How To Engineer An Economic Crisis: Lessons From Ghana's Handbook

 

                                                Photo credit:REUTERS/ Francis Kokoroko

Three years ago, Ghana stood out as the shining star among African countries. Ghana was what every other African country wanted to become. The big brother we all looked up to.

 In 2019, Ghana’s economy was heralded as the fastest growing economy in the world. The IMF had estimated Ghana’s economy to grow by 8.8% that year, a jump from a growth rate of 5.6% in 2018, driven largely by flourishing oil and non-oil sectors. More to that, in December of 2019 the Ghana Cedi had appreciated by 14.81 % against the US dollar as compared to an appreciation of about 9.05% during the same period in 2018. Inflation levels were also considerably moderate at 7.9%.

Looking at Ghana’s economy three years later, the wheels seem to have come off. In July this year, Fitch solutions reviewed Ghana’s economic growth estimate from to 2.6% from an earlier estimate of 4.8%. It is worth noting that the economy had averaged a growth rate of about 6.8% before the pandemic. Just this year, the Ghana Cedi has been labeled the worst performing currency globally after losing over 50 per cent to the dollar. Additionally, in November this year, inflation levels hit a 21-year high of 50.3% up from 40.4% the previous month. If you imagined that things couldn’t get any worse then you are in for a rude shock. On 5^th December, the Ghanaian Finance Ministry announced the commencement of a domestic debt exchange before going ahead to issue a statement on 18th December to the effect that it had suspended payment on its Eurobonds, Commercial loans and most bilateral loans which effectively makes it one of the largest sovereign debt defaults this year.

Sovereign debt default is especially perilous for two major reasons. The first is that it leads to higher interest rates. This is because a default heightens the country’s risk thus making borrowing to refinance debt even dearer. Secondly, it is likely to lead to the weakening of a country’s currency as investors try to sell off their local assets in order to exit the defaulting country. If the country is a net importer of basic necessities such as food, the country’s citizens could be in for a very bumpy ride. Apparently, Ghana is such a country.

So how did Ghana get there?

During a presser in October, the Ghanaian president Nana Akufo-Addo heaped blame on “malevolent forces that had come together at the same time” as the reason for Ghana’s woes. By that he meant hangovers from the effects of the COVID-19 pandemic and the Russian-Ukrainian war. His reasons are justified but he was only telling half the story, nay, quarter.

What we are witnessing in Ghana today is a manifestation of recklessness fiscal management in the previous decade especially for the period between 2017 and 2020 during the twilight years of former president John Mahama tenure. For a long time, the Ghanaian government has been living way above its means as it continuously accumulated budget deficits. To plug those deficits, it turned to borrowing and now their goose is starting to really get cooked. As per latest statistics, Ghana’s public debt stands at 467.4 Billion Cedis ($37.4 Billion), 42% of it being domestic while the rest 58 % is external. When presenting the budget in early December, finance minister Ofori-Atta admitted that the debt to GDP ratio had crossed 100 %. The trouble with this huge debt stock has been the cost of financing interest payments and maturing principal payments. Presently, an upwards of 70% of Ghana’s revenue collection goes towards servicing debt leaving minimal space for other statutory obligations or investment in education, health and infrastructure. This is not helped by the fact that domestic revenue mobilization in the country of 31 million has been dismal due to tax exemptions for large corporations and of course corruption. According to the country’s auditor general, Ghana’s economy loses about 2.2 Billion Cedis (US$300 million) annually through this channel. Additionally, the Auditor General had flagged financial irregularities of about 48 Billion Cedis (over US $ 8 Billion) for the years between 2016 and 2020.

Apart from financial irregularities and loopholes in revenue mobilization, Ghana’s debt troubles have been as a result of – to use very Akufo-Ado terms- two “malevolent forces” or rather factors in the past decade. The first factor is that in 2014, the then government entered into a rather expensive capacity charges agreement with independent power producers in a bid to address perennial power outages. This agreement saw the Ghanaian government pay up to US $ 937.5 million in capacity charges between 2017 and 2020. The second factor is that, the Ghanaian government instigated a financial sector clean up in 2018 that cost about US $ 4Billion in borrowed funds - a figure which experts believe could have been less had implementation been more efficient.

It not difficult to see that the aforementioned factors, all happening within a breath, are a perfect recipe for an economic crisis of diabolical proportions.

            Is Kenya headed Ghana’s way?

Ghana’s default earlier this week has sparked debate online as to whether Kenya might be headed that way. However finance experts have come out to say that it is still farfetched. However looking at the parallels between Kenya and Ghana, you might want to hold your breath.

Just like Ghana, we are coming from a ten year period where government amassed such high debt within a very short time.

In 2023, we have a $ 2 Billion (sh246 Billion) Eurobond maturing. The Kenyan Treasury estimates that, the payment of the maturing Eurobond coupled with other debt repayment obligations, will push Kenya’s external debt service costs by 97 per cent from ksh. 241 Billion in the current financial year to Ksh. 475.6 billion in the 2023/2024 fiscal year.

When you put into perspective that the Kenyan shilling has been on free fall for the better part of the year, hitting all time lows against the US dollar and shattering the records time and time again, then it is not difficult to see that the costs of servicing external debts might jump even higher than projected next year.

It is also worth noting that in 2021, Kenya’s  debt service to revenue ratio stood at about 68%.

To stoke your fears even further, in July and November this year, our National treasury started conversations on debt switches on domestic paper something akin to Ghana’s debt exchange that is presently ongoing.

The only saving grace is that the government has been aggressively pursuing revenue collection which shall then be used to service debt as well as meet other needs. Only time will tell but if there’s anything to learning from Sri-Lanka’s economic meltdown earlier this year, it is that it doesn’t take an Armageddon for an economic crisis to manifest. It could be one bad policy away.