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Ghana: New Debt Trap

AfricaFocus Bulletin
October 18, 2016 (161018)
(Reposted from sources cited below)

Editor's Note

"Ghana is in a debt crisis. Despite having had significant amounts of debt canceled a decade ago, the country is losing around 30% of government revenue in external debt payments each year. Such huge payments are only possible because Ghana has been able to take on more loans from institutions such as the International Monetary Fund (IMF), which are used to pay the interest on debts to previous lenders, whilst the overall size of the debt increases. "

The downward spiral of debt, whether for individuals or for countries, is commonly driven by loans that are risky and unrealistic, a phenomenon for which both lenders and borrowers bear responsibility. Structural vulnerability and misleading expectations fuel a cycle in which interest payments increase the debt while payments become increasingly difficult. A new report from the Jubilee Debt Campaign, UK, with a coalition of non-governmental organizations in Ghana, provides a clear illustration from a country that is in many other respects a positive model for African political and economic progress.

Nevertheless, the report documents, Ghana is again falling into a debt trap. The causes include 1) continued dependence on primary commodities with volatile pricing on international markets and (2) bad judgement by both the Ghanaian government and by international lenders pitching high-interest loans which can only be paid under optimistic and unrealistic economic scenarios for the period of the loan. For example, according to the report, there were three successive $1 billion bond issues from 2013 to 2015, the latest at an interest rate of 10.75%. Strikingly, the World Bank provided a guarantee for the latest bond despite its own rules blocking such risky loans.

This AfricaFocus Bulletin includes selected excerpts from the press release, executive summary, and full report. The full report is available at

For previous AfricaFocus Bulletins on Ghana, visit

For previous AfricaFocus Bulletins on debt and related issues of international capital flows, visit

++++++++++++++++++++++end editor's note+++++++++++++++++

"World Bank broke its own rules over high-interest loans to Ghana," Excerpt from Jubilee Debt Campaign, UK, press release, October 9, 2016

According to Sarah-Jayne Clifton, Director of the Jubilee Debt Campaign, UK:

"The underlying causes of Ghana's new debt crisis are that neither borrowers nor lenders have learned from past mistakes, and that its economy remains reliant on primary commodities, leaving it extremely vulnerable to the recent global commodity price crash. The people of Ghana should not have to suffer through yet another debt crisis while lenders who speculated on their economy reap huge profits out of high interest loans guaranteed by the World Bank.

Ghana's debts need to be reduced or restructured to escape another prolonged debt trap, while regulation of lending, more responsible borrowing, and tax justice are essential to end this cycle of debt crises once and for all."

The fall and rise of Ghana's debt : How a new debt trap has been set

October 2016

Integrated Social Development Centre Ghana, Jubilee Debt Campaign UK, SEND Ghana, VAZOBA Ghana, All-Afrikan Networking Community Link for International Development, Kilombo Ghana and Abibimman Foundation Ghana.

[Full report and executive summary available for download at - direct URL:]

Executive Summary [excerpts]

Ghana is in a debt crisis. Despite having had significant amounts of debt canceled a decade ago, the country is losing around 30% of government revenue in external debt payments each year. Such huge payments are only possible because Ghana has been able to take on more loans from institutions such as the International Monetary Fund (IMF), which are used to pay the interest on debts to previous lenders, whilst the overall size of the debt increases.

Ghana's crisis is the result of a gradual increase in lending and borrowing off the back of the discovery of oil and high commodity prices. More money was then borrowed following the fall in the price of oil and other commodities since 2013, to try to deal with the impact of the commodity price crash, whilst the relative size of the debt also grew because of the fall in the value of the Ghanaian currency (the cedi) against the dollar ($).

The underlying causes of the return to a debt crisis are therefore the continued dependence on commodity exports, as well as borrowing and lending not being responsible enough, meaning that new debts do not generate sufficient revenue to enable them to be repaid.

