Ghana’s discussions with external creditors look stalled, and there is no indication President Akufo-Addo is willing to accommodate the proposed fiscal adjustment that would help accelerate bilateral creditor talks to support the country’s bailout request from the International Monetary Fund.
In December, the West African nation reached a staff-level agreement with the IMF for a $3 billion loan. But it’s yet to get financing assurances from external creditors – a requirement needed to get IMF’s executive board approval for the loan.
Without a balance of payment support, Ghana risks having a full-blown economic crisis.
The government partially completed a domestic debt restructuring in February after five deadline extensions for bondholders to participate in the debt exchange.
It suspended payments on most of its external debt, including Eurobonds, commercial loans and some bilateral loans, a move lenders described as “unilateral and unfriendly.”
However, the Paris Club of lender nations pledged to quicken the formation of a creditor committee, a first step needed to discuss possible debt relief and has invited China, which is Ghana’s biggest bilateral lender to join the talks.
Finance Minister Ken Ofori-Atta is scheduled to visit Beijing, known for its intolerance of debt relief, in the coming weeks to convince the authorities to agree to extensions of maturities and moratorium on debt servicing, and haircuts on interest rates on the $1.9 billion debt owed China.
The economic catastrophe starring Ghana is due to fiscal indiscipline by the government as it excessively borrowed to finance expensive social intervention programmes. The covid-19 pandemic worsened an already precarious fiscal situation.
The market subsequently expected a cut in government spending as the country was shut out of international capital markets in 2022. However, it increased expenditure by more than 23% and offered high-interest rates to entice domestic investors to fund the government.
Amidst the plea for debt cancellations to help qualify for IMF bailout, the government increased spending by more than $4 billion in 2023, as contained in the national budget statement.
“The budget failed to signal that we are in a crisis and need support,” a financial analyst with Accra-based Dalex Finance, Joe Jackson, told 3Business.
The lack of faith in the government’s ability to repay its debt sparked sharp sell-offs of its bonds as investors exited and dumped the currency.
Spending cuts suggestions ignored
Despite the clear fiscal indiscipline, bilateral and most commercial lenders are willing to incur some losses to help the cocoa producer to secure a much-needed loan from the IMF.
However, their fiscal adjustment suggestions to the government have fallen on deaf ears.
President Akufo-Addo is yet to acknowledge the bloated size of his government, let alone take drastic measures to shrink the overstuffed administration to save the taxpayers’ money.
In a rare move, the German Ambassador to Ghana, Daniel Krull, called out the government for refusing to cut spending to reflect the worsening economic situation.
The diplomat, whose country is advocating for debt relief for Ghana, compared the size of the Akufo-Addo-led government to that of his home country, Germany.
“I only can compare with other countries like mine, and I can come to the conclusion that there is huge number, the number is much higher than in my country, so that may bring me to the conclusion that there is room for improvement,” the Ambassador said.
He added that “if I look at the budget of the German Foreign Ministry, and the German government, I am convinced there are important parts [in Ghana’s budget] that can be cut without hurting the economic development, and I am convinced without going into details this is also true for Ghana.”
Akufo-Addo defends borrowing and spending
Two weeks later, President Akufo-Addo defended his government borrowing and spending that landed the economy in a debt crisis in his state of the nation address. He, however, called on creditors to accelerate debt relief talks for Ghana.
“Mr Speaker, let me state emphatically that we have not been reckless in borrowing and in spending. It is worth noting that the debts we are servicing were not only contracted during the period of this administration.”
The President subtly responded to the German Ambassador, who openly criticized the government’s expenditures and defiance of expenditure rationalization.
“Mr Speaker, we have spent money on things that are urgent, to build roads and bridges and schools, to train our young people and equip them to face a competitive world,” asking critics if these investments are unworthy.
The defense could anger creditors in the European Union, where Germany is a leading member.
“The position of Germany reflects that of the EU. So if the government refuses to listen to their sound counsel, we may not get support from EU nations that we owe,” Banking Consultant Richmond Atuahene told 3Business.
Nana Akufo-Addo’s broader remarks suggest nothing is wrong with his government size and fiscal plan, and if creditors are hoping for an adjustment that would require reducing appointees, they may be out of luck.
Lack of care for investor sentiments
February 7 was yet another deadline for investors to swap their bonds that paid an average of 19% for new papers that would pay between 8% and 15%. The finance minister had pleaded with bondholders to “burden share” to save the economy from collapse.
Amidst the plea, President Akufo-Addo replaced six ministers, including two who resigned to join the governing party’s flagbearer race that same day. The seventh appointment was a deputy local government minister elevated to a minister status despite having a substantive minister for the same position.
“The President clearly shows he does not care about public and investor sentiments. He should have used the opportunity to consolid ate some of these ministries to reflect difficulties of the time,” Associate Professor at the University of Ghana Business School, Lord Mensah, told 3Business.
He has clearly shown little interest in fiscal adjustment excerpt to urge bilateral lenders to offer debt reliefs to help restore investor confidence so the government could return to its old expensive lifestyle.
Maybe unlucky this time because the President’s abrasive style has infuriated some bilateral creditors who have asked for a basis to support a broke economy that behaves like “a fabulously rich sultanate in the Gulf.”
As it becomes apparent that the debt relief talks and IMF board approval would go beyond the government’s March timeline, it would be unwise to ignore calls for spending cuts, which partly caused the delay.
Written by Sani Abdul-Rahman | 3Business