Adnan Adams Mohammed
Ghana’s economic collapse cannot solely be blamed on COVID-19 pandemic and the Russian/Ukraine war, Fitch Solutions has discounted government’s overused excuse.
It explains that, even before these external shocks hit the global economy, Ghana’s debt was above the sustainable level as measured against the International Monetary Fund’s threshold of debt to Gross Domestic Product ratio of 70 percent and below.
The international investors’ research firm argued that, Ghana went back to the international capital market in early 2021 in desperation for cash. This attracted investors to take advantage of the sweet rates Ghana was selling its Eurobonds, and led to investors oversubscribing Ghana’s bonds which later resulted in currency sell off, after which the country started witnessing symptoms of hiding chronic economic disease of escalating exchange rate and inflation since early 2022
“I think the answer is, it’s been aggravated by the Covid-19 pandemic and the war in Ukraine. Those two are not the only cost to Ghana’s woes”, Senior Country Risk Analyst, Mike Kruiniger, responding to a question at a recent Sub Saharan Africa Macroeconomic Update event said. “Both external and internal shocks caused the macroeconomic imbalances in the country.”
“Ghana’s debt servicing costs were already rising pretty rapidly prior to the pandemic with the government having to work on pretty large scale of spending projects including restructuring of the banking sector and providing free secondary education to everyone in Ghana”, he explained.
Mr. Kruiniger also blamed the high borrowing on the international capital market as one of the country’s problems.
“Ghana went back to the international capital market in early 2021, with this seamless desperation for cash. Investors started to flood the country which led the currency to sell off and after that, we’ve seen all the problems that Ghana has been facing since early 2022”.
He concluded that though the Covid-19 and the Russian Ukraine war have contributed to Ghana’s crisis, they are not only the reasons behind Ghana’s economic challenges.
Meanwhile, the Institute of Economic Affairs pointed that indiscipline in managing the country’s finances have caused the high fiscal deficits and consequently high inflation and currency instability, forcing innocent Ghanaians and businesses to pay for the mismanagement.
The think-tank expressed it worry in a paper published and titled “Institutionalising Fiscal Discipline and Macroeconomic Stability for Sustained Growth in Ghana: The Constitutional Pathway.”
Lead Researcher at the Intitute, Dr. John Kwakye, noted that Ghana has a long history of fiscal indiscipline and this is evident in its fiscal deficits being almost consistently higher than those of its peers in Africa.
“Our deficits tend to escalate in election years when we elevate election-related spending. Then we borrow to finance the deficits and cause our public debt to escalate to unsustainable levels. We have been in that situation numerous times. Our debt reached the first crisis situation around 2004, when it ballooned to over 100% of GDP”.
“We had to seek relief under the HIPC Initiative, which caused the debt-to-GDP ratio to drop to a sustainable level of 26% in 2006. Thereafter, we returned to our culture of fiscal indiscipline, which caused the debt to rise yet again. And today, the debt-to-GDP ratio is back to an unsustainable level of over 100%”, he explained.
He added that the country must do everything possible to safeguard or institutionalise fiscal discipline under the constitution, else it will always record macroeconomic instability.
Also, associated with the high fiscal deficits has been high inflation and currency instability, which the IEA called for immediate action.
According to Dr. Kwakye, Ghana has had much higher inflation rates than its peers, adding, the cedi has experienced much higher depreciation over the years.
Again, he said “government domestic borrowing to finance the deficits has elevated interest rates to levels that have crowded out the private sector, inhibiting investments and stifled economic growth. High fiscal deficits and the associated demand pressures have also spilled over to the external sector, leading to high current account deficits”.
The economist opined that, prevalent fiscal indiscipline and its associated macroeconomic instability, and over-borrowing to spend on goods and services are what have taken the country to the IMF about 17 times.
“We have been caught up in an unending cycle of high fiscal deficits, high interest rates, high inflation, high current account deficits, rapid exchange rate depreciation, and unstable growth. It is our prevalent fiscal indiscipline and associated macroeconomic instability and debt crises that have taken us to the IMF seventeen times”.