At the moment, all the costs of the crisis are being born by the people of Ghana, and none by the lenders. This is unfair. Lenders should carry their share of the cost of any irresponsible lending, and of the change in circumstance caused by the fall in commodity prices.

Additional action is also needed in order to prevent a repeat of Ghana's crisis, including changes on the part of the government and lenders to ensure that loans are well used, and that more of the revenue generated by the economy is turned into government revenue by taxation.

Commodity dependence

Ghana's dependence on commodities dates back to colonialism. ... [almost 60 years after independence] the country's economy remains dependent on the export of just three primary commodities - gold, cocoa and now oil, which together make up over 80% of Ghana's exports.

Debt crisis and debt cancellation

This dependence on commodities was the central factor underlying a debt crisis which was common to much of the global South in the 1980s and 1990s. Global commodity prices fell at the start of the 1980s, rapidly increasing the size of foreign debt payments which could only be paid out of foreign earnings such as exports. As commodity producers across the world expanded production in order to pay debts, on the advice of the IMF and World Bank, commodity prices stayed low for over 20 years.

From the mid-1990s the global Jubilee movement called for debt cancellation, which led to the creation and enhancement of two debt relief schemes run by the IMF and World Bank, the Heavily Indebted Poor Countries initiative and Multilateral Debt Relief Initiative.

As a result of this debt cancellation, Ghana's government external debt fell from $6.6 billion in 2003 to $2.3 billion in 2006. Significant improvements in education and healthcare followed, due to money being saved and invested, alongside good government policies, enhancing basic service provision. ...

Commodity and lending boom, and manufacturing decline

However, Ghana's dependence on commodities continued, and as prices rose, this created more willingness for lenders to give loans off the back of a growing economy.

Gold and cocoa prices began to increase from the mid- 2000s, as part of a global boom in primary commodity prices heavily influenced by Chinese growth and demand, on top of continued high consumption in rich North American, European and Asian economies. Furthermore, Ghana discovered oil, and began to produce and export it from 2011. Collectively these changes led to a booming economy. Between 2006 and 2013 Ghana's GDP per person grew by 44%. However, over the same time period the number of people living below the national poverty line only fell by 10%, a slower rate than in the previous seven years when growth had been far lower. The reason was that much of the proceeds of growth went to those with the highest incomes. For every 1 cedi increase in income for the poorest 10%, the incomes of the richest 10% increased by more than 9 cedi.

This rapid economic growth led to an increased willingness and desire of various institutions to lend to Ghana, with a corresponding willingness to borrow. Loans increased steadily from 2008 to 2011. In total, between 2007 and 2015 there were $18.2 billion of external loans and $8.7 billion of debt payments, leaving $9.5 billion of the additional borrowing to be spent within Ghana.

There is little transparency on what the loans were used for, from both the government and lenders. The IMF figures on public capital formation show no relationship with the increase in lending, suggesting that whilst some loans could have been used for investment, the increase in lending did not lead to an increase in investment.

One of the more transparent lenders is the World Bank. Whilst they provide little information before loans are agreed - preventing civil society, media and politicians from holding the government and the World Bank to account - they do publish details during and after projects. Our analysis of these reports shows that 25% of outstanding debt from Ghana to the World Bank is for projects where the World Bank judged its own performance to be less than satisfactory.

Moreover, between May 2007 and February 2015 Ghana was assessed by the IMF and World Bank to be at moderate risk of debt distress, and since March 2015 of high risk. The World Bank is only meant to give half its support to moderate-risk countries as loans, and the other half as grants; to high-risk countries it is only meant to make grants. Yet between May 2007 and February 2015, 93% of World Bank funding to Ghana was in the form of loans. And since March 2015 when the World Bank was meant to stop giving Ghana loans, it has agreed $1.16 billion of new loans or loan guarantees.

With high commodity prices and the beginning of oil production, export revenues increased rapidly from 2008 to 2012. Yet there is evidence that manufacturing was crowded out. As a share of GDP, manufacturing production halved from over 10% in 2006 to 5% by 2014.

