The Ghanaian government is back on track with borrowing more money to expand its economy, and this couldn’t be more wrong as this move, while presented as a good news in the short-term, will impact the Ghanaian economy in the long-term.
The Ghanaian government has recently reached an agreement to restructure $5.4 billion of loans with its official creditors, including China and France. According to the Ghanaian government, this deal paves the way for the International Monetary Fund (IMF) to disburse $600 million under its $3 billion bailout program for Ghana.
We know that Chinese loans to African countries typically have maturities of 15 to 20 years, which is longer than the maturities of loans from traditional Western lenders such as the World Bank and the IMF. Chinese loans typically have interest rates that are lower than the market rates for African countries. This is because China is often willing to lend to African countries at concessional rates as a way to build goodwill and influence. Chinese loans are often backed by commodities, such as oil or minerals. This means that if the borrower is unable to repay the loan, China can seize the commodities as collateral.
The debt relief is meant to help ease Ghana’s debt burden and free up resources for government spending. The IMF funding will provide much-needed support for Ghana’s economy, which has been hit hard by rising inflation and a depreciating currency. All of this is beneficial for Ghana in the short-term but not in the long-term because Ghana, one way or another, must repay the loan. And this will impact its economic growth.
The Ghanaian economy is, indeed, overleveraged. This means that the country has borrowed heavily, to the point where its debt burden is becoming unsustainable. Ghana’s public debt currently stands at around 88% of its GDP, which is well above the recommended threshold of 55% for developing countries. This means that most of the money borrowed is used to servicing the debt rather than investing in productive ventures that generate cashflow for the economy.
By endlessly borrowing, the Ghanaian government is perpetuating a Ponzi scheme where new loans are used to pay existing loans. These new loans do come with interest rates, which means that the Ghanaian government must make interest payments on every loan it takes. Doing so prevents the Ghanaian economy from growing and it increases the cost of living for Ghanaian consumers and businesses through the crowding-out effect.
When the government borrows money by issuing bonds, it competes with businesses and individuals for loanable funds in the financial market. This increased demand can drive up interest rates for everyone. Thus, higher interest rates make it more expensive for businesses to borrow money for investments, expansion, or hiring. This can dampen economic activity and reduce private-sector spending.
This begs the question to know if the Ghanaian economy is caught in a debt trap. If the Ghanaian government wants to reduce its debt by other means than continuing the Ponzi scheme it currently perpetrating, it may need to increase taxes on Ghanaian taxpayers. However, doing so will necessarily reduce the disposable income for Ghanaian taxpayers and businesses, which could trigger political and social unrest.