Review and Analysis of Debt Sustainability: Ghana

This report seeks to highlight trends in key debt management measures for a selected number of African countries with debt management problems (Central African Republic, Chad, Ghana, Mozambique, Senegal and Zambia). Extra analysis on Ghana is presented. The question of whether certain African countries would be able to meet their debt obligations without resorting to default in the foreseeable future has been on the minds of many stakeholders. Public debt sustainability has become an issue recently because some countries who received aid under HIPC are again accumulating unsustainable debt. Between 1980 and 1995, that is before HIPC, the average growth rate was about 2 percent and rose to about 6 percent after HIPC (1996 to 2017) for the six selected countries. Proper debt management and debt relief partly account for better economic performance. Based on the growth prospects, another round of borrowing has been intensified. The debt/GDP ratio and external debt service over exports ratio have been rising for this group of countries. Another worrying trend is the rise in interest payments on external debt. The share of concessional loans increased throughout the 1980s, 1990s and early 2000s to an average of about 76 percent in 2005 but has since been falling to an average of 47 percent in 2017. The implication is that these countries are increasingly borrowing from the open market instead of borrowing from traditional donors, who are known to insist on due diligence and prudent financial behaviour before disbursements are made. This serves as a check on sustainable debt accumulation.
After rebasing the economy of Ghana in 2013, the debt/GDP ratio fell from 73.9 percent in 2016 to 57.9 percent in 2018. Projections by the World Bank shows that the debt/GDP ratio would soon be higher than the benchmark of 56 percent for Ghana and higher than the 70 percent specified by the WAEMU. The consequence is that about 86 percent of interest and charges payments were made to commercial sources in 2017, while only 6 percent and 8 percent were paid to bilateral and multilateral sources respectively. The MOFEP has budgeted to pay about 88 percent to commercial sources in 2018. Another observation is that the share of the domestic debt owed to the local banking system has fallen from 52.5 percent in 2014 to 35.4 percent in 2017. The share of the foreign sector increased from 17.1 percent in 2014 to 38.4 percent in 2017, but down to 30 percent in 2018. This makes the public finance venerable to exchange rate shocks when investors decide to take their funds out of the economy.