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Ghana: New Debt Trap
AfricaFocus Bulletin
October 18, 2016 (161018)
(Reposted from sources cited below)
Editor's Note
"Ghana is in a debt crisis. Despite having had significant amounts
of debt canceled a decade ago, the country is losing around 30% of
government revenue in external debt payments each year. Such huge
payments are only possible because Ghana has been able to take on
more loans from institutions such as the International Monetary
Fund (IMF), which are used to pay the interest on debts to previous
lenders, whilst the overall size of the debt increases. "
The downward spiral of debt, whether for individuals or for
countries, is commonly driven by loans that are risky and
unrealistic, a phenomenon for which both lenders and borrowers bear
responsibility. Structural vulnerability and misleading expectations
fuel a cycle in which interest payments increase the debt while
payments become increasingly difficult. A new report from the
Jubilee Debt Campaign, UK, with a coalition of non-governmental
organizations in Ghana, provides a clear illustration from a country
that is in many other respects a positive model for African
political and economic progress.
Nevertheless, the report documents, Ghana is again falling into a
debt trap. The causes include 1) continued dependence on primary
commodities with volatile pricing on international markets and (2)
bad judgement by both the Ghanaian government and by international
lenders pitching high-interest loans which can only be paid under
optimistic and unrealistic economic scenarios for the period of the
loan. For example, according to the report, there were three
successive $1 billion bond issues from 2013 to 2015, the latest at
an interest rate of 10.75%. Strikingly, the World Bank provided a
guarantee for the latest bond despite its own rules blocking such
risky loans.
This AfricaFocus Bulletin includes selected excerpts from the press
release, executive summary, and full report. The full report is
available at http://tinyurl.com/zb8rm7u
For previous AfricaFocus Bulletins on Ghana, visit
http://www.africafocus.org/country/ghana.php
For previous AfricaFocus Bulletins on debt and related issues of
international capital flows, visit
http://www.africafocus.org/intro-iff.php
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"World Bank broke its own rules over high-interest loans to Ghana,"
Excerpt from Jubilee Debt Campaign, UK, press release, October 9,
2016
http://tinyurl.com/hcgx8mg
According to Sarah-Jayne Clifton, Director of the Jubilee Debt
Campaign, UK:
"The underlying causes of Ghana's new debt crisis are that neither
borrowers nor lenders have learned from past mistakes, and that its
economy remains reliant on primary commodities, leaving it extremely
vulnerable to the recent global commodity price crash. The people of
Ghana should not have to suffer through yet another debt crisis
while lenders who speculated on their economy reap huge profits out
of high interest loans guaranteed by the World Bank.
Ghana's debts need to be reduced or restructured to escape another
prolonged debt trap, while regulation of lending, more responsible
borrowing, and tax justice are essential to end this cycle of debt
crises once and for all."
The fall and rise of Ghana's debt : How a new debt trap has been set
October 2016
Integrated Social Development Centre Ghana, Jubilee Debt Campaign
UK, SEND Ghana, VAZOBA Ghana, All-Afrikan Networking Community Link
for International Development, Kilombo Ghana and Abibimman
Foundation Ghana.
[Full report and executive summary available for download at
http://jubileedebt.org.uk - direct URL: http://tinyurl.com/zb8rm7u]
Executive Summary [excerpts]
Ghana is in a debt crisis. Despite having had significant amounts of
debt canceled a decade ago, the country is losing around 30% of
government revenue in external debt payments each year. Such huge
payments are only possible because Ghana has been able to take on
more loans from institutions such as the International Monetary
Fund (IMF), which are used to pay the interest on debts to previous
lenders, whilst the overall size of the debt increases.
Ghana's crisis is the result of a gradual increase in lending and
borrowing off the back of the discovery of oil and high commodity
prices. More money was then borrowed following the fall in the
price of oil and other commodities since 2013, to try to deal with
the impact of the commodity price crash, whilst the relative size
of the debt also grew because of the fall in the value of the
Ghanaian currency (the cedi) against the dollar ($).
The underlying causes of the return to a debt crisis are therefore
the continued dependence on commodity exports, as well as borrowing
and lending not being responsible enough, meaning that new debts do
not generate sufficient revenue to enable them to be repaid.
