorted to taking out domestic loans, paying annual interest rates of almost 30%. The central bank stepped in to provide the government with funding after it risked defaulting on the local debt, but it decided to limit further support to stay within its legal lending threshold. Some lawmakers demanded that Finance Minister Ken Ofori-Atta take the fall for the economic crisis and called for his dismissal, but the ruling party ultimately refused to back a motion to censure him.
- How did the IMF become involved?
Ghana shunned a multilateral initiative that would have enabled it to suspend foreign debt interest payments, and said it wouldn’t seek help from the IMF, before changing its tune in July 2022. In late October, Akufo-Addo dismissed speculation that a funding deal could translate into losses for any of Ghana’s creditors, but a month later his administration said it would enter into talks on a debt restructuring. The IMF signed off on a $3 billion extended-credit facility in May after Ghana reached an agreement in principle to overhaul its external debt. The financing, which included a $600 million immediate payment, was contingent on the government increasing taxes, imposing losses on domestic investors and other tough measures.
- How will investors be affected?
While the government is targeting $10.5 billion in external debt-service relief during its three-year program with the IMF, final restructuring terms are only expected to be agreed around mid-2023. Interest payments on the nation’s $13 billion of eurobonds, as well as commercial loans and most bilateral obligations have been suspended since mid-December. The holders of about two-thirds of Ghana’s domestic bonds have already taken a hit, agreeing to voluntarily exchange existing securities for ones that pay less interest.
- How have markets responded to the meltdown?
The crisis triggered an exodus from Ghana’s currency and bonds. The cedi declined 28% against the dollar between January and mid-December 2022, making it one of the world’s worst-performing currencies. Improving prospects for an IMF program helped it to stage a partial recovery. The premium investors demand to hold the country’s dollar bonds rather than US Treasuries still exceeds 2,700 basis points, well above the 1,000 level that signals distress, according to JPMorgan Chase & Co. indexes.
