Ghana is in the middle of a huge economic crisis and has been forced to agree to a $3 billion loan from the IMF to ease its debt problems. This is a country that has fallen into economic difficulties despite its significant natural resources such as gold, cocoa and oil.

Like all economies worldwide, Ghana has struggled to recover from the Covid 19 pandemic and the resulting supply chain problems. The country has also had to face rising food and energy costs because of the war in Ukraine. Like many economies, the combination of these forces has led to higher and higher inflation in Ghana. 

The Ghanaian economy has experienced prices rising by over 40 per cent over the last 12 months which makes it one of the highest inflation rates on the African continent. The country also has a balance of payment current account problem with a deficit of $3.64 billion which is nearly 5 per cent of its GDP. As a result, it has dangerously low levels of foreign exchange reserves. 

The Ghanaian national debt is now at 90 per cent of its GDP. This brings big servicing problems for the government because interest payments have to be made and there are continuous repayments that need to be paid on maturing government bonds.

The rise in government debt started in 2017 when the Ghanaian government embarked on ambitious spending programmes. For example, the government put into place significant investment in education. These big spending plans were funded through borrowing, much of it from external sources. At the same time, the government decided to cut a range of taxes such as VAT on a range of goods and services which led to a significant fall in tax revenues.

The challenge of Ghana’s external debt is a particular problem for the government. The country’s debt servicing put downward pressure on its currency the cedi. The cedi has lost more than 50 per cent of its value this year and this considerably pushes up the interest and repayment costs of Ghana’s debt. 

The country’s debt crisis has led to a fall in confidence amongst investors which means they add a risk premium (a higher interest rate) to any loans they make to the Ghanaian government. There is also evidence of capital flight. As a result of this, the IMF has had to step in and lend the government money. 

Possible point to discuss with a class

1. How do governments borrow money?

2. What is the national debt?

3. What has caused Ghana's increase in national debt?

4. Why is an increase in Ghana's national debt a problem for the country?

5. What is external debt?

6. Why is the depreciation of the Ghanaian cedi a problem for the country's external debt?