Economics | Africa | Marcel Thomkins

Emerging Economies in the Debt Trap - The case of Ghana

This article by Marcel Thomkins will undertake a brief investigation into the current situation of Ghanas 2019 fiscal deficit and public debt stock and provides recommendations for its resolution.

"… by 1966, the economy appeared wholly dependent on the goodwill of its creditors, whereas the thrust of policy intentions in the previous ten years had been to relieve Ghana of its colonial dependence.”

Krassowski, A. (2010). 

Speaking on the Black Star Square on Tuesday, 6th of March 2018 during the 61st Independence Day Celebration, the President of Ghana, Nana Akufo-Addo, reinforced his call for a “Ghana Beyond Aid” and further outlined the policies that would transform how Ghanaians are schooled, how they work and notably how they think. Similar to the first President of the Republic, Kwame Nkrumah, his vision for the future strongly emphasised the economic independence from the former colonisers turned donor states; and similar to his predecessor, he risks swapping one dependency for another in the process.

Starting under the former NDC government, Ghana’s public debt, including large bonds of foreign denominated loans, has skyrocketed. The resulting interest payments consume large parts of Ghana’s tax revenues, thus threatening to fiscally paralyse the government in case of future crises and challenges.

Several authors and institutions, including the IMF, the World Bank and most recently the Ghanaian Institute for Fiscal Studies (IFS) have therefore turned their attention towards Ghana’s public debt, analysing its implications, sustainability and possible remedies. This paper will outline the problem of Ghana’s debt level, capturing relevant parts of the academic discussion, analyse its potential causes and finally focus on a possible solutions in the form of relevant  policy recommendations.

The Debt Trap

For the last 10 years, the Budget of the Ghanaian Government has experienced a constant deficit, averaging around 9% annually, the financing of which necessitated the issuance of government bonds, both domestic and foreign, and the taking up of large loan packages by multilateral organisations. As of December 2017, Ghana’s total debt stock was estimated at GH¢ 142 billion, or 69.8% of GDP, down from 73,3% in December 2016 (Bank of Ghana, 2018).

Although the issuance of Government bonds can help attract foreign capital[1] to the economy and allow for the formation of domestic saving opportunities, which supports the nascent Ghanaian money market, a high ratio of debt to GDP can indicate a higher risk of government default. The exact burden it places on a country, however, largely depends on factors such as the average interest rate and whether the bonds are denominated in local or foreign currency. For example, in the 2018 budget, with a debt to GDP ratio of 68.7%, the Government of Ghana intends to spend 24% of its Budget on interest payments. Germany in 2016, with a similar ratio of 68.1% only had to spend 11% of its Budget on interest payments, as, due to lender confidence, it could refinance its public debt domestically for an interest rate of less than 1% (BMF, 2017).

Due to the limited size of its economy, fears of inflation and recently escalating borrowing, Ghana is forced to offer much higher interest rates to attract lenders. In December 2017, Domestic Treasury Bill Rates (TBR) for 182-day bonds were issued by the Bank of Ghana with a 13.8% interest rate[2] (Bank of Ghana, 2017). The resulting Gross Financing Needs (GFN)[3] rank among the highest of frontier/emerging markets at above 25% of GDP in 2015. (IMF, 2015). The large sums that are required to service this debt drain the government of its financial resources and put into question its ability to achieve its expensive development programmes, such as the one-District one-Factory or the Free-SHS policies.

The share of the budget dedicated to debt service has increased considerably since 2008, rising from 12.3% to 25.8% in 2017 (Ministry of Finance, 2017). The outlook becomes even more dramatic when interest payments are compared solely with domestic tax revenues, excluding oil rents and foreign grants, as done recently by Professor Newman Kusi at an IFS Conference:

“…While in 2008, about 16 pesewas of each GHu20b51.0 tax collected by the government was used to pay interest on its debt; by 2017, the figure had increased to 42 pesewas due to the astronomical increase in the public debt stock over the period […] with serious negative implications for growth and poverty reduction.”

Professor Newman Kusi, IFS (13.03.18)

But not only the size of Ghana’s debt stock has increased, its composition has changed as well. Since 2012, the percentage share of the total debt stock that stems from external lenders has increased from 47.7% to 55.4%, and with it, the need to allocate increasing amounts of money to service the external debt (Figure 2). The IMF estimates that such payments used up 29% of government revenue in 2016, which is considerably higher than its upper limit of debt sustainability set at 18-22% (IMF, 2015).