Commodity price crash and the new debt trap

A combination of the recent fall in the price of commodities and the loans not being used well enough to ensure they could be repaid has now pushed Ghana back into debt crisis.

In early 2013 the price of gold fell significantly, as did the price of oil from the start of 2014. Since the start of 2013 the value of the cedi against the dollar has fallen by 50%. This has caused the dollar-denominated size of Ghana's economy to fall from $47.8 billion in 2013 to $36 billion in 2015. Because external debts are owed in dollars or other foreign currencies, this has in turn increased the relative size of the debt and debt payments. External debt has grown from $14.7 billion in 2013 to $21.1 billion in 2016 (an increase of 44%), yet because of the depreciation external debt has gone up from 30% of GDP in 2013 to an expected 56% in 2016 (an increase of 87%). One response to these economic shocks has been for the government to borrow more money, most visibly through $1 billion of bond issues each in 2013, 2014 and 2015, all under English law. This money has mainly been used to make external and domestic debt interest and principal payments, and to fund ongoing government costs, plugging the gap created by dollar revenue being lower than expected. Less visibly, there has also been significant borrowing directly from external financial institutions.

The interest rates on the new debts are high, rising from 7.9% for the 2013 bond issue to 10.75% for the October 2015 one. For the October 2015 bond issue, the World Bank once again broke its own rules by guaranteeing $400 million of payments if the Ghanaian government fails to make them. The World Bank is not meant to give such guarantees for governments assessed as at high risk of debt distress, which Ghana had been for the previous seven months. The high interest rate and guarantee mean that if the Ghanaian government were to pay the interest every year until 2024, then default on all other payments from 2025, including the principal, the bond speculators would still have made $90 million more than if they had lent to the US government. This means that the speculators lent to Ghana believing that there was a high chance they would not be fully repaid.

However, for the moment those speculators are being paid, in part because since April 2015 the IMF has been lending more money which is being used to meet debt payments, effectively bailing out previous lenders. In return, the Ghanaian government has to cut government spending and increase taxes, a process which is expected to intensify further after the December 2016 elections. Under current plans, government spending per person (adjusted to account for inflation) will fall by 20% between 2012 and 2017.

The IMF estimates the Ghanaian government's external debt payments in 2016 will be 29% of revenue, well above the 18-22% it normally regards as the upper limit of sustainability. Payments are expected to stay well above 20% of revenue until at least 2035. This is only considered possible due to a combination of very optimistic expectations and requirements for large spending cuts and tax increases, the very things the IMF has been criticising the European Union for in the case of Greece.

The IMF predicts:

  • Dollar GDP growth averaging 8.2% a year from now until 2035. Yet, from 2008 to 2015 Ghana's economy grew at less than half this rate despite the discovery of oil. * Growth in government revenue in line with GDP, collecting 19-21% a year. Yet, Ghana has only once collected 19% of GDP in government revenue in a year (in 2011) since IMF records began in 1980. ...
  • A fall in the average interest rate paid on external debt from 5.1% to 4.1%. Yet, interest rates on external private and multilateral debt have been increasing, and dollar interest rates are expected to increase as and when the US Federal Reserve continues to raise rates.
  • A large primary budget surplus by 2017, and continuing surpluses from then on. Yet, this will mean continuing government spending cuts and tax increases, and will take demand out of the economy, thereby reducing growth and risking a classic debt trap where austerity leads to less growth, which in turn increases the relative size of the debt, which leads to more austerity and less growth, and so on.

Escapes from the trap

Debt is already placing a significant burden on Ghana's economy and society, and the country is at risk of falling back into an extended debt trap, with an economic stagnation and possible increases in poverty rates and failure to implement the Sustainable Development Goals. Today's crisis has resulted from a multitude of factors: failure to diversify away from commodities, the government and lenders failing to ensure loans were used productively enough, falling global commodity prices, particularly gold and oil, and the opportunism of speculators lending at high interest rates seeking large profits.

