The prevailing economic situation suggests that by 2026, Ghana’s economy could face a severe decline following a recession. While the nation’s current strategy of postponing economic reforms through debt restructuring offers short-term relief, it also poses significant long-term financial and economic challenges.
Ghana is currently renegotiating its debt terms to enhance economic stability. However, the commencement of debt repayments after 2026 may lead to substantial economic difficulties, including heightened financial pressure and potential depreciation of the dollar-cedi exchange rate. Understanding these potential consequences requires a study of economic theories, comparative analysis with other nations, and an examination of evidence illustrating the economic challenges Ghana may encounter.
Ghana’s Debt Restructuring
Restructuring debt involves changing the terms of current debt to ease fiscal pressure. Ghana has adopted this approach in an effort to reduce its high debt levels and establish a viable path to economic recovery. However, when repayments resume after 2026, the nation might encounter a number of financial problems.
Economic Theories and Implications
Debt Overhang: According to Krugman (1988), large levels of debt discourage investment because prospective investors anticipate that taxes or austerity measures will be necessary to repay the debt, which would lower their profits. If debt repayments begin beyond 2026, Ghana may see a decrease in public spending on infrastructure and education, impeding the country’s long-term economic growth.
Ricardian Equivalency: This theory, proposed by Barro (1974), holds that when a government takes on debt, people expect future taxes to pay it back. As a result, they save more money, reducing their current consumption. This could cause Ghana’s aggregate demand to decline, hindering economic growth and possibly triggering a recession if private sector spending does not compensate for the reduced government spending.
Interest Rate Spirals: Excessive debt levels can lead to higher borrowing costs as investors demand higher interest rates to offset the perceived risk. This creates a vicious cycle where the national budget is increasingly consumed by rising interest rates, leaving less money for essential services and productive investments (Blanchard, 1985).
Doing a Comparative Analysis with Other Countries
Analysing the debt restructuring and repayment experiences of other nations yields insightful information:
Greece: According to Arghyrou and Tsoukalas (2010), the country’s financial crisis and subsequent restructuring in the 2010s caused a sharp decline in the economy, a significant increase in unemployment, and social unrest. Ghana could experience similar socioeconomic difficulties if austerity measures are required to fulfill financial commitments.
Argentina: The country’s repeated debt crises and attempts at restructuring serve as a warning about the potential for long-term instability. Despite restructuring, Argentina has faced frequent defaults, hyperinflation, and a decline in investor confidence (Sturzenegger & Zettelmeyer, 2006). Ghana must ensure that its restructuring agreements are sustainable and promote economic stability to avoid such dangers.
Jamaica: The island nation successfully restructured its debt in 2010 and 2013, which improved its fiscal situation and spurred economic expansion. The implementation of structural reforms, such as tax reforms and public sector modernization, was crucial to its success (Jamaica’s Ministry of Finance, 2013). Ghana might take a cue from Jamaica’s strategy by combining extensive economic reforms with debt restructuring.
Potential Repercussions for Ghana
Fiscal Strain: Resuming debt repayments may put pressure on Ghana’s finances and make it more difficult for the country to invest in infrastructure, healthcare, and education. This can impede progress and exacerbate already-existing socioeconomic problems.
Depreciation of Currency and Inflation: Higher borrowing rates and lower investor confidence may cause currency depreciation and inflationary pressures. Ghana’s economy heavily relies on imports, particularly of basic commodities like food, fuel, and raw materials. A weaker cedi relative to the dollar would increase the cost of these imports, driving inflation and reducing consumer purchasing power. This would impact businesses and consumers, raising living expenses and possibly inciting social unrest.
Historical Examples: Strong currencies and high debt levels have historically resulted in severe economic suffering for nations. For instance, hyperinflation and a collapsing currency brought about by Argentina’s repeated debt crises resulted in extreme poverty and unstable economic conditions (Sturzenegger & Zettelmeyer, 2006). Ghana needs to execute responsible budgetary measures and preserve macroeconomic stability to avoid similar consequences.
Social Discontent: As demonstrated in Greece, austerity policies and a decrease in public spending may cause social discontent and political instability. It will be essential to guarantee social safety nets and targeted assistance for vulnerable communities. High rates of underemployment and youth unemployment in Ghana may escalate tensions, leading to unrest and political instability.
Evidence of Economic Hardship
Indicators of possible financial stress that we can examine include the following:
Volatility of Exchange Rates: The recent volatility of Ghana’s exchange rate is indicative of underlying economic risks. The Bank of Ghana estimates that in 2021 the value of the cedi fell relative to the US dollar by about 12% (Bank of Ghana, 2021). If debt repayments put pressure on foreign exchange reserves and investor confidence after 2026, this tendency might worsen.
Growing Inflation: High import costs and currency depreciation have been the main causes of Ghana’s ongoing inflation problem. As of December 2021, Ghana’s inflation rate was 12.6%, among the highest in recent memory (Ghana Statistical Service, 2021). Resuming loan payments after 2026 may increase inflationary pressures, lowering real incomes and living standards.
Fiscal Deficits: Public spending on debt repayment and basic services is the main cause of Ghana’s ongoing large fiscal deficit. The forecasted budget deficit for 2021 was 12.1% of GDP, far higher than the 3% convergence threshold set by the West African Monetary Zone (IMF, 2021). After 2026, it may become necessary to balance debt repayments with other expenses, requiring challenging budgetary adjustments and austerity measures.
Youth Unemployment: High youth unemployment is a serious problem, with an estimated 12% of Ghana’s youth population unemployed as of 2021 (World Bank, 2021). Reduced public funding for job development and education initiatives after 2026 may exacerbate this problem, escalating social tensions and possibly sparking instability.
In summary
Restructuring Ghana’s debt is an essential step toward achieving economic stability. However, the consequences when repayment starts in 2026 could present serious difficulties, including financial hardship, inflation, currency depreciation, and social unrest. Ghana can better navigate these potential risks by understanding economic theory and learning from the experiences of other nations. Reducing the risks associated with debt repayment will require implementing structural reforms, maintaining budgetary restraint, and promoting an inclusive growth approach.
References
- Arghyrou, M. G., & Tsoukalas, J. D. (2010). The Greek debt crisis: likely causes, mechanics and outcomes. The World Economy, 34(2), 173-191.
- Bank of Ghana. (2021). Annual Report.
- Barro, R. J. (1974). Are government bonds net wealth? Journal of Political Economy, 82(6), 1095-1117.
- Blanchard, O. J. (1985). Debt, deficits, and finite horizons. Journal of Political Economy, 93(2), 223-247.
- Ghana Statistical Service. (2021). Consumer Price Index.
- International Monetary Fund. (2021). Ghana: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Ghana.
- Krugman, P. (1988). Financing vs. forgiving a debt overhang. Journal of Development Economics, 29(3), 253-268.
- Sturzenegger, F., & Zettelmeyer, J. (2006). Debt Defaults and Lessons from a Decade of Crises. MIT Press.
- World Bank. (2021). World Development Indicators.
By Roger T. D. Wills, Economist and Financial Analyst