In the field of deficit financing, external debt presents a particular challenge, as it is denominated in foreign currency[4] and needs to be repaid in such. Servicing external debt not only drains the country of its foreign exchange reserves and causes a net outflow of capital, but the amount of GH¢ required also depends on the respective exchange rate. The taking up of foreign denominated debt in emerging economies is sometimes referred to as the “Original Sin” of Public Finance (Eichengreen & Hausmann, 2010). As can be seen in Figure 2, since 2008 the Ghana Cedi has lost around 80% of its value versus the US Dollar, meaning that a loan of $100 in 2008 could be repaid by GH¢ 100 plus interest, but in 2017 required GH¢ 440 plus interest to repay.

This process was exemplified last year, when from May to June 2017 the level of external debt remained unchanged at $17.1 billion, but due to the depreciation of the Cedi in that month, the local value of the debt increased by GH¢ 1.2 billion from GH¢ 73.4 to GH¢ 74.6 (Bank of Ghana, 2017). With continuously high inflation and, since 2016, a rising US Federal Reserve Rate, it is likely that the Cedi will experience further depreciative pressure, which in turn would increase the burden of servicing the foreign currency bonds. This threat is even greater in case of a sudden reversal of credit flows, which, caused by a political or economic crisis, could send the Cedi plummeting and render repayment of foreign loans impossible thus risking state default, as amply demonstrated during the Asian Financial Crisis of 1997[5].

Domestic debt is generally seen as less problematic, as the funds used to service domestic interest rates remain in the country and currency, and thereby even aid in the creation of a domestic capital market by providing saving opportunities in form of Treasury Bonds, which, in turn, can be traded as financial securities. However, the magnitude of Ghana’s domestic debt stock poses two challenges.

Firstly, if the government attracts too great a part of a nation’s capital market, it risks drying up the sources of domestic capital by driving up national lending rates and crowding out other borrowers, thus decreasing private lending and investments (Quartley & Afful-Mensah 2014).

Secondly, another form of crowding out might take place in the national Budget. As Figure 3 demonstrates, the relationship between capital expenditure[6] and interest payments has experienced a complete turnover in the last six years. Capital expenditure, roughly double the size of interest payments in 2012, have dwindled down to only half the amount of interest payments in 2018. This dramatic change in spending patterns naturally influences economic performance. In a recent empirical analysis, Ansah-Offei (2016) finds that the cost of servicing the accumulated debt have negatively affected GDP growth in Ghana from 1990-2012.

For all the detrimental effects the expansion of public debt has on the Ghanaian economy, measuring positive outcomes appears rather difficult. Jones (2016) wrote a highly influential[7] paper on “The fall and rise of Ghana’s debt” in which he summarizes that for all the foreign lending the Government of Ghana received by its multilateral donors, there exists little transparency on what the money was spend on. He further explains that IMF figures on public capital formation do not demonstrate a positive relationship between lending and investment, hinting at the fact that the loans might have been used for non-investment purposes, like interest payments or wages.

So, is Ghana currently headed for a debt trap?

This question cannot readily be answered, as no common definition of a state of Debt Trap exist and the term is thus being used inflationary to describe any form of unfavourable fiscal arrangements. Also the “entrapment” can oftentimes still be overcome by sound fiscal management, which is why the implied inevitability is somewhat misleading.

What is mostly referred to as fiscal Debt Trap is a state in which the debt servicing component of the national budget approaches the gross borrowing number, i.e. when expenditure can not, or should not, be reduced and interest payments have to be financed by additional borrowing (Financial Express, 2018). Figure 4 shows the development of interest payments and the total of domestic and external financing. It clearly demonstrates how government financing, beginning in 2014, was increasingly consumed by the rising interest rate payments and in 2017 even surpassed it. If new government debt is only taken up in order to finance old obligations, further fiscal deficits appear highly questionable. A reversal of this trend will require heavy cuts in expenditure, as short term revenue increases are unlikely, which lowers economic growth and in-turn might reduce tax income, thus creating a fiscal downward spiral, recently exemplified by Greece[8]. Following the definition given above, it can be argued that latest since 2015 Ghana finds itself in a Debt Trap.

