Why Ghana went from hero to zero for investors


Ghana is learning the hard way why oil can be a blessing and a curse. The start of commercial crude production helped make the West African country one of the continent’s most popular investment destinations, but also prompted successive governments to borrow all the way. Skittish investors have unloaded bonds and Ghana’s currency, the cedi, amid growing concerns over its ability to pay off debts. The falling exchange rate led to soaring prices of basic necessities, from milk to bus tickets, and prompted the central bank to raise interest rates sharply. With the economy on its knees, the administration of President Nana Akufo-Addo has appealed to the International Monetary Fund for an aid package of up to $3 billion.

1. Why was Ghana so popular among investors?

The first country in sub-Saharan Africa to gain independence after colonial rule, Ghana has been a bastion of stability in a region plagued by civil unrest and coups. It has held peaceful elections regularly since the 1990s, power has changed hands between rival parties and presidents, and it has an independent judiciary and a vibrant parliament. The world’s second-largest cocoa producer and Africa’s second-largest gold producer, it began exporting oil at the end of 2010. The following year, gross domestic product jumped nearly 14%. The economy has grown every year since then, albeit at a more modest pace, with the government’s adoption of a free market system helping to attract foreign capital and financing.

The government abandoned budgetary discipline and turned on the spending taps in anticipation of an oil bonanza. But the revenue it generated was insufficient to cover a succession of costly flagship programs, and the budget deficit soared as borrowing increased to fill funding gaps. Overspending was particularly common during election years. The Akufo-Addo administration has waived fees for all high school students and pays for their upkeep and accommodation. In 2021, the government spent $1 billion to refinance loans taken out by indebted private power producers, a move that was aimed at reducing its electricity bills. A plan to shore up a banking sector weakened by bad debt has cost taxpayers more than 25 billion cedis ($2.5 billion), and about 8 billion more cedis is needed to complete the process. Covid-19 has dealt another blow to already strained state finances. After selling Eurobonds in each of the previous nine years, it was barred from international capital markets in 2022 as investors lost faith in Ghana’s ability to service its debt. The government shunned an initiative that would have allowed it to suspend the service of its loans and pledged to no longer seek IMF support, before changing its tone in July 2022.

3. How precarious are Ghana’s finances?

The country is on the verge of a budget crisis and could be forced to restructure a debt burden that was equivalent to 78.3% of gross domestic product at the end of June, against 62.5% five years earlier. When it could no longer access international markets, the government resorted to domestic borrowing, paying annual interest rates of almost 30%. The central bank stepped in to provide funding to the government after it risked defaulting on its local debt, but it plans to limit further support to stay within its legal lending threshold. In early August, S&P Global Ratings downgraded the country’s credit rating by one notch to CCC+, seven levels below investment grade, citing high government funding needs and limited access to external financing.

4. How have investors reacted to the crisis?

There has been an exodus from the currency and bond markets. The nearly 40% drop in the cedi between the start of 2022 and the end of August made it the world’s worst performer after the failing Sri Lankan rupee. Its dollar-denominated bonds are trading at yields more than 10 percentage points higher than those of US Treasuries, a sign of distress.

5. What are the authorities doing to remedy the situation?

The Ministry of Finance has pledged to put government finances back on a sustainable path, cutting spending and reducing the projected fiscal deficit for 2022. The Bank of Ghana has raised its policy rate by 850 basis points between November 2021 and August 2022 to support the currency and help tame inflation. The central bank has also increased the cash reserves that banks are required to hold and has started buying dollars from mining and oil companies operating in the country – moves aimed at bolstering the country’s depleting foreign exchange reserves.

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