At the moment, all the costs of the crisis are being born by the
people of Ghana, and none by the lenders. This is unfair. Lenders
should carry their share of the cost of any irresponsible lending,
and of the change in circumstance caused by the fall in commodity
prices.
Additional action is also needed in order to prevent a repeat of
Ghana's crisis, including changes on the part of the government and
lenders to ensure that loans are well used, and that more of the
revenue generated by the economy is turned into government revenue
by taxation.
Commodity dependence
Ghana's dependence on commodities dates back to colonialism. ...
[almost 60 years after independence] the country's economy remains
dependent on the export of just three primary commodities - gold,
cocoa and now oil, which together make up over 80% of Ghana's
exports.
Debt crisis and debt cancellation
This dependence on commodities was the central factor underlying a
debt crisis which was common to much of the global South in the
1980s and 1990s. Global commodity prices fell at the start of the
1980s, rapidly increasing the size of foreign debt payments which
could only be paid out of foreign earnings such as exports. As
commodity producers across the world expanded production in order
to pay debts, on the advice of the IMF and World Bank, commodity
prices stayed low for over 20 years.
From the mid-1990s the global Jubilee movement called for debt
cancellation, which led to the creation and enhancement of two debt
relief schemes run by the IMF and World Bank, the Heavily Indebted
Poor Countries initiative and Multilateral Debt Relief Initiative.
As a result of this debt cancellation, Ghana's government external
debt fell from $6.6 billion in 2003 to $2.3 billion in 2006.
Significant improvements in education and healthcare followed, due
to money being saved and invested, alongside good government
policies, enhancing basic service provision. ...
Commodity and lending boom, and manufacturing decline
However, Ghana's dependence on commodities continued, and as prices
rose, this created more willingness for lenders to give loans off
the back of a growing economy.
Gold and cocoa prices began to increase from the mid- 2000s, as part
of a global boom in primary commodity prices heavily influenced by
Chinese growth and demand, on top of continued high consumption in
rich North American, European and Asian economies. Furthermore,
Ghana discovered oil, and began to produce and export it from 2011.
Collectively these changes led to a booming economy. Between 2006
and 2013 Ghana's GDP per person grew by 44%. However, over the same
time period the number of people living below the national poverty
line only fell by 10%, a slower rate than in the previous seven
years when growth had been far lower. The reason was that much of
the proceeds of growth went to those with the highest incomes. For
every 1 cedi increase in income for the poorest 10%, the incomes of
the richest 10% increased by more than 9 cedi.
This rapid economic growth led to an increased willingness and
desire of various institutions to lend to Ghana, with a
corresponding willingness to borrow. Loans increased steadily from
2008 to 2011. In total, between 2007 and 2015 there were $18.2
billion of external loans and $8.7 billion of debt payments,
leaving $9.5 billion of the additional borrowing to be spent within
Ghana.
There is little transparency on what the loans were used for, from
both the government and lenders. The IMF figures on public capital
formation show no relationship with the increase in lending,
suggesting that whilst some loans could have been used for
investment, the increase in lending did not lead to an increase in
investment.
One of the more transparent lenders is the World Bank. Whilst they
provide little information before loans are agreed - preventing
civil society, media and politicians from holding the government
and the World Bank to account - they do publish details during and
after projects. Our analysis of these reports shows that 25% of
outstanding debt from Ghana to the World Bank is for projects where
the World Bank judged its own performance to be less than
satisfactory.
Moreover, between May 2007 and February 2015 Ghana was assessed by
the IMF and World Bank to be at moderate risk of debt distress, and
since March 2015 of high risk. The World Bank is only meant to give
half its support to moderate-risk countries as loans, and the other
half as grants; to high-risk countries it is only meant to make
grants. Yet between May 2007 and February 2015, 93% of World Bank
funding to Ghana was in the form of loans. And since March 2015
when the World Bank was meant to stop giving Ghana loans, it has
agreed $1.16 billion of new loans or loan guarantees.