Analyzing causes of debt 

In order to find a remedy to Ghana’s current debt predicament it is imperative to first attempt to analyse the deeper causalities of the increase in debt and interest payments from which a number of recommendations can be derived in the ensuing chapter. The simple, direct cause of the worsening debt situation is the constant deficit between government revenues and expenditure, and to understand this, it is useful to monitor the two forecasts that inform the government’s fiscal policy. Both the amounts of forecasted revenues as well as the planned expenditure repeatedly fail to capture the actual fiscal outturn, in some cases by as much as 15%. In most years revenues are overestimated and expenditures underestimated, thus causing the deficit. The reasons behind this may be political or technical, as the following analysis will attempt to demonstrate.

Expenditure and Democracy

A quick look at Figure 4 reveals a major source of instability in the Ghanaian Budget, the electoral cycle. In 2008, 2012 and 2016 actual expenditure exceeded the budgeted amount by at least 14%, hinting at a concerning trend to sway the electorate with lavish spending, and possibly employing state funds to support the sitting governments campaign.

Albeit alarming, a political culture of “buying voters” is by no means limited to Ghana and appears to be a general challenge for democratic states. Haan (2014) finds that „political deficits“ appear in all states that hold elections, but are particularly strong in young democracies and significantly increased the sitting governments chances of re-election.

According to Prof. Felix Asante, Director of the Institute of Statistical, Social and Economic Research (ISSER) of the University of Ghana, the main cause of Ghana’s high election year deficit is the postponement of the execution of development projects to the last year of an electoral cycle. “It usually takes the next three years after every election period to adjust deficits only to relapse to its status quo the next election period”, the ISSER director explained (Ghana Talks Business, 2016).

The Revenue forecasting error

Figure 5 showcases the percentage amount of the forecasting error for government revenues from 2008 to 2017. In these last ten years, estimated revenues were on average 9% off the final revenue outturn of each respective year, with a balanced mean[9] showing revenue outturn averaging 4% lower than forecasted.

This is significantly higher than the mean of 0.6% that Buettner & Kauder (2010) found for a sample of 13 OECD countries between 1997-2008. Intuitively, only the balanced mean appears relevant, as only underestimations risk to increase the deficit. The average forecasting error of 9% however implies failure to anticipate revenue increases as well, which threatens fiscal stability in other ways.

Svensson (2000) argues that such an unanticipated fiscal bonanza, also called “windfall revenue” leads to inefficient spending and a higher incentive to privately appropriate parts of the additional funds. Additionally, underestimated revenues might entice governments to drastically increase spending and borrowing in the subsequent fiscal year, expecting a similar drastic revenue increase. It appears that something alike could have caused the spike in borrowing that can be witnessed in Figure 1 for 2012, just after revenues were 17% underestimated. In their most recent “Fiscal Alert” the IFS argues that the revenues brought in by the discovery of oil and high commodity prices after 2010 kick-started Ghana’s massive borrowing drive in 2012 (IFS, January 2018).

The Medium Term Debt Strategy (MTDS) 

By following the Medium-Term Debt Strategy (MTDS), the Government of Ghana has already initiated a process of rehabilitating its public finances by reorganizing its debt obligations. As of 2015, roughly half of the General Financing Need (GFN) was financed through short-term domestic debt, which might cause temporary liquidity shortages, due to the short maturity of the loans possibly coinciding with fiscal volatility. A major achievement of the MTDS has thus been the rollover of the high interest, short maturity loans to cheaper, long-term debt, partly by replacing them with loans denominated in foreign currency. Although the near term gross financing needs have thus been reduced, this improvement came at the cost of greater exposure to international currency volatility (IMF, 2015). In other areas signs of relief are emerging as well. Since the second quarter of 2017, the Government appears to have achieved a surplus in its primary balance[10], which sends a signal of fiscal solidity to international money lenders, thus significantly reducing the rates at which they will provide financing (Izák, 2009). A consolidation of the deficit, combined with the expected surge in GDP growth in 2018 may therefore ease the pressure on the budget, without further structural improvements in the budget process. It is however unlikely that the trend of steady deficits and rising debt to GDP ratios can be reversed.


