The Institute for Fiscal Studies (IFS) has issued a strong caution to the Ghanaian government against hastily returning to the international bond market for borrowing.
Instead, the research think tank has urged the government to draw lessons from the Bank of Ghana’s Gold Purchase Programme, which successfully increased international reserves without creating additional debt.
In a detailed report, the IFS highlighted Ghana’s history of debt crises as a key reason for its warning. Since 2000, the country has faced two major debt crises: the first in 2001, which resulted from excessive external debt accumulation in the 1980s and 1990s and was resolved through debt forgiveness under the Heavily Indebted Poor Countries (HIPC) Initiative, and the second in 2022, triggered by a loss of access to international capital markets after credit rating downgrades.
The 2022 crisis, the IFS noted, was fueled by a rapid buildup of both external and domestic debt over the preceding decade. However, the immediate trigger was external, as Ghana’s downgrade to junk status cut off access to the international bond market. The think tank emphasized that negotiations during the recent debt restructuring were more complex and protracted for external debt than for domestic debt, underscoring the risks of over-reliance on foreign borrowing.
“While the nation must avert a return to excessive debt build-ups of any form at all costs, past experience shows it is especially imperative to avoid sliding back into another foreign debt entanglement,” the IFS stated.
The IFS advised the government to maintain the fiscal discipline demonstrated over the past three years, during which Ghana managed without borrowing from international bond markets. This period, the think tank noted, compelled the government to pursue lower fiscal deficits, a stance that should be sustained to minimize borrowing needs.
“The government should not look for the least opportunity to return to the international bond market,” the IFS cautioned. “To ensure this, the government should learn lessons from the past three years, when the country carried on without borrowing from the international bond market. During this period, the government was compelled to pursue steps to ensure lower fiscal deficits. This stance should be maintained into the future, since low deficits imply low borrowing.”
The IFS also pointed to the Bank of Ghana’s Gold Purchase Programme as a model for increasing international reserves without incurring debt. “The crisis moved the central bank to more vigorously seek non-debt-creating avenues to increase its international reserves. This should teach the government a lesson that the nation’s natural resources can be leveraged for self-reliance,” the report stated.
The think tank’s recommendations come at a critical juncture for Ghana, as the government seeks to stabilize the economy and rebuild fiscal credibility following the recent debt crisis. By avoiding excessive external borrowing, maintaining fiscal discipline, and leveraging natural resources, the government can reduce its vulnerability to external shocks and lay the foundation for sustainable economic growth.
The IFS’s warning serves as a timely reminder of the risks associated with over-reliance on international bond markets and the importance of prudent fiscal management in safeguarding Ghana’s economic future.
