Ghana is currently experiencing firsthand how oil can be both a blessing and a curse.
The start of commercial petroleum production made the West African country one of the most popular investment locations on the continent, but it also forced succeeding governments to borrow heavily.
As worries about Ghana’s ability to pay its debts grew, cautious investors sold both its bonds and cedi currency.
The central bank raised interest rates dramatically in response to the falling exchange rate, which also caused a spike in the cost of basic needs like milk and bus fares.
The administration of President Nana Akufo-Addo has requested up to $3 billion in help from the International Monetary Fund due to the nation’s faltering economy.
An Age Of Plenty: Ghana And Investors
Ghana was the first country in sub-Saharan Africa to achieve independence under colonial control, and since then it has served as a haven of peace in a region rife with coups and civil turmoil.
Since the 1990s, it has routinely staged peaceful elections; the presidency has been held by competing parties and individuals; it has an independent judiciary, and its parliament is active.
It started exporting oil in late 2010. It is the second-largest producer of gold in Africa and cocoa in the world. The gross domestic product increased by over 14% the following year.
Since then, the economy has grown each year, albeit at a slower rate thanks to the government’s embrace of the free market and the enticement of foreign investment and financing.
When Everything Came Crashing Down
In anticipation of an oil bonanza, the administration abandoned economic restraint and unleashed the spending taps. However, the income it generated was not enough to pay for a series of pricey flagship programs, and as borrowing increased to fill financing gaps, the budget deficit grew.
Election years saw an unusually high rate of overspending. All senior high school students no longer pay fees, and their housing and maintenance are covered by the Akufo-Addo administration. In order to lower its electricity costs, the government spent $1 billion in 2021 repaying loans obtained by indebted private power providers.
As investors lost faith in Ghana’s ability to pay its loans, it was barred from the international capital markets in 2022 after selling Eurobonds for each of the nine years prior.
The administration refused a proposal that would have allowed it to halt debt repayments and committed not to use any more IMF assistance before changing its mind in July 2022.
How Far Ghana’s Finances Crashed
In order to avoid a fiscal crisis, the government may have to restructure its debt, which at the end of June represented 78.3% of its GDP, up from 62.5% five years earlier.
The government turned to taking out domestic loans, paying annual interest rates of around 30%, since it was unable to access international markets.
After the government feared defaulting on its local debt, the central bank stepped in to supply it with funding; nevertheless, it intends to limit future assistance to remain within its legal lending ceiling.
S&P Global Ratings reduced the country’s credit rating by one notch in early August, to CCC+, seven levels below investment grade, citing the government’s high funding needs and constrained access to external financing.
Investors’ Response to Ghana’s Financial Situation
The bond and currency markets have seen a mass flight. After Sri Lanka’s rupee, which defaulted, the cedi had the second-worst performance in the world thanks to its roughly 40% fall between the beginning of 2022 and late August. Its dollar-denominated bonds trade at yields that are more than 10% higher than those of US Treasuries, which is a sign of trouble.
What Is Being Done About The Situation
The Finance Ministry has committed to reducing spending and the anticipated budget deficit for 2022 in order to put the state’s finances back on a sound course. In order to strengthen the cedi and combat inflation, the Bank of Ghana increased its benchmark lending rate by 850 basis points between November 2021 and August 2022.
In an effort to boost the country’s declining foreign reserves, the central bank also raised the minimum cash reserves that banks must maintain and started purchasing dollars from mining and oil firms in the country.
Source: Bloomberg
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