Emmanuel Cherry, chief executive of the Construction Companies Association of Ghana, sits in a cafe on the edge of the Accra Children's Park, near the derelict Ferris wheel and children's train, as the government agency prepares thousands of They were tallying up the amount owed to contractors.
He said the outstanding amount, excluding interest, totaled 15 billion cedis, or about $1.3 billion. “Most of our contractors are home-based,” Cherry said. Their workers were laid off.
As in many other countries in this West African country, contractors have to wait in line to receive their money. The teacher trainees are claiming that they must be paid two months' worth of unpaid wages. An independent power company warning of widespread power outages is $1.58 billion in debt.
The government is virtually bankrupt. After defaulting on billions of dollars in debt to foreign financial institutions in December, President Nana Akufo-Addo's administration is forced to agree to a $3 billion loan from lender of last resort, the International Monetary Fund. I no longer get it.
This is the 17th time Ghana has been forced to rely on the fund since gaining independence in 1957.
This latest crisis was caused in part by the havoc of the coronavirus pandemic, Russia's invasion of Ukraine, and soaring food and fuel prices. But the tortuous cycle of crisis and relief has plagued dozens of poor and middle-income countries in Africa, Latin America and Asia for decades.
These inexorable loops are scheduled to be discussed at the latest United Nations General Assembly meeting starting on Tuesday. The developing world's debt burden is now estimated at more than $200 billion, threatening to upend economies and wipe out hard-earned gains in education, health care and incomes. However, poor and low-income countries struggle to gain sustained international attention.
In Ghana, as Accra negotiates with foreign creditors, the IMF has drawn up a detailed rescue plan to reinvent the country by reining in debt and spending, raising revenue and protecting the poorest.
Still, for Ghana and other debt-laden emerging economies, thorny questions persist: Why is this time different?
Tshidi M. Tsikata, a senior fellow at the African Center for Economic Transformation in Accra, said the latest relief plan outlined for Ghana addresses key issues. But, like many previous crises, the crisis continues to recur, he said.
The last time Ghana relied on this fund was in 2015. Ghana began repaying the loan within her three years and became one of the fastest growing economies in the world. Ghana was held up as a model for the rest of Africa.
Agricultural production increased and the main exports of cocoa, oil and gold increased. The country was investing in infrastructure and education and beginning to clean up its banking industry, which was full of failed lenders.
However, Accra is once again in a desperate situation. The IMF loan agreement and the delivery of a $600 million installment in May helped stabilize the economy, resolve wild swings in currency levels and restore some confidence. Inflation is still above 40%, but down from a peak of 54% in January.
But despite the IMF's blueprint, Tsikata, who previously headed the fund's division for 30 years, said the chances of Ghana not finding itself in a similar position in the next few years “rest on a wing and a prayer.” ” he said. ”
The catastrophic effects of climate change loom over this issue. A United Nations analysis suggests that trillions of dollars in new funding will be needed to reduce the impact on developing countries within the next decade.
In Ghana, at the end of 2022, the government owed $63.3 billion not only to foreign creditors, but also to domestic financial institutions such as pension funds, insurance companies and local banks, which the government believed were safe investments. Ta. The situation was so unusual that for the first time the IMF made resolution of this domestic debt a precondition for relief. The partial restructuring, which resulted in a reduction in revenue and an extension of the deadline, was completed in February. A haircut may have been necessary, but trust in banks has been damaged.
With respect to foreign financial institutions, there are thousands of private, semi-governmental and government creditors, including those in China, each with different objectives, financing arrangements and regulatory controls.
The size and type of debt means that “this crisis is far more severe than the kinds of economic difficulties Ghana has faced in the past,” said Stefan Roode, head of the IMF's mission to Ghana.
A dizzying proliferation of lenders is now a feature of debt in many distressed countries around the world, making debt problems more complex and difficult to resolve.
“You don't have six people in a room,” said Joseph E. Stiglitz, a Nobel Prize winner and former chief economist at the World Bank. “He has 1,000 people in one room.”
“Last year was the worst year.”
Outside Victoria Kurappa's narrow stall at Makola Market, a snaking line of vendors sell live chickens, packs of toilet paper, electronic chargers and more from giant baskets balanced on their heads. I was walking.
As restructuring negotiations with foreign financial institutions continue, households and businesses are doing their best to respond. Chrappah has been selling imported bath mats, shower curtains, and household items for over 20 years.
“Last year was the worst year,” she said.
Inflation soared and the cedi lost more than half its value compared to the US dollar. Countries that import everything from medicines to cars have hurt consumers and businesses. The Bank of Ghana raised interest rates to combat inflation, hurting businesses and households that rely on short-term borrowing or wish to invest. The base interest rate is currently 30%.
With the currency depreciating rapidly, “you can sell at one price in the morning, but the next day you have to think about changing the price,” Klappa explained.
Not only their purchasing power but also their savings were cut in half. Doreen Ajeti, a product manager at Accra-based financial firm Dalex Swift, said last year it cost her 50 cedis for a bottle of Tylenol to ease her 19-month-old baby's teething pains. Now it's 110.