With high commodity prices and the beginning of oil production,
export revenues increased rapidly from 2008 to 2012. Yet there is
evidence that manufacturing was crowded out. As a share of GDP,
manufacturing production halved from over 10% in 2006 to 5% by
2014.
Commodity price crash and the new debt trap
A combination of the recent fall in the price of commodities and the
loans not being used well enough to ensure they could be repaid has
now pushed Ghana back into debt crisis.
In early 2013 the price of gold fell significantly, as did the price
of oil from the start of 2014. Since the start of 2013 the value of
the cedi against the dollar has fallen by 50%. This has caused the
dollar-denominated size of Ghana's economy to fall from $47.8
billion in 2013 to $36 billion in 2015. Because external debts are
owed in dollars or other foreign currencies, this has in turn
increased the relative size of the debt and debt payments. External
debt has grown from $14.7 billion in 2013 to $21.1 billion in 2016
(an increase of 44%), yet because of the depreciation external debt
has gone up from 30% of GDP in 2013 to an expected 56% in 2016 (an
increase of 87%). One response to these economic shocks has been
for the government to borrow more money, most visibly through $1
billion of bond issues each in 2013, 2014 and 2015, all under
English law. This money has mainly been used to make external and
domestic debt interest and principal payments, and to fund ongoing
government costs, plugging the gap created by dollar revenue being
lower than expected. Less visibly, there has also been significant
borrowing directly from external financial institutions.
The interest rates on the new debts are high, rising from 7.9% for
the 2013 bond issue to 10.75% for the October 2015 one. For the
October 2015 bond issue, the World Bank once again broke its own
rules by guaranteeing $400 million of payments if the Ghanaian
government fails to make them. The World Bank is not meant to give
such guarantees for governments assessed as at high risk of debt
distress, which Ghana had been for the previous seven months. The
high interest rate and guarantee mean that if the Ghanaian
government were to pay the interest every year until 2024, then
default on all other payments from 2025, including the principal,
the bond speculators would still have made $90 million more than if
they had lent to the US government. This means that the speculators
lent to Ghana believing that there was a high chance they would not
be fully repaid.
However, for the moment those speculators are being paid, in part
because since April 2015 the IMF has been lending more money which
is being used to meet debt payments, effectively bailing out
previous lenders. In return, the Ghanaian government has to cut
government spending and increase taxes, a process which is expected
to intensify further after the December 2016 elections. Under
current plans, government spending per person (adjusted to account
for inflation) will fall by 20% between 2012 and 2017.
The IMF estimates the Ghanaian government's external debt payments
in 2016 will be 29% of revenue, well above the 18-22% it normally
regards as the upper limit of sustainability. Payments are expected
to stay well above 20% of revenue until at least 2035. This is only
considered possible due to a combination of very optimistic
expectations and requirements for large spending cuts and tax
increases, the very things the IMF has been criticising the
European Union for in the case of Greece.
The IMF predicts:
- Dollar GDP growth averaging 8.2% a year from now until 2035. Yet,
from 2008 to 2015 Ghana's economy grew at less than half this rate
despite the discovery of oil. * Growth in government revenue in
line with GDP, collecting 19-21% a year. Yet, Ghana has only once
collected 19% of GDP in government revenue in a year (in 2011)
since IMF records began in 1980. ...
- A fall in the average interest rate paid on external debt from
5.1% to 4.1%. Yet, interest rates on external private and
multilateral debt have been increasing, and dollar interest rates
are expected to increase as and when the US Federal Reserve
continues to raise rates.
- A large primary budget surplus by 2017,
and continuing surpluses from then on. Yet, this will mean
continuing government spending cuts and tax increases, and will
take demand out of the economy, thereby reducing growth and risking
a classic debt trap where austerity leads to less growth, which in
turn increases the relative size of the debt, which leads to more
austerity and less growth, and so on.
Escapes from the trap
Debt is already placing a significant burden on Ghana's economy and
society, and the country is at risk of falling back into an
extended debt trap, with an economic stagnation and possible
increases in poverty rates and failure to implement the Sustainable
Development Goals. Today's crisis has resulted from a multitude of
factors: failure to diversify away from commodities, the government
and lenders failing to ensure loans were used productively enough,
falling global commodity prices, particularly gold and oil, and the
opportunism of speculators lending at high interest rates seeking
large profits.
