ACCRA, Ghana — Emmanuel Cherry, chief executive of an association of Ghanaian construction companies, was sitting in a cafe next to the Accra Children’s Park, near an abandoned Ferris wheel, tallying up how much money government entities owe to thousands of contractors.
Before interest, he said, late payments amount to 15 billion cedis, about $1.3 billion. “Most contractors are at home,” she said. His workers have been fired.
Teacher trainees in the West African country also complain that they are owed two months of back pay. Independent power producers who have warned of major blackouts are owed $1.5 billion.
The Government of Ghana is essentially bankrupt. After defaulting in December on billions of dollars owed to foreign lenders, President Nana Akufo-Addo’s Administration had no choice but to accept a $3 billion loan from the lender of last resort, the International Monetary Fund. —the 17th time Ghana has tapped the fund since gaining independence in 1957.
This latest crisis was caused in part by the pandemic, the Russian invasion of Ukraine, and rising food and fuel prices. But the tortuous cycle of crises and bailouts has plagued dozens of poor and middle-income countries in Africa, Latin America and Asia for decades. The debt burden of developing countries is now estimated to exceed $200 billion.
In Ghana, the IMF presented a detailed rescue plan — controlling debt and spending, raising incomes and protecting the poorest — as Accra negotiates with foreign creditors.
The Government owed $63.3 billion at the end of 2022, not only to foreign creditors but also to local lenders — pension funds, insurance companies and local banks. The situation was so unusual that the IMF for the first time made settlement of this domestic debt a prerequisite for a bailout. A partial restructuring was completed in February, but it undermined confidence in the banks.
As for foreign lenders, there are thousands of private, semi-public and government creditors, including China, that have different objectives, lending agreements and regulatory controls.
The magnitude and type of debt mean that “this crisis is much deeper than the kind of economic difficulties Ghana has faced in the past,” said Stéphane Roudet, head of the IMF mission in Ghana.
Last year, inflation soared and the cedi lost more than half its value compared to the US dollar — a setback for a country that imports everything from medicines to cars. The Bank of Ghana raised interest rates to tackle inflation. The benchmark rate is now 30 percent.
The purchasing power and value of savings have been drastically reduced. Doreen Adjetey, a product manager at Dalex Swift, an Accra-based financial company, said a month’s worth of food for her family now costs more than 3,000 cedis, compared to 1,000 last year.
Default rates for small and medium-sized businesses have increased from 30 to 70 percent. The real estate and construction markets have also suffered.
When the pandemic hit in 2020, fears of a global debt crisis increased. Ghana, like many developing countries, had become heavily indebted, encouraged by years of low trade rates.
As the U.S. Federal Reserve and other central banks raised interest rates to combat inflation, developing countries’ foreign debt payments — valued in dollars or euros — unexpectedly soared at the same time as the prices of imported food, fuel and fertilizers.
But unfortunate global events did not create Ghana’s debt crisis.
The current Government, like previous ones, spent much more than it collected in revenue. Taxes as a percentage of total production are also lower than the average in the rest of Africa.
To make up for the deficit, the government continued to borrow, offering ever higher interest rates to attract foreign lenders. And then he borrowed more to pay interest on previous loans. At the end of last year, debt interest payments gobbled up more than 70 percent of government revenue.
Manufacturing accounts for just 10 percent of Ghana’s output. Without a thriving industrial sector that provides stable employment and produces exportable goods, Ghana has no other sources of income from abroad that can generate wealth and pay for necessary imports. Furthermore, Ghana’s economy depends mainly on exports of raw materials such as cocoa, oil and gold, the prices of which rise and fall.
Ken Ofori-Atta, Ghana’s Finance Minister, said he was “extremely confident” that the nation would have strong growth after emerging from this debt tunnel.
But where does a developing country get the kind of financing it needs to grow? Ofori-Atta asked.
Before the cycle of debt crises is broken, that question will have to be answered.
By: PATRICIA COHEN
BBC-NEWS-SRC: https://www.nytimes.com/2023/09/18/business/economy/ghana-debt-imf.html, IMPORTING DATE: 2023-10-05 20:50:10
#Government #Ghana #bankrupt #tortuous #debt #cycle