Sub-Saharan African countries are facing a funding squeeze due to persistent global inflation and tighter monetary policies, resulting in higher borrowing costs and pressure on exchange rates.

The interest burden on public debt is increasing due to a reliance on expensive market-based funding and a long-term decline in aid budgets. This lack of financing is exacerbating macroeconomic imbalances, with high levels of public debt and inflation, and a significant number of people experiencing acute food insecurity. The economic recovery has been interrupted, with growth expected to decline to 3.6 percent in 2023.

The funding squeeze may force countries to reduce resources for critical development sectors, weakening the region’s growth potential. To address macroeconomic imbalances, policymakers need to consolidate public finances, contain inflation, allow the exchange rate to adjust, and ensure that climate change efforts do not crowd out basic needs like health and education. International assistance remains critical to alleviating financing constraints.

Import Cover

According to the 2023 International Monetary Fund Regional Economic Outlook Report (Sub-Saharan Africa), Ghana’s net international reserves are expected to reach a concerning level of only three weeks of import cover by the end of 2023. This forecast contrasts sharply with the Bank of Ghana’s Summary of Economic and Financial Data, which estimated the country’s import cover at 2.7 months.

The significant discrepancy raises alarms as it implies that Ghana’s economy could face serious trouble if foreign inflows were to halt abruptly. This is because the country’s reserves currently hold only a few dollars for balance of payment transactions. Among Sub-Saharan African countries, Zimbabwe, South Sudan, and Ethiopia are the only nations expected to record import cover lower than Ghana.

Inflation

In February 2023, Ghana stood out among Sub-Saharan African countries with its significantly higher inflation rate of 54.2%, compared to the regional median of about 10%. Additionally, while roughly half of the countries in the region recorded double-digit headline inflation, Ghana’s inflation rate was more than five times higher.

Similarly, while around 80% of countries experienced double-digit food inflation, Ghana’s food inflation rate was over 50%. However, the recent deceleration of fuel prices due to international price drops of up to 30% since mid-2022 has provided some relief to the region.

Interest Payments to Revenue, Excluding Grants

In 2022, Ghana was burdened with significant interest payments, spending around 45% of its revenue (excluding grants) to cover these costs, ranking the highest in Sub-Saharan Africa. This is significantly higher than the median sub-Saharan African country, which spent around 11% of revenues on interest payments. The increase in borrowing costs in the region can be attributed to various factors, including a decline in aid budgets and a greater reliance on more expensive market-based finance.

Additionally, increased integration in international debt markets and deepening of domestic financial markets have made it easier for countries like Ghana to contract more private domestic and external debt on non-concessional terms. While inflows from China were once a significant source of financing, they have declined markedly in recent times.

Public debt as a share of GDP

In 2022, Sub-Saharan Africa’s public debt ratio stood at 56% of GDP, but in Ghana, it was significantly higher at 104% of GDP. This marks levels not seen since the early 2000s.

The pandemic has contributed to the rise in public debt, driven by fiscal deficits resulting from overlapping crises, slow growth, and exchange rate depreciations. This increase in public debt levels has sparked concerns about debt sustainability, with 19 of the region’s 35 low-income countries already in debt distress or facing a high risk of debt distress in 2022. In response, Ghana announced its debt restructuring in December 2022.

Currency Depreciation

In 2022, most currencies in Sub-Saharan Africa experienced depreciation against the US dollar, with an average of about 17%. However, Ghana’s currency depreciation was much higher, at over 50%. Only Ghana and Zimbabwe had their currency depreciated over 50% between September 2022 and April 2023.

This was particularly problematic for those already facing high inflation like Ghana which was 54.8% at the end of the year, as the region relies heavily on imports, with a significant share invoiced in dollars. As of 2021, around 40% of the region’s debt was external, and currency depreciation contributed to higher general government debt. Despite some easing of exchange rate pressures since November 2022, they still remain elevated and volatile.

Economic Growth

Despite facing a challenging economic environment, sub-Saharan Africa is expected to experience a decline in growth in 2023, with the IMF forecasting a decrease from 3.9 percent in 2022 to 3.6 percent. However, the situation is even more subdued for Ghana, which is categorized as a resource-intensive country.

The IMF has revised their growth forecast for Ghana from 2.8 percent to 1.6 percent for 2023, marking the second year of growth slowdown for the country. This is in contrast to neighboring non-resource-intensive countries like Benin, Togo, and Ivory Coast, which are expected to grow between 5.5 to 6%. The rise in central bank policy rates to fight inflation and debt default are common factors contributing to the growth underperformance across the region.

Despite this, some countries, such as Niger, the Democratic Republic of the Congo, and Senegal, are expected to experience higher growth due to the coming online of oil and gas. However, Equatorial Guinea is projected to experience significant economic contraction due to a decline in oil production. Overall, Ghana’s high inflation, debt crises, and economic mismanagement do not bode well for the country’s economic outlook.

Recommendations

the challenges faced by Ghana’s economy are multifaceted and require a comprehensive approach to address them. The country’s reliance on resource-based exports makes it vulnerable to global commodity price fluctuations, as seen in the recent decline in oil production. Additionally, Ghana’s high inflation rate, increasing debt burden, and economic mismanagement have contributed to a slow growth outlook.

To turn things around, Ghana must focus on improving its fiscal discipline and implementing structural reforms to attract foreign investment, especially in the non-resource sectors. This includes diversifying the economy and developing a stronger manufacturing and services sector. Additionally, prioritizing investment in infrastructure, education, and healthcare will be crucial in building a more resilient and sustainable economy.

The Ghanaian government should also work towards enhancing debt management and reducing borrowing costs, including exploring debt restructuring options and seeking alternative sources of financing, such as concessional loans and grants. Improving public financial management and reducing corruption will be key to creating fiscal space and ensuring that resources are directed towards productive investments.

Furthermore, Ghana should prioritize containing inflation and stabilizing its currency to reduce the impact of currency depreciations on household purchasing power and debt service. Overall, while Ghana’s economic outlook may appear bleak, there are opportunities for growth and development if the country can implement the necessary reforms to address its macroeconomic imbalances and create a more favorable environment for investment and growth.