The people of Ghana should not have to bear all the suffering of a
crisis caused by government policy, irresponsible lenders, and
global economic shocks, especially when speculators continue to
extract large profits from the country.
...
Additional excerpts from full report
Slowing progress in reducing poverty and increased inequality
During the 'boom' up until 2013, progress in reducing poverty slowed
down, and inequality increased.
The most recent data on poverty and inequality in Ghana comes from
the Ghana Living Standards Survey in 2013. This shows that the
number of people living in poverty fell from 7 million in 2006 to
6.3 million in 2013. The proportion of people living in poverty
fell from 31.9% to 24.2%. Poverty is defined as not having enough
income to meet all basic food and non-food needs, and was set at
1,314 cedi per adult per year for 2013 ($1,460 a year in Purchasing
Power Parity terms, 32 or $4 a day). According to a report for
Unicef, this means the average annual rate of poverty reduction
slowed to 1.1 percentage points a year from 2006 to 2013, down from
1.8 percentage points in the 1990s.
In total, the number of people living in poverty fell by 10% between
2006 and 2013. In contrast, over the same time period GDP per
person grew by 44%. In the previous seven-year period from 1999 to
2006, the number of people living in poverty fell by 14% whilst the
economy only grew by 18%. There has been an increasing divergence
between the pace of economic growth and the pace of poverty
reduction.
This divergence is because more of the financial benefits of growth
have been going to richer people. Average adult consumption for
Ghana's richest 10% increased by 1,246 cedi between 2006 and 2013,
almost ten times more than the increase of 135 cedi for the poorest
10%. The 'richest' 10% is still a relative term however - the
average income of the richest 10% in 2013 of 5,789 cedi a year was
equivalent to $6,500 in Purchasing Power Parity terms. Within the
richest 10% there are still huge disparities in income and wealth.
Overall, inequality has been increasing on almost all measures (see
Table 1 below).
...
The New Debt Trap
Ghana is now at risk of entering an extended debt trap in which
government spending continues to fall with negative impacts on
poverty, inequality and economic growth, while debt stays high.
Meanwhile, high interest rates on private loans mean speculators
continue to take large profits out of the country.
The fall in oil prices from the middle of 2014 led to significant
falls in expectations of government revenue collection in Ghana, on
the part of the government, foreign speculators and the IMF. This
in turn led to sharp falls in the value of the cedi against the
dollar, thus increasing the relative size of debt payments.
Meanwhile, external debt payments began to increase from 2012 as
interest payments needed to be made on the recently taken out
private external debt, whilst interest and principal payments on
the multilateral and bilateral loans increased because of the
increase in such debts, and because grace periods 80 on loans given
after HIPC and MDRI came to an end (see Graph 14 below).
Initially these increased debt payments were met by more borrowing
of both external and domestic debt. In addition, in April 2015, an
agreement was reached with the IMF for $930 million of loans from
2015 to 2018, all of which are effectively being used to help meet
debt payments, including the interest to private speculators.
These have been added to by other similar loans from the World Bank
and African Development Bank.
...
Projections beyond 2017.
The IMF is only able to predict that Ghana will be able to keep
paying its debt by making very optimistic predictions about the
future.
The IMF and World Bank DSA projects that external debt service will
continue to stay high for many years, still being almost one-
quarter of government revenue in 2035. However, it also projects
that overall external debt and total public debt will gradually
fall as a percentage of GDP. This assumes that growth in GDP
measured in dollars is high, averaging over 8% in nominal terms. It
also assumes there is a primary surplus every year, from a height
of 2.3% of GDP in 2017 to 0.9% by 2025 and 0.1% in 2035.
However, the predictions for dollar-GDP growth in the DSA have
already proven over-optimistic compared to the more recent April
IMF World Economic Outlook for 2016 and 2017, which, as noted
above, indicates that external debt will continue to rise.
