The most recent financial action is a component of the West African country’s effort to restructure its domestic, which is necessary to be eligible for the next installment of a $3 billion International Monetary Fund (IMF) bailout. Ghana now wants to concentrate on talks with foreign creditors, according to Business Insider Africa.
As part of this agreement, Ghana agreed to swap some of its local currency debt for longer-term, external debt. This swap effectively erased half of Ghana's debt, which amounted to about $7 billion.
The Ghanaian government is now restructuring the domestic debt of 123 billion Ghana Cedis, which includes debt owing to independent power producers, the central bank, domestic U.S. dollars, cocoa, bills, and pension funds.
According to Business Insider Africa, the official said that the non-tradable central bank debt, which included overdrafts to the government and cocoa marketing, a COVID-19 bond, and other legacy debt spanning 15 years, had been written off. Indeed the majority of those obligations had been paying interest at the current rate of 30%, which is the main interest rate set by the central bank.
There were a few reasons why Ghana agreed to this debt restructuring. First, Ghana's debt was becoming increasingly unsustainable. The country's debt-to-GDP ratio had reached 80%, and debt servicing payments were absorbing more than half of the government's revenues. This was putting a strain on the economy and making it difficult for the government to invest in critical areas such as education and healthcare.
Second, the debt restructuring was seen as a way to restore investor confidence in Ghana's economy. The IMF's endorsement of the restructuring was seen as a positive signal to investors, and it helped to reduce Ghana's borrowing costs.
Finally, the debt restructuring was seen as a way to free up resources for other purposes. By erasing half of its debt, Ghana was able to reduce its debt servicing payments and free up about $600 million per year. This money could be used to fund development projects, improve social services, or reduce taxes.
The write-off the half of the Ghanaian government’s debt is extremely important because it can improve Ghana’s credit score as it increases Ghana’s lending capacity. However, this could also incentivize the Ghanaian government to want to borrow even more money in the future. And the problem with borrowing is that it reduces the real value of future goods since a portion of that value is extracted to pay back the obligation.
The debt restructuring was surely a major achievement for Ghana, and it is expected to help the country's economy recover from the recent economic crisis. However, it is important to note that the debt restructuring is not a magic bullet. Ghana will still need to implement a number of reforms in order to put its economy on a sustainable footing.