As mentioned earlier, the ills that plague the budget process are both technical and political in nature. The obvious causality between the electoral cycle and government spending sprees is likely to stem from political considerations. In the Ghanaian budget process, Parliament has little power to introduce new spending items to the Budget and the Finance Minister is thus in a comfortable position to regulate his ministers’ spending. He could therefore put a stop to excessive spending taking place in election years[11], if he was inclined to do so. It therefore appears that in such situations, it is the political will to reduce the deficit which is lacking in comparison to the prospects of winning the election.

As a sitting government has access to the budget, spending might either be scheduled to take effect only in the fiscal year of the election, or outright flow towards the purpose of securing votes. Research conducted by the Centre for Democratic Development (CDD) indicates that in 10 poverty stricken districts on average 84% of voters would pick the candidate that could provide them with direct material benefits (NoPoor Conference, 2016). Additionally, political parties in Ghana, although highly regarded by a constitution which charges them to inform and guide the political will of the people, do not receive any public funding from the state. Parties thus entirely depend on donations, which in turn depend on the confidence of donors that the party will stay in, or come to, power and reward them for their contribution (Gyampo, 2015). As the survival of a political party therefore depends on winning elections, the current situation incentivises buying votes from poorer constituencies by using public funds, thus, in turn, ballooning the election year budget. Gyampo (2015) therefore proposes to have political parties should be funded from the state’s coffers, according to their share of the vote. This solution would take some pressure from the sitting government to win literally “at all cost”.

If the budget process is mapped out in a flow chart as done by Spiller & Tomasi (2003) and Stein et al. (2008) such aspects concerning political institutions would be the X1 of the formula (Figure 7), and thus outside the focus of public financial management advisory that the Good Financial Governance Programme (GFG) offers.

In order to achieve the dependent Variable Y (Good Financial Governance) support for X2, the other main source of the fiscal deficit could be approached however, namely the revenue forecasting error. Revenue forecasts define the budget envelope, by serving as the principal resource constraint, and therefore form an integral part for any government spending policy. Effective forecasting institutions, which are sufficiently staffed, operate according to up-to-date best practices and with modern equipment and are therefore the base for any meaningful medium-term planning[12] (Danninger et al. 2004). Kyobe and Danninger (2005) find that in developing countries the institutions charged with revenue forecasting are generally underdeveloped.

Apart from this lack of sufficient skills and equipment, it is political pressure to overestimate potential revenues that result in less reliable budget forecasts. One method to limit such political interference is the involvement of an external forecasting agency. In an empirical cross-country comparison of best practices in revenue forecasting of OECD countries, Buettner & Kauder (2010) find that the independence of revenue forecasting from possible government manipulation exerts a robust, significantly positive effect on the accuracy of revenue forecasts. A different approach places revenue forecasts in two separate government bodies, thus creating institutions competing for accuracy. In an earlier study on US state revenues, Bretschneider et al. (1989) find that in those states where executive and legislative branches of the government were issuing competing forecasts, accuracy was higher.

The solution to the problem of “political deficits” hinges on the political will not to overspend in election years. But as Haan (2014) pointed out, this is still a winning strategy, and as long as absolute poverty is not eradicated, and parties do not receive public funds, there appears to be little incentive from the Government’s side to change the current situation. It is however by strategically supporting forecasting institutions and their political independence, that the threat of falling into the debt trap by recurrent election year deficits can be minimised.


Ansah-Offei, M. (2016). The effects of short-term foreign debt flows and debt servicing on economic growth in Ghana (Doctoral dissertation).

Bank of Ghana (2017) Summary of Economic and Financial Data, September ( ; Summary of Economic and Financial Data, March 2018 (

BMF, Bundesministerium der Finanzen (2017) Vorläufiger Haushaltsabschluss des Bundes für das Jahr 2016,( Januar

Bretschneider, S. I., Gorr, W. L., Grizzle, G., & Klay, E. (1989). Political and organizational influences on the accuracy of forecasting state government revenues. International Journal of Forecasting5(3), 307-319.

Buettner, T., & Kauder, B. (2010). Revenue forecasting practices: differences across countries and consequences for forecasting performance. Fiscal Studies31(3), 313-340.

Burda, M., & Wyplosz, C. (2013). Macroeconomics: a European text. Oxford university press.

