Ghana’s ongoing debt restructuring program, designed to address the nation’s escalating financial challenges, has highlighted the complexities of managing both domestic and external debt.
While domestic debt restructuring presented significant hurdles, the process of renegotiating external debt has proven even more arduous, according to the Institute for Fiscal Studies (IFS). The involvement of multiple international creditors, including bondholders, bilateral lenders, and multilateral institutions, has made the negotiations protracted and fraught with challenges.
Ghana’s debt woes are not new. The country faced its first major debt crisis in 2001, following decades of excessive external borrowing in the 1980s and 1990s. The situation became so severe that Ghana had to seek relief under the Heavily Indebted Poor Countries (HIPC) Initiative, which provided critical debt forgiveness and averted economic collapse. However, the lessons from that period appear to have been short-lived. By 2022, Ghana found itself in the throes of another debt crisis, this time driven by a combination of domestic and external borrowing over the preceding two decades.
The 2022 crisis was exacerbated when Ghana lost access to the international bond market after its credit ratings were downgraded to junk status. This forced the government to pursue urgent debt restructuring to restore fiscal stability. While domestic debt restructuring involved negotiations with local bondholders and financial institutions, external debt restructuring proved far more complicated. International creditors often demand stringent conditions, including long-term economic reforms, before agreeing to any relief or restructuring terms.
Dr. Said Boakye, an economist with the IFS, noted that the delays in finalizing external debt restructuring compelled Ghana to adopt strict fiscal measures. These included cutting government expenditure, boosting revenue mobilization, and exploring alternative funding sources. These measures, while necessary, have placed additional strain on the economy and underscored the importance of sustainable debt management.
One of the key lessons from Ghana’s recent crisis is the need for proactive debt management to prevent excessive borrowing, particularly from external sources. The country’s reliance on foreign borrowing has repeatedly led to financial instability, as seen during both the 2001 and 2022 crises. The past three years, during which Ghana has operated without access to the international bond market, have also provided valuable insights. The government has been forced to adopt more prudent fiscal policies, including reducing budget deficits and exploring non-debt financing options.
A notable development during this period has been the Bank of Ghana’s Gold Purchase Program, which aims to build international reserves through non-debt mechanisms. This initiative highlights the potential of leveraging the country’s natural resources to enhance financial self-reliance. Moving forward, experts argue that Ghana should intensify efforts to maximize revenue from its resource base rather than reverting to unsustainable external borrowing.
While access to international capital markets can provide much-needed funding for development projects, the IFS has urged the government to exercise caution. Excessive borrowing, even when opportunities arise, could risk reigniting another debt crisis. Instead, fiscal discipline and innovative financing strategies should remain at the forefront of Ghana’s economic policy.
Ghana’s debt restructuring journey underscores the delicate balance between leveraging external financing for growth and maintaining fiscal sustainability. The country’s experience serves as a cautionary tale for other nations grappling with similar challenges, emphasizing the importance of prudent debt management and the dangers of over-reliance on foreign borrowing. As Ghana continues its path to recovery, the lessons learned from this crisis will be crucial in shaping a more stable and self-reliant economic future.