A month's worth of groceries costs more than 3,000 cedis instead of 1,000 cedis. Previously, she and her husband had a comfortable monthly income of 10,000 cedis. When the exchange rate was 5 cedis to the dollar, that's equivalent to about $2,000. At today's rates, it's worth $889.
Joe Jackson, director of business operations at Darex, said default rates for small and medium-sized enterprises were “through the roof,” jumping from 30% to 70%.
The real estate and construction markets also slumped. “The number of homes in the market for first-time buyers has declined significantly,” said Joseph Aidoo Jr., executive director of Devtraco Limited, a major real estate developer.
When the pandemic hit in 2020, paralyzing economies, shrinking revenues and increasing health costs, concerns about a global debt crisis grew. Ghana, like many developing countries, was heavily indebted, fueled by years of low commercial interest rates.
When the Federal Reserve and other central banks raise interest rates to combat inflation, the prices of imported food, fuel, and fertilizer soar, while developing countries' external debt payments, measured in dollars or euros, unexpectedly increase. It went up.
As Ghana's foreign exchange reserves neared zero, the government began paying directly for refined oil imports with gold purchased by the central bank.
Still, while a series of unfortunate world events may have accelerated Ghana's debt crisis, Ghana did not cause it.
The current government, like its predecessors, has spent far more than it has received. Taxes as a share of gross product are also lower than the average for the rest of Africa.
To make up for the shortfall, the government continued to borrow, offering higher and higher interest rates to attract foreign lenders. And I borrowed more to pay off the interest on my previous loan. By the end of last year, interest payments on the debt had swallowed up more than 70% of government revenue.
“The government is bloated and inefficient,” said E. Gyima Boadi, director of the research network Afrobarometer. Several Ghanaian economists and business leaders say half-finished schools, hospitals and other projects will be abandoned when a new government takes office. He said corruption and mismanagement were also issues.
More fundamentally, Ghana's economy is not set up to generate the kinds of jobs and incomes needed for widespread development and sustainable growth.
“Ghana's success story is real,” said Aurélien Kruse, lead country economist at the World Bank's Accra office. However, “it may have been a little oversold'' because “the rapid growth is not diversified.'' The economy relies primarily on the export of raw materials such as cocoa, oil, and gold, and prices peak and soar.
Manufacturing accounts for only 10% of Ghana's output, a decline since 2013. Lacking a thriving industrial sector to provide stable employment and produce exportable goods, Ghana has other sources of income from abroad that can build wealth and pay for needed imports. there is not. .
This model, importing expensive goods and exporting cheap resources, characterized the colonial system.
Senyo Hoshi, executive chairman of Accra-based investment firm Cleve & Tobe, runs an agribusiness that produces rice in the Volta region and works with more than 1,000 farmers. Told. However, he is unable to make the necessary equipment upgrades because the interest rate is 30%, making it impossible for him to borrow money. “We have stopped production,” he said.
“For us, that means a shutdown.”
As the global financial system struggles to restructure hundreds of billions of dollars in existing debt, the question of how to avoid a debt trap in the first place is more urgent than ever.
It takes a lot of money to invest in desperately needed roads, technology, schools, clean energy, and more. But dozens of countries lack the domestic savings needed to pay for it, as well as subsidies and low-cost loans from international organizations.
“The fundamental issue is the need for funding,” said Brahima S. Coulibaly, a senior fellow at the Brookings Institution.
Governments then turn to international capital markets, where investors scour the world for high returns. Martín Guzmán, Argentina's former finance minister who was in charge of debt restructuring in 2020, said political leaders and investors alike often look for short-term wins, whether it's the next election or an earnings call.
This free movement of capital around the world has led to a flood of financial crises. “Inequality is built into the fabric of international finance,” the United Nations Global Crisis Response Group concludes in an analysis.
Even worthwhile investments, not all of them necessarily, will not necessarily generate enough income to repay the loan.
When a recession hits or when foreign financial institutions become spooked, governments find themselves in a bind. This process may accelerate in Africa, where studies have found that there is an exaggerated perception of risk, leading to lower credit ratings and higher funding costs.
Without a safety cushion to fall back on, a small government funding shortfall can turn into a catastrophe. Consider a household in dire straits, unable to cover next month's rent and facing eviction. Now, instead of incurring hundreds of dollars in debt, household members are now homeless.
Ghana's Finance Minister Ken Ofori-Atta said that for us, a credit downgrade “means closure.”
Some organizations are charting routes out of the debt trap, including expanding low-cost loans from multilateral banks like the World Bank.
Debt Justice, which advocates for debt cancellation, along with many economists, argues that some of the $200 billion in debt needs to be canceled. She also called on governments and lenders to publicly disclose loan amounts and terms and what the funds were used for, and to increase tracking and auditing.
Other research groups are looking at ways to stabilize Africa's evolving bond markets and help governments withstand short-term funding shortages and booms and busts in commodity prices.
Mr Ofori-Atta said he had “tremendous confidence” that Ghana would achieve strong growth once it emerges from this debt tunnel.
However, the problem of finding manageable amounts of low-cost investment funds remains.
Where do African countries, or developing countries, get the money they need to grow? Ofori-Atta asked.
That question must be answered before we can break the cycle of debt crises.
