World Bank warns Ghana, others of government debt distress impact on economy

The World Bank is warning Ghana and some Sub-Saharan African countries that government debt distress would have large adverse spillovers on growth and financial stability, where banks are heavily exposed to sovereign debt.

In its January 2023 Global Economic Prospects report, the Bretton Wood said Ghana, Kenya and Sierra Leone, in particular, would have adverse effects of the financial challenges on their economies due to their worsening debt situation.

It stressed that increased non-concessional borrowing in the Sub-Saharan Arica region could cause a sharp rise in debt service costs if global interest rates keep rising.

“Government debt distress would have large adverse spillovers on growth and financial stability in many countries, especially where banks are heavily exposed to sovereign debt (Ghana, Kenya, Sierra Leone). Increased reliance on non-concessional borrowing in SSA could cause a sharp rise in debt service costs if global interest rates keep rising”.

Ghana is already undergoing a debt restructuring which has come under several oppositions, particularly from holders of Government of Ghana bonds, whose bonds are being restructured.

This is a prerequisite for a necessary International Monetary Fund-support programme.

The World Bank further said the baseline projections remain subject to multiple downside risks amid continuing uncertainty about the war in Ukraine, the degree of global and domestic monetary tightening that will be needed to subdue inflation, among others.

“The baseline projections remain subject to multiple downside risks amid continuing uncertainty about the war in Ukraine, the Black Sea Grain Initiative, the degree of global and domestic monetary tightening that will be needed to subdue inflation, and the extent of deceleration of the world economy”.

It pointed out that commodity prices may drop further than assumed if growth in major economies falls short of projections.

It concluded that “policy tightening across SSA may have to pick up pace if price pressures persist or if risks of debt distress are increased by higher global interest rates and currency depreciations”.