Ghana is a country once described as Africa’s shining star by the World Bank. She had the world’s fastest-growing economy in 2019 after it doubled its economic growth. But today, it is no longer the economic poster boy of West Africa. Despite being a major cocoa and gold exporter, it is battling its worst financial crisis in decades. The inflation rate is hovering at a record 50.3 percent, the highest in 21 years.
According to the United Nations Food and Agriculture Organization, agriculture represents 21 percent of Ghana’s GDP and accounts for more than 40 percent of its export earnings. At the same time, it provides more than 90 percent of the food the country needs. The earlier growth was attributed to the oil sector.
Why would a country declare bankruptcy?
Just like individuals and corporations, nations can also become bankrupt. It happens when a country does not have money to pay its debts or the interest applicable to its debts. In case a country goes bankrupt, it will not be able to repay the value of the bonds and the applicable interest. Meaning your investments in treasury bonds might drain.
Ghana uses 27% of its revenue to pay interest incurred on loans. However, the 73% of their revenue could not sustain the country. Because her borrowing culture continued without expanding on her revenue collection. Her economic growth was also affected by the government’s failure to invest in the agricultural sector where the yield would translate into more foreign exchange earnings to drive economic growth and employment.
The president blames the crisis on the pandemic (COVID-19) and the Russia-Ukraine war. However, analysis believes that certain political and economic decisions have resulted in the situation. For example, the government introduced a free education program in public high schools, and free meals to students at primary and secondary levels.
The government scrapped what it called 15 “nuisance taxes”. These included the 17.5 percent value-added tax on financial services, real estate, and selected imported medicines. They also reduced import duties on spare car parts and abolished the 1 percent special import levy and the 17.5 percent VAT on domestic airline tickets. All these brought a massive reduction in government revenue
What happens when a country declares bankruptcy?
When a country actually goes bankrupt, the International Monetary Fund is a good place to go. IMF promotes global economic growth and financial stability, encourages international trade, and reduces poverty. It accomplishes this by monitoring capacity building and providing loans. While the IMF is currently working on these goals with its 190 member nations, the organization has still faced criticism for the possible negative impacts of its structural adjustment programs. IMF supports through policy advice, capacity-building activities, and concessional financial support.
With IMF and World Bank support Ghana will have to restructure debt negotiations with creditors, and work out a plan to manage and reduce its debt burden over time. The road to recovery from bankruptcy will be long and challenging for Ghana. It will require a concerted effort from the government, international partners, and the Ghanaian people. Measures such as fiscal discipline, transparent governance, and efforts to diversify the economy would be essential to rebuild the nation’s financial stability.