July 17 (Bloomberg) -- Less than a decade after Ghana and Zambia had most of their debt written off, the two nations are struggling to finance their budgets and are under pressure to seek emergency loans from the International Monetary Fund.
Government spending in Ghana and Zambia has been growing at what the IMF considers unsustainable levels, both countries had their debt ratings downgraded in the past year and their currencies were the worst performers in Africa against the dollar in the first half of the year.
Prompted by a global debt relief campaign led by the likes of Irish rock singer Bono, Ghana and Zambia were cleared since 2005 of debt of about $14 billion owed to the IMF, World Bank and other global lenders. Since then, both countries have racked up borrowing, including selling their first dollar bonds to tap rising demand from foreign investors searching for high-yielding debt. As the funds flowed in, spending curbs weakened.
“There’s no question that Ghana and Zambia misbehaved badly during the boom years,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mailed response to questions. “They were among the naughtiest pupils in the class and they’re now suffering the consequences.”
Ghana’s debt levels are set to reach 61 percent of gross domestic product by December as the budget deficit exceeds 10 percent for a third consecutive year, according to Fitch Ratings. The debt ratio was 26 percent in 2006, data from the IMF shows.
The West African nation’s currency has slumped 29 percent against the dollar this year, inflation has soared to 15 percent and the liquidity crunch is so severe that the central bank printed money to finance the government’s budget gap in the first quarter.
“Nobody would have expected such a rapid increase in debt,” Bernard Anaba, a policy analyst at the Integrated Social Development Centre, an Accra-based research group that lobbied for debt relief as part of the Jubilee 2000 campaign, said by phone. “The debt relief gave us breathing space but the campaign has been forgotten too soon.”
Jubilee 2000 ran a program called “Drop the Debt,” supported by musicians such as Bono and Bob Geldof, to help persuade wealthier nations to cancel the outstanding loans of the world’s poorest nations so that funds could be spent on health and schooling. The campaign drew thousands of supporters at protests at Group of Eight summits in the early 2000s, culminating in the Live 8 music concerts in 2005, aimed at drawing global attention to poverty in Africa.
Concern about rising indebtedness is too often focused on the borrowers and not the lenders, Tim Jones, a policy officer at the Jubilee Debt Campaign, a successor of Jubilee 2000, said in a phone interview from London.
“We are worried that there’s a new round of irresponsible lending,” he said. “This has been driven by a rise in aid money being used as loans rather than grants and by lax monetary policies in the U.S. and Europe.”
Ghana’s government has scrapped fuel subsidies and imposed a moratorium on new contracts in an effort to curb spending. Finance Minister Seth Terkper yesterday revised higher the government’s budget deficit target for this year to 8.8 percent from 8.5 percent.
Terkper said on May 29 the government hasn’t ruled out seeking IMF assistance, though it’s still assessing whether measures put in place to help narrow the fiscal gap have been effective.
Zambia’s crisis is less severe and more recent. The fiscal gap widened to 6.8 percent of GDP in 2013 from an average of just 2.3 percent between 2005 and 2012. Government debt is forecast by Fitch to remain at 31 percent to 33 percent of GDP until 2015.
Zambia’s government said last month it will discuss a new aid program with the IMF that will seek to rein in the budget deficit. The kwacha has gained 2.9 percent against the dollar this month, paring its decline this year to 9.5 percent.
“Ghana’s had more of a prolonged history of fiscal slippage over the years; that’s meant that relations with the IMF have become more tense over time,” David Cowan, director of economic and market analysis at Citigroup Inc. in London, said by phone.
“Zambia comes to this with a slightly different history,” he said. “Its relationship with the fund has seen its economy improve drastically in the last decade by following fund policy advice.”
Ghana’s cedi fell 0.9 percent to 3.407 against the dollar as of 4:14 p.m. in Accra, while the kwacha fell 0.2 percent to 6.13 per dollar.
Ghana and Zambia haven’t been alone in tapping investor appetite for riskier assets. Ivory Coast sold new dollar-denominated bonds yesterday since defaulting on debt in 2011, while Kenya sold $1.5 billion of bonds last month. Senegal has announced plans to sell foreign debt and Sierra Leone will offer domestic bonds to investors abroad for the first time next month.
Fitch estimates that sovereign debt issuances in sub-Saharan Africa may reach $6 billion this year, compared with a record $11 billion in 2013.
The rush to sell bonds prompted IMF Managing Director Christine Lagarde to raise concerns of rising indebtedness on the continent. Some African countries have “gone a bit ahead of themselves” and exposed themselves to external risks as global interest rates rise, Lagarde said in a speech on May 30, without identifying any countries. Potential market volatility could be “detrimental” to these nations, she said.
While Ghana and Zambia recorded consistent high growth rates in excess of 5 percent in the past four years, authorities haven’t done enough to curb public spending or diversify their sources of income from commodities. Zambia earns about 60 percent of export revenue from copper, while gold makes up about half of proceeds in Ghana.
“Both countries are dependent on their respective mining sectors for a disproportionate amount of their tax revenue and the end of the commodity bull run hit tax revenues in both countries,” Clare Allenson, an analyst at Eurasia Group in London, said in an e-mailed reply to questions. They “need another mechanism to signal commitment to fiscal consolidation.”
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