Dr. Felix Larry ESSILFIE
Ghana’s economic recovery remains fragile, with significant challenges in debt sustainability, fiscal consolidation, and external financing.
The recent caution by the World Bank against an early return to international capital markets underscores the complex interplay of macroeconomic risks and policy imperatives that the government must carefully navigate.
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Given Ghana’s history of heavy reliance on external borrowing, a premature re-entry into the capital markets could exacerbate existing vulnerabilities, undermining the progress made under the ongoing IMF-supported program. The urgency of fiscal discipline, debt management, and revenue mobilization cannot be overstated, as the country stands at a critical juncture where policy missteps could lead to severe economic consequences.
Ghana’s economic landscape has been marked by persistent macroeconomic vulnerabilities over the eight years. A combination of high fiscal deficits, a rapidly rising public debt burden, and external imbalances has pushed the economy into distress, necessitating multilateral intervention.
By 2022, Ghana’s public debt-to-GDP ratio had exceeded 90%, an unsustainable level that eroded investor confidence and triggered a severe liquidity crisis. The decision to seek a $3 billion bailout from the International Monetary Fund (IMF) was a direct response to these mounting pressures, providing a structured framework to restore macroeconomic stability through fiscal consolidation, debt restructuring, and structural reforms.
A fundamental component of the IMF-supported program is the commitment to prudent fiscal management. This includes expenditure rationalization, enhanced revenue mobilization, and reducing reliance on commercial borrowing. The domestic debt exchange program and ongoing negotiations with external creditors, including Eurobond holders and bilateral lenders, are intended to restructure Ghana’s unsustainable debt portfolio. However, these efforts remain incomplete, and any deviation from the IMF program’s fiscal targets could derail the broader stabilization agenda.
Returning to capital markets prematurely presents considerable risks that could undermine Ghana’s recovery trajectory. One of the most immediate concerns is the high interest rate premium that Ghana would face in the current global financial environment. Sovereign credit ratings for the country remain highly speculative, with agencies such as Moody’s and S&P assigning ratings in the CCC/Caa range.
This places Ghana in a category where investors demand significantly higher risk premiums to compensate for potential default risks. In practical terms, any new Eurobond issuance would likely attract interest rates well above 10–12%, significantly higher than the pre-crisis levels of 7–8%. Given the already elevated debt servicing burden, taking on new, expensive debt would further strain the fiscal position, reducing the government’s ability to finance critical expenditures and undermining the IMF’s fiscal consolidation efforts.
Moreover, investor confidence remains weak, with lingering concerns about Ghana’s ability to meet its debt obligations post-restructuring. The debt restructuring process, while necessary, has created an environment of uncertainty that discourages long-term capital inflows.
The international investment community remains cautious, and any attempt to issue new bonds before completing the restructuring process could lead to under-subscription or distressed pricing, further complicating Ghana’s financing strategy. The risks associated with debt service pressures are particularly pronounced in an environment where external debt obligations already consume a substantial share of government revenue.
Taking on additional commercial debt at higher interest rates could exacerbate liquidity risks, making it difficult for the government to meet fiscal targets without resorting to further austerity measures or currency depreciation.
An early return to capital markets could also have significant exchange rate implications. Ghana’s foreign exchange market has experienced volatility, with depreciation pressures stemming from both structural factors and external shocks.
A premature bond issuance would necessitate additional foreign currency inflows to service external debt, which could increase demand for foreign exchange and lead to renewed depreciation of the cedi. This, in turn, would fuel imported inflation, eroding the real purchasing power of households and businesses. Such a scenario would counteract the inflation-targeting measures implemented by the Bank of Ghana, complicating monetary policy management.
While there are potential benefits to market re-entry, these advantages are largely conditional on a more favorable macroeconomic environment. A successful bond issuance could provide short-term liquidity relief, easing fiscal constraints and financing critical development projects.
Additionally, if timed correctly, it could serve as a signal to investors that Ghana’s economic reforms are yielding results, thereby improving market confidence. However, these benefits are only realizable if Ghana strengthens its fiscal position, stabilizes macroeconomic indicators, and restores credibility in its debt management framework. As of now, these conditions have not been fully met, making the risks associated with premature borrowing outweigh any potential benefits.
The broader fiscal policy landscape further underscores the importance of a cautious approach. Ghana’s fiscal consolidation efforts under the IMF program are centered on enhancing domestic revenue mobilization and rationalizing expenditure. The country’s tax-to-GDP ratio remains below 14%, significantly lower than the regional average of 18–20%, reflecting systemic inefficiencies in tax collection and compliance.
Addressing these gaps through broad-based tax reforms, including tax base expansion and digital tax administration, is critical for reducing reliance on external borrowing. Similarly, expenditure rationalization measures, such as improved state-owned enterprise (SOE) financial management and subsidy restructuring, must be pursued to create fiscal space for priority investments. Without these reforms, any new external borrowing would only perpetuate the cycle of fiscal distress.
The World Bank’s caution aligns with empirical evidence from countries that have navigated similar economic recovery paths under IMF supervision. Argentina’s experience from 2017 to 2019 provides a stark warning. After securing an IMF bailout, Argentina rushed back to international markets, issuing high-yield bonds that ultimately led to a severe currency crisis and a second IMF intervention.
Zambia’s recent debt crisis also highlights the dangers of premature market re-entry. After defaulting on its Eurobonds, Zambia struggled to regain investor confidence, and attempts to issue new bonds at unfavorable terms only deepened its economic woes. These cases reinforce the importance of sequencing debt restructuring and market re-entry to avoid exacerbating macroeconomic vulnerabilities.
While the World Bank’s warning is well-founded, there is room for strategic re-engagement with capital markets under more favorable conditions. Ghana must first strengthen its fiscal and debt management policies to build a credible foundation for future borrowing.
Enhancing domestic revenue mobilization through progressive tax reforms and reducing tax exemptions should be a top priority. Rationalizing expenditure by streamlining subsidies and improving SOE efficiency is equally critical. A well-structured debt refinancing strategy that prioritizes concessional financing over commercial debt will help reduce debt servicing costs and mitigate liquidity risks.
Timing market re-entry wisely is also crucial. Government must demonstrate tangible progress in meeting IMF fiscal targets, stabilizing inflation, and building external reserves before considering a Eurobond issuance. Engaging with credit rating agencies to improve the country’s sovereign rating will be essential in securing more favorable borrowing terms. Alternative financing mechanisms, such as public-private partnerships, diaspora bonds, and green bonds, should be explored to diversify funding sources and reduce dependence on volatile capital markets.
Restoring investor confidence will require transparent policymaking, clear communication on debt restructuring progress, and a disciplined fiscal framework. Strengthening foreign exchange reserves will provide a buffer against currency volatility, ensuring that any future market re-entry does not lead to undue pressure on the cedi.
The World Bank’s warning against premature market re-entry is a prudent advisory that Ghana must heed. The country’s macroeconomic fundamentals remain fragile, and a premature return to capital markets would likely result in high borrowing costs, increased debt vulnerabilities, and potential credibility risks. Ghana’s path to sustainable economic recovery lies in prudent fiscal management, structural reforms, and a well-calibrated debt strategy that prioritizes long-term resilience over short-term liquidity relief.
By exercising patience and adhering to a disciplined fiscal framework, Ghana can restore debt sustainability, rebuild investor confidence, and re-enter capital markets under more favorable conditions that support sustained economic growth.
The writer is a Development Economist and Executive Director, IDER
Email: [email protected]