Ghana and 27 developing countries remain stuck in debt trap – World Bank

• Posted on February 21, 2024February 21, 2024
• by Nana Kwesi Coomson
• Comment

The World Bank has disclosed that 28 developing economies including Ghana with – the weakest credit ratings – remain stuck in a debt trap with no hope of escape anytime soon.

According to the Bretton Wood institution, their average debt-to-Gross Domestic Product was nearly 75% at the end of 2023 – 20 points greater than the typical developing economy. 

In an article, “A silent debt crisis is engulfing developing economies with weak credit ratings”, however, it said some developing economies are finally seeing the light at the end of the tunnel, global inflation is receding and global interest rates appear to have peaked, prompting a bond-issuance rush by these economies to refinance their debt before the opportunity vanishes.

“In early January, Mexico, Indonesia, and several other developing economies easily raised more than $50 billion from bond investors. Yet 28 developing economies—those with the weakest credit ratings— remain stuck in a debt trap with no hope of escape anytime soon. Their average debt-to-GDP ratio was nearly 75% at the end of 2023—20 points greater than the typical developing economy”.

“They account for a quarter of all developing economies with credit ratings and 16.0% of the global population. However, their collective economic activity constitutes a mere 5.0% of global output, which makes it easy for the rest of the world to ignore their predicament. Their debt crisis, as a result, is silent—and it could intensify”, it added. 

Continuing, the World Bank said these economies need immediate help from abroad—both in the form of debt relief for some of them and an overall upgrade in the global framework for restructuring debt, which has so far delivered little relief to countries that need it most.

“A good start would be to build the fiscal space necessary for economic growth and resilience. Overlapping crises of the past five years deepened the debt challenges, but fiscal imprudence was often the original cause of their troubles. Before they lost access to capital markets, their governments had borrowed too much, especially in foreign currencies—the equivalent of nearly 30% of their GDP on average”, it added. 

Ghana remains in debt distress category

Meanwhile, Ghana which is one of the affected countries remains in debt distress, according to the Debt Sustainability Analysis.

Secondly, the DSA by the World Bank and the International Monetary Fund shows that the debt is unsustainable.

“Given the ongoing debt restructuring and large and protracted breaches to the DSA thresholds, Ghana is currently in debt distress and the debt sustainability analysis shows that debt is unsustainable.”

It continued that “Ghana lost international market access in late 2021, and the macroeconomic situation became more challenging in 2022, with large losses in international reserves, sharp depreciation of the exchange rate, and soaring inflation. The deterioration of market sentiment widened Eurobond spreads to above 2900 basis points at end-December 2022, and they have remained in distressed territory”.

However, with the existence of the IMF programme, there are expectations that Ghana’s debt situation will change to become sustainable by 2026.

-Joy Business