The people of Ghana should not have to bear all the suffering of a crisis caused by government policy, irresponsible lenders, and global economic shocks, especially when speculators continue to extract large profits from the country.


Additional excerpts from full report

Slowing progress in reducing poverty and increased inequality

During the 'boom' up until 2013, progress in reducing poverty slowed down, and inequality increased.

The most recent data on poverty and inequality in Ghana comes from the Ghana Living Standards Survey in 2013. This shows that the number of people living in poverty fell from 7 million in 2006 to 6.3 million in 2013. The proportion of people living in poverty fell from 31.9% to 24.2%. Poverty is defined as not having enough income to meet all basic food and non-food needs, and was set at 1,314 cedi per adult per year for 2013 ($1,460 a year in Purchasing Power Parity terms, 32 or $4 a day). According to a report for Unicef, this means the average annual rate of poverty reduction slowed to 1.1 percentage points a year from 2006 to 2013, down from 1.8 percentage points in the 1990s.

In total, the number of people living in poverty fell by 10% between 2006 and 2013. In contrast, over the same time period GDP per person grew by 44%. In the previous seven-year period from 1999 to 2006, the number of people living in poverty fell by 14% whilst the economy only grew by 18%. There has been an increasing divergence between the pace of economic growth and the pace of poverty reduction.

This divergence is because more of the financial benefits of growth have been going to richer people. Average adult consumption for Ghana's richest 10% increased by 1,246 cedi between 2006 and 2013, almost ten times more than the increase of 135 cedi for the poorest 10%. The 'richest' 10% is still a relative term however - the average income of the richest 10% in 2013 of 5,789 cedi a year was equivalent to $6,500 in Purchasing Power Parity terms. Within the richest 10% there are still huge disparities in income and wealth. Overall, inequality has been increasing on almost all measures (see Table 1 below).


The New Debt Trap

Ghana is now at risk of entering an extended debt trap in which government spending continues to fall with negative impacts on poverty, inequality and economic growth, while debt stays high. Meanwhile, high interest rates on private loans mean speculators continue to take large profits out of the country.

The fall in oil prices from the middle of 2014 led to significant falls in expectations of government revenue collection in Ghana, on the part of the government, foreign speculators and the IMF. This in turn led to sharp falls in the value of the cedi against the dollar, thus increasing the relative size of debt payments.

Meanwhile, external debt payments began to increase from 2012 as interest payments needed to be made on the recently taken out private external debt, whilst interest and principal payments on the multilateral and bilateral loans increased because of the increase in such debts, and because grace periods 80 on loans given after HIPC and MDRI came to an end (see Graph 14 below).

Initially these increased debt payments were met by more borrowing of both external and domestic debt. In addition, in April 2015, an agreement was reached with the IMF for $930 million of loans from 2015 to 2018, all of which are effectively being used to help meet debt payments, including the interest to private speculators. These have been added to by other similar loans from the World Bank and African Development Bank.


Projections beyond 2017.

The IMF is only able to predict that Ghana will be able to keep paying its debt by making very optimistic predictions about the future.

The IMF and World Bank DSA projects that external debt service will continue to stay high for many years, still being almost one- quarter of government revenue in 2035. However, it also projects that overall external debt and total public debt will gradually fall as a percentage of GDP. This assumes that growth in GDP measured in dollars is high, averaging over 8% in nominal terms. It also assumes there is a primary surplus every year, from a height of 2.3% of GDP in 2017 to 0.9% by 2025 and 0.1% in 2035.

However, the predictions for dollar-GDP growth in the DSA have already proven over-optimistic compared to the more recent April IMF World Economic Outlook for 2016 and 2017, which, as noted above, indicates that external debt will continue to rise.