Danninger, S., Cangiano, M., & Kyobe, A. (2004) The Political Economy of Revenue-Forecasting Experience from Low Income Countries. Washington, DC: International monetary Fund, 2004. IMF Working Paper 05/02.Gyampo, R. E. V. (2015). Public funding of political parties in Ghana: An outmoded conception?. Ufahamu: A Journal of African Studies38(2).

Eichengreen, B., & Hausmann, R. (Eds.). (2010). Other people's money: debt denomination and financial instability in emerging market economies. University of Chicago Press.

Ghana Talks Business (2016) (

Ghana Web (01.08.2017) (

Gyampo, R. E. V. (2015). Public funding of political parties in Ghana: An outmoded conception?. Ufahamu: A Journal of African Studies38(2).

Haan, J. (2014). Democracy, elections and government budget deficits. German Economic Review15(1), 131-142.

IMF and World Bank Debt Sustainability Analysis, December 2015. (

Institute for Fiscal Studies (2018) Is Ghana in a Debt Trap?, Fiscal Alert No. 9.

Izák, V. (2009). Primary balance, public debt and fiscal variables in postsocialist members of the European union. Prague Economic Papers2, 114-130.

Jones, T (2016). The Fall and Rise of Ghana’s Debt. How a New Debt Trap has been Set. London: Jubilee Debt Campaign, October.

Krassowski, A. (2010). Development and the Debt Trap: Economic Planning and External Borrowing in Ghana. Routledge.

Kusi, Newman, Institute for Fiscal Studies, 13.03.2018 (

Kyobe, A., & Danninger, M. S. (2005). Revenue forecasting: how is it done? Results from a survey of low-income countries (No. 5-24). International Monetary Fund.

Ministry of Finance, Government of Ghana (2008-2018) Budget Statements (

Michael Burda and Charles Wyplosz (1995), European Macroeconomics, 2nd ed., Ch. 3.5.1, p. 56. Oxford University Press

NoPoor Conference (2016) Ghanaians vote on personalities, not policies (

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Stein, E., Tommasi, M., Scartascini, C., & Spiller, P. (2008). Policymaking in Latin America. How politics shapes policies, IADB, Harvard University, New York.

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[1] As Government Bonds generally have a lower default risk as FDI.

[2] Albeit down from their all-time high 25,8% at the end of 2014.

[3] GFN are defined as the sum of the budget deficit plus the amount of rollover of maturing debt obligations.

[4] In the Ghanaian case mostly US-Dollar with few Euro bonds.

[5] In July 1997 the Thai government was forced to float the Thai baht and defaulted on its massive foreign denominated debt. The contagion of the crisis spread throughout East Asia, causing the IMF to bail-out Thailand, Indonesia and South Korea (Radelet & Sachs, 1998).

[6] i.e. spending for future benefit, such as investments in infrastructure, health or research.

[7] The IFS extensively quotes from it and accepts all its political recommendations in their Fiscal Alert No.9

[8] Following the Global Financial Crisis of 2007, the debt to GDP ratio of Greece soared from 103% to 146.2% in 2010 and technically fell into a state of default. In order to return the country to solvency, European countries provided the country with low interest loans on the condition drastic cuts to wages, pensions and social welfare. The resulting economic collapse however almost halved the Greek GDP and thus ended up increasing debt to GDP ratios even further to 180% by 2016 (Source: Eurostat)

[9] The mean is calculated by subtracting the overestimations from the underestimations.

[10] The primary balance is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments. The total deficit (which is often called the fiscal deficit or just the 'deficit') is the primary deficit plus interest payments on the debt. (Burda & Wyposz, 2013)

[11] The Finance Minister drastically reduced spending during the 2017 fiscal year, without significant outcry from his party members (Ghana Web, 01.08.2017)

[12] Improved forecasting would also be quintessential for the development of a Medium Term Revenue Strategy (MTRS) in Ghana.



Marcel Thomkins

Marcel Thomkins is a Political Economist who focuses on questions of International Relations, Macroeconomic Policy and Economic Development in Emerging Markets. After graduating with a B.Sc. in Economics and East Asia Studies at Tuebingen University, Marcel pursued the Political Economy postgraduate programme at King`s College London. Specifically, he is interested in the Middle East and East Asia regions both for the implications of economic and political developments there on other markets, but also for possible "best practices" in development and state building, that could be adapted in other contexts.