The only way the IMF can predict Ghana's debt will keep being paid
is by assuming:
- high growth in dollar GDP, averaging 8.2% a year
- the government collecting around 19-21% of GDP in revenue every
year, ie, revenue growing in line with GDP
- a fall in the average interest rate paid on external debt from
5.1% to 4.1% over the medium term
- a large primary surplus by 2017 of 2.3%, and continual surpluses
after, albeit at a falling proportion of GDP
Any significant failure in these assumptions could cause debt to
increase further out of control, ultimately costing the people of
Ghana more if it continues to be paid. Yet all of these assumptions
are either optimistic or require significant sacrifices.
...
Escapes from the debt trap
Urgent action is needed to ensure Ghana does not fall into a debt
trap in which government spending continues to fall with negative
impacts for poverty, inequality and economic growth, while debt
stays high.
To avoid this trap debt payments need to be cut. At the moment, all
the costs from irresponsible lending and borrowing, and the decline
in oil and other commodity prices, are falling on the people of
Ghana, and none of them on the lenders. Below we make
recommendations on how the debt trap can be avoided through lenders
sharing in the burden of failed lending and the external economic
shock of falling commodity prices.
In addition, to prevent this trap being created again, there needs
to be greater transparency and accountability in relation to debt
on the part of the government of Ghana and lenders, tax justice to
ensure that more of the revenue generated in Ghana stays in the
country and is available for social spending and public investment,
and a reorientation of the Ghanaian economy away from reliance on
primary commodities.
Below are proposals which we believe the government, political
parties and lenders should discuss with civil society both before
and after the elections in December 2016.
Conduct a debt audit
In this report we have attempted to identify how much debt there is,
who the loans were given by, what they were for and on what terms.
However, the lack of transparency with many loans means this is
difficult to do and much information is not publicly available.
Both the government and all lenders should release details of how
much is owed, to whom, on what terms, and what the money was meant
to be used for (if specified). This could be done through
establishing an independent debt audit commission.
...
Make lending and borrowing more productive and accountable
Ghana's debt has increased rapidly without it being clear what the
loans were for, and how projects they were funding were being
monitored and evaluated.
...
Make adjustment fair
Any reduction in debt payments from measures below will help prevent
Ghana getting further stuck in a debt trap. But government finances
will still need to be improved to ensure sustainable finances which
allow poverty and inequality to be reduced and the Sustainable
Development Goals to be met.
The Ghanaian government should:
- Protect all vital public spending, such as on healthcare and
education, social services and welfare protections, and key
economic infrastructure.
- Increase tax revenues from large companies and rich individuals,
including by ceasing to grant tax waivers, including for public-
private partnership projects, and increasing the capacity of tax
collection authorities to ensure existing laws relating to issues
such as transfer mispricing are implemented.
...
Hold a debt conference
The change in oil price means that Ghana cannot make debt payments
wthout significant cuts in vital government expenditure, high
economic growth and continued high borrowing. It is unfair for the
suffering caused by the change in global economic conditions to be
born entirely by the people of Ghana and none by the lenders.
The Ghanaian government could call a conference of all its creditors
to negotiate the debt down to a level consistent with meeting the
Sustainable Development Goals. A UN body such as UNCTAD could be
contracted to advise on what a sustainable level of debt would be.
Negotiations have been held between the government and local banks
and some power sector debts, 98 but a much more comprehensive
approach is now needed across external debt.
...
Default or threaten to default on some of the debt
The Ghanaian government could stop paying some or all of the debt.
For most if not all creditors, it is the threat (or reality) of not
paying which will incentivise them to renegotiate the terms of the
debt. For instance, if some lenders did not respond to requests for
a debt conference, threatening to default or defaulting could make
them more willing to do so. Defaults on different types of debt
come with different implications which we discuss below.
...
Cancel unjust debts
The details of many loans are unknown, so no assessment can yet be
made of how well the money was spent and how responsibly the
lenders acted to ensure it was invested well. However, this report
has uncovered that the World Bank broke its own rules by disbursing
93% of its money to Ghana as loans when it should have been giving
half grants and half loans. Furthermore, at least $540 million of
debt owed to the World Bank is for projects where the World Bank
itself has said its performance was less than satisfactory (25% of
debt where there is an assessment).
...
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providing reposted commentary and analysis on African issues, with a
particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.
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