The only way the IMF can predict Ghana's debt will keep being paid is by assuming:

  • high growth in dollar GDP, averaging 8.2% a year
  • the government collecting around 19-21% of GDP in revenue every year, ie, revenue growing in line with GDP
  • a fall in the average interest rate paid on external debt from 5.1% to 4.1% over the medium term
  • a large primary surplus by 2017 of 2.3%, and continual surpluses after, albeit at a falling proportion of GDP

Any significant failure in these assumptions could cause debt to increase further out of control, ultimately costing the people of Ghana more if it continues to be paid. Yet all of these assumptions are either optimistic or require significant sacrifices.


Escapes from the debt trap

Urgent action is needed to ensure Ghana does not fall into a debt trap in which government spending continues to fall with negative impacts for poverty, inequality and economic growth, while debt stays high.

To avoid this trap debt payments need to be cut. At the moment, all the costs from irresponsible lending and borrowing, and the decline in oil and other commodity prices, are falling on the people of Ghana, and none of them on the lenders. Below we make recommendations on how the debt trap can be avoided through lenders sharing in the burden of failed lending and the external economic shock of falling commodity prices.

In addition, to prevent this trap being created again, there needs to be greater transparency and accountability in relation to debt on the part of the government of Ghana and lenders, tax justice to ensure that more of the revenue generated in Ghana stays in the country and is available for social spending and public investment, and a reorientation of the Ghanaian economy away from reliance on primary commodities.

Below are proposals which we believe the government, political parties and lenders should discuss with civil society both before and after the elections in December 2016.

Conduct a debt audit

In this report we have attempted to identify how much debt there is, who the loans were given by, what they were for and on what terms. However, the lack of transparency with many loans means this is difficult to do and much information is not publicly available. Both the government and all lenders should release details of how much is owed, to whom, on what terms, and what the money was meant to be used for (if specified). This could be done through establishing an independent debt audit commission.


Make lending and borrowing more productive and accountable

Ghana's debt has increased rapidly without it being clear what the loans were for, and how projects they were funding were being monitored and evaluated.


Make adjustment fair

Any reduction in debt payments from measures below will help prevent Ghana getting further stuck in a debt trap. But government finances will still need to be improved to ensure sustainable finances which allow poverty and inequality to be reduced and the Sustainable Development Goals to be met.

The Ghanaian government should:

  • Protect all vital public spending, such as on healthcare and education, social services and welfare protections, and key economic infrastructure.
  • Increase tax revenues from large companies and rich individuals, including by ceasing to grant tax waivers, including for public- private partnership projects, and increasing the capacity of tax collection authorities to ensure existing laws relating to issues such as transfer mispricing are implemented.


Hold a debt conference

The change in oil price means that Ghana cannot make debt payments wthout significant cuts in vital government expenditure, high economic growth and continued high borrowing. It is unfair for the suffering caused by the change in global economic conditions to be born entirely by the people of Ghana and none by the lenders.

The Ghanaian government could call a conference of all its creditors to negotiate the debt down to a level consistent with meeting the Sustainable Development Goals. A UN body such as UNCTAD could be contracted to advise on what a sustainable level of debt would be. Negotiations have been held between the government and local banks and some power sector debts, 98 but a much more comprehensive approach is now needed across external debt.


Default or threaten to default on some of the debt

The Ghanaian government could stop paying some or all of the debt. For most if not all creditors, it is the threat (or reality) of not paying which will incentivise them to renegotiate the terms of the debt. For instance, if some lenders did not respond to requests for a debt conference, threatening to default or defaulting could make them more willing to do so. Defaults on different types of debt come with different implications which we discuss below.


Cancel unjust debts

The details of many loans are unknown, so no assessment can yet be made of how well the money was spent and how responsibly the lenders acted to ensure it was invested well. However, this report has uncovered that the World Bank broke its own rules by disbursing 93% of its money to Ghana as loans when it should have been giving half grants and half loans. Furthermore, at least $540 million of debt owed to the World Bank is for projects where the World Bank itself has said its performance was less than satisfactory (25% of debt where there is an assessment).


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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