IMF debt assessments fail to fully capture Ghana’s mounting crisis risks – Dr. Maxwell Opoku-Afari

Ghana's descent into debt distress in 2022 was preceded by years of warning signs that were visible but were not sufficiently reflected in assessments of how quickly the economy could tip into crisis, a new policy paper by former First Deputy Governor of the Bank of Ghana, Dr. Maxwell Opoku-Afari, has argued.

The study, published by the Finance for Development Lab (FDL), raises questions about whether the debt sustainability framework applied to Ghana adequately captured the risks associated with the country’s changing debt structure, particularly the rapid expansion of expensive domestic debt.

According to the paper, successive IMF-World Bank Debt Sustainability Analyses (DSAs) did identify growing vulnerabilities. Ghana was classified as being at high risk of debt distress as far back as 2015.

However, the assessments continued to regard the debt as sustainable on assumptions including continued market access and successful fiscal consolidation.

Dr. Opoku-Afari argues that the problem was therefore not necessarily an absence of warning signals, but the extent to which those signals were translated into assessments of the probability and speed of an eventual crisis.

The evidence, he notes, had become increasingly difficult to ignore.

The present value of public debt-to-GDP, which was below the 55 percent benchmark in the early 2010s, increased sharply after 2014 and reached nearly 93 percent by 2022. Debt-service pressures were even more telling.

The external debt service-to-revenue ratio breached its benchmark as early as 2013 and exceeded 40 percent of government revenue by 2022.

The paper also finds that interest payments remained consistently above 20 percent of government revenue over the period assessed, while international reserves hovered close to the conventional minimum of three months of import cover.

These developments, Dr. Opoku-Afari argues, pointed to growing liquidity problems alongside the deterioration in Ghana’s overall debt position.

Domestic debt was not as safe as it appeared

A central criticism in the paper concerns the treatment of Ghana under the Low-Income Country Debt Sustainability Framework (LIC-DSF).

According to Dr. Opoku-Afari, the framework was not sufficiently responsive to Ghana’s evolution into a frontier economy with significant access to international capital markets and an increasingly sophisticated domestic debt market.

In particular, the framework did not sufficiently capture risks arising from domestic debt. That became increasingly important as government shifted towards the domestic market, where commercial banks, pension funds, insurance companies and foreign investors became major holders of government securities.

Far from eliminating risk, the paper argues that the strategy changed its form.

The weighted-average interest rate on Ghana’s public debt over the period assessed was estimated at 10.7 percent, while 17.5 percent of the debt stock was due to mature within one year.

Foreign-currency-denominated debt also averaged 54.5 percent of total public debt, leaving the country heavily exposed to exchange-rate movements.

This produced what the paper describes as a dangerous interaction between the quantity and quality of debt.

As interest payments increased, government needed to borrow more. Refinancing occurred at increasingly expensive rates, while depreciation of the cedi simultaneously increased the domestic-currency value of external obligations.

Dr. Opoku-Afari identifies three important shortcomings in the surveillance architecture.

First, baseline projections were often optimistic, relying heavily on assumptions of sustained fiscal consolidation, stronger domestic revenue mobilisation and robust economic growth.

Second, domestic-debt dynamics and the feedback loop between government finances and the financial sector were not fully internalised.

Third, successive adjustment programmes tended to place greater operational emphasis on near-term fiscal consolidation than on resolving the structural weaknesses that repeatedly generated new fiscal pressures.

These included energy-sector inefficiencies, state-owned enterprise governance weaknesses and persistent shortcomings in tax policy and administration.

The consequence, the paper argues, was that Ghana could periodically restore macroeconomic stability without eliminating the underlying conditions responsible for repeated debt accumulation.

Seventeen IMF programmes, but recurring vulnerabilities

Ghana’s repeated return to the IMF is therefore presented as a deeper policy concern.

The 2023 arrangement was reportedly the country’s 17th IMF-supported programme in roughly six decades.

For Dr. Opoku-Afari, that history suggests that stabilisation has not consistently translated into durable structural adjustment.

Fiscal consolidation can improve headline indicators, the paper acknowledges, but such gains remain vulnerable if the underlying sources of fiscal risk are left unresolved.

The lesson from Ghana, therefore, extends beyond the country itself.

As African economies increasingly develop domestic capital markets and gain access to commercial financing, traditional assessments centred heavily on the size of external debt may no longer provide a sufficient early-warning system.

Dr. Opoku-Afari calls for greater attention to liquidity and refinancing risks, domestic debt costs, sovereign-bank linkages, contingent liabilities and the wider public-sector balance sheet.

The study also advocates routine stress-testing and scenario analysis to determine what happens to public finances when interest rates rise, currencies depreciate or investors abruptly refuse to refinance maturing government debt.

GNA