Ghana’s fiscal governance challenges and path to recovery through developmental financing

As Ghana approaches the close of 2024 and transitions into 2025, the nation finds itself at a fiscal crossroads. While efforts such as the Domestic Debt Exchange Programme (DDEP) and the International Monetary Fund (IMF) Extended Credit Facility have provided some stability, significant fiscal governance challenges remain. Ghana’s current inflation rate of 35.8% (as of Q3 2024) and a public debt-to-GDP ratio of approximately 77% underscore the magnitude of these challenges.

The government’s fiscal deficit stands at 6.9% of GDP, with debt servicing accounting for nearly 65% of domestic revenue. Despite these daunting figures, opportunities for fiscal consolidation and growth exist through innovative developmental financing models, including infrastructure bonds, Public-Private Partnerships (PPPs), diaspora bonds, and Sukuk (Islamic bonds).

Current Fiscal Challenges

Ghana’s fiscal challenges are deeply rooted in structural inefficiencies:

High Debt Burden: Debt servicing remains a major strain on government resources. Domestic debt restructuring under the DDEP has eased immediate pressures but at the cost of reduced confidence in government securities.

Revenue Mobilization Deficit: Ghana’s tax-to-GDP ratio of 13.4% lags behind the Sub-Saharan African average of 16%, leaving a significant gap in fiscal space.

Expenditure Pressures: The rising cost of subsidies, public sector wages, and arrears continues to limit the government’s ability to invest in capital projects.

Inflation and Currency Depreciation: Persistent inflation and a weakening cedi erode household purchasing power, complicating monetary and fiscal policy alignment.

Path to Recovery: Developmental Financing Models

Innovative financing models can help Ghana address its fiscal challenges while maintaining essential investments in infrastructure and social services.

1. Infrastructure Bonds

Infrastructure bonds are long-term instruments designed to finance critical projects, such as roads, railways, and power plants. Ghana can issue a targeted infrastructure bond worth GH₵10 billion to finance key projects under the Ghana Infrastructure Investment Fund (GIIF).

This approach offers dual benefits: attracting patient capital while addressing infrastructure gaps that constrain economic productivity. For instance, every GH₵1 billion invested in transport infrastructure could generate up to 10,000 direct and indirect jobs.

2. Public-Private Partnerships (PPPs)

PPPs leverage private sector capital and expertise to deliver public services and infrastructure. Projects like the $570 million Accra-Tema Motorway expansion illustrate the potential of PPPs in addressing infrastructure needs without overstretching public finances.

By creating a robust PPP framework with clear risk-sharing mechanisms, Ghana could unlock up to $2 billion in private sector investment annually, focusing on healthcare, education, and energy.

3. Diaspora Bonds

Ghana’s diaspora community, estimated to contribute $4.7 billion in remittances annually, represents a significant untapped resource. A $500 million diaspora bond could be marketed as an attractive, patriot-driven investment opportunity for Ghanaians abroad, earmarked for transformative sectors such as renewable energy and healthcare.

4. Sukuk (Islamic Bonds)

Sukuk offers Ghana access to non-interest financing, a growing market globally. Sukuk proceeds can be allocated to projects aligned with Islamic finance principles, such as affordable housing and green energy. A $300 million Sukuk issuance could diversify Ghana’s investor base and reduce borrowing costs.

Practical Solutions and Policy Recommendations

To successfully implement these financing models, Ghana must take the following steps:

Enhance Revenue Mobilization:

Broaden the tax base by formalizing the informal sector, which contributes only 2% to direct tax revenues.

Increase Value Added Tax (VAT) efficiency, which currently operates below potential, by improving digital tax collection systems.

Strengthen Debt Management:

Create a debt stabilization fund, financed by windfall revenues from commodities like gold, to mitigate debt service pressures during economic downturns.

Engage in concessional borrowing from multilateral institutions to refinance high-cost debt.

Boost Institutional Frameworks:

Strengthen the capacity of institutions like the GIIF and the Public Investment Management Unit (PIMU) to ensure transparency and efficiency in deploying funds raised through developmental financing.

Streamline processes for PPP projects to reduce bureaucratic delays.

Align with IMF Programme Goals:

Stick to fiscal discipline targets under the IMF program, particularly the aim of reducing the fiscal deficit to 4.5% of GDP by 2026.

Channel IMF disbursements into catalytic investments that enhance long-term economic resilience.

Engage Stakeholders:

Foster partnerships with multilateral development banks, private sector investors, and the diaspora community to ensure broad-based buy-in for financing initiatives.

Conclusion: A Sustainable Fiscal Future:

Ghana’s fiscal governance challenges are formidable but not insurmountable. By embracing innovative developmental financing models and implementing sound fiscal reforms, the country can chart a path to economic recovery and resilience.

The proposed solutions are not merely theoretical; they are actionable and backed by Ghana’s unique potential, particularly its rich human and natural resources. With strategic planning and execution, Ghana can turn its fiscal challenges into opportunities for sustainable growth.

Dr. Shaibu Ali, Director General, Islamic Finance Research Institute of Ghana