Two global consensuses that defined development paradigm in Ghana are under threat

The background to this second round of interviews is to talk about what some people are calling a “poly-crisis”—multiple overlapping crises from long-standing climate impacts, COVID (less on the health side and more on the economics and debt side), the fallout from the Ukraine conflict (particularly on price and availability of key foodstuffs, fertilizer, fuel), and also the hike in inflation and interest rates in North America and Europe, and its consequences for many countries, particularly those in the Global South.

We’ve been watching the difficulties faced by Ghana and the Ghanaian government negotiating a bailout program with the IMF. What’s your analysis of the current economic situation, given Ghana’s reputation for sound macroeconomic management? How did the country get to its current crisis?

The short answer is that Ghana’s reputation has not matched the reality for a number of years now. I do not deny that compared to its neighbors, Ghana is substantially better run in some important departments. One critical, beneficial distinction is the maturity of the political duopoly that currently governs it.

There is a sense in which the leading political lights have come to an accommodation that the electoral machine is a valid and sufficient mechanism to ration power among themselves. But beyond that grand contract at the top, the social contract with the rest of society has never been as robust as it has been made to look.

But let me address your question directly in respect of the current macroeconomic crisis. In 2003, Ghana approached international rating agencies to begin a process of reintegrating into the international capital markets, which had changed dramatically since the 1980s debt crisis, during which Ghana had a bit of a fracas with the London Club.

By 2003, the Eurobond market was in bloom; and it was no longer the London Club or Paris Club that was dominant. For most peripheral, frontier, and emerging markets, it was the Eurobond market that mattered most. So, in 2003, one of the rating agencies gave Ghana a sovereign rating.

In 2006, Ghana received the second-largest debt relief settlement granted to any African country after the DRC. This gave the government massive fiscal room. And then in 2007, we issued our first Eurobond (US$750m), which coincided with the discovery of oil.

This led international investors to believe there was a new petrol state in the offing in Africa that was not only democratic, but also a leading producer of other valuable commodities—cocoa and gold.

Then the financial crisis of 2008 happened, and a series of fascinating coincidences began to take hold in Ghana. The business and political cycles converged. The government was no longer constantly under financial pressure because they had new fiscal room, but democracy had also intensified into a system of competitive patronage networks.

So, every time there were elections, the government could borrow large amounts of money and distribute it across the country for projects selected for their electoral more than their socioeconomic returns. In 2007, the government borrowed and spent aggressively, but still lost the election. The new government immediately went to the IMF.

Oil then came on stream in 2010 and dramatically amplified the government’s fiscal capacity. On top of that, we decided to carry out a massive labor market adjustment in the public sector. The government implemented a “Single Spine Pay program” which tripled the public wage bill coupled with massive borrowing, which had now become part and parcel of how we do business.

We also started rebasing our GDP, which massively inflated GDP in nominal terms, further increasing our capacity, on paper, to borrow. By 2014, it became evident that the nascent oil boom was not sufficient to transform Ghana into a true petrol state and investors had to rethink their models. Our bonds came under siege on international markets, coupled with a domestic electrical power crisis, largely due to high rates of urbanization.

So, in 2014, we went back to the IMF for another policy adjustment. And then we did something very interesting: We opened up a true domestic capital market by introducing the Ghana fixed-income market, enabling the government to issue long-term domestic securities, including some in dollars. That meant that Ghana could borrow significant sums domestically, on top of the international market.

Moreover, not willing to lose access to international capital, Ghana was willing to pay investors 10% on its Eurobonds to regain access to this market, and the World Bank was willing to guarantee 40% of the issuance to cement this prospect. That was in 2015.

We now had a domestic capital market where local capitalists have been able to participate in betting on Ghana’s future. And international investors had been wooed back by the IMF program and the World Bank’s partial guarantee. Despite these developments, that government also lost power during the elections. The electric power crisis had gone on for two years and the people had turned against them.

In 2017, a new government inherited the IMF program. They very skillfully got the IMF to waive a lot of the targets and convinced them that the country’s circumstances had fundamentally changed due to new sources of growth. In 2019, the government exited the program in good faith. They then went straight back to borrowing large amounts of money, increasing Ghana’s Eurobond exposure from US$3.5 billion to nearly US$14 billion.

In the last couple of years, we were doing around US$6 billion in external financing a year, mostly from commercial sources. That began a dramatic transformation of Ghana’s international assistance program, from one that was primarily based on multilateral and bilateral concessional loans with a sprinkle of commercial borrowing, to one heavily reliant on private capital markets.

In the former model, the government had no choice but to subscribe to some degree of policy oversight by independent actors. Even as late as 2015, Ghana still used devices like a “sinking fund” to amortize debt over time, a practice dating to Ghana’s colonial past. However, the new government shelved some of these constraints, believing they were outdated, and sought to master the capital markets.

They believed what matters most is to manage confidence. If you manage confidence, enough money will come, you will then invest it and be able to pay it back. Consistent with this logic, the government even attempted to raise $50 billion at one go through a so-called century bond.

You see, the country had investment bankers at the helm. The finance minister himself was an investment banker for three decades. His right-hand man had also been an investment banker in New York. Fiscal management, therefore, had a swashbuckling Wall Street feel about it.

In 2020, we had another election. COVID-19 struck at the same time as the election, which was momentous. In a country where the political cycles had converged with fiscal cycles, COVID provided the best cover to borrow massively.

The government got the rapid credit finance payout from the IMF, in the form of US$1 billion in Special Drawing Rights (SDRs), and they raised a further GHC10 billion domestically (~US$1.5 billion) from the Bank of Ghana. Additional resources came from the World Bank and an expansionary budget.

We now know that they only spent 20 to 25% on anything that could remotely be called COVID response. If you look at Ministry of Health investments, the bulk went into building hospitals and clearing hiring backlogs, decisions driven more by the pending elections than COVID, per se. It’s using COVID as cover to invest in the health system, which is a good thing in itself but not necessarily about emergency COVID relief.

The real COVID expenditure was the social relief in things like free water, free electricity, distribution of hot food, etc. This came to around US$400 million, which is much less in terms of actual fiscal exposure to COVID, given that they raised around US$3 billion using COVID as the basis.

By 2021, all the effects of this borrowing started to manifest, and Ghana came under pressure. The government decided that the way out was to double down on borrowing and bring in more capital from overseas to smooth out the kinks.

First, they went to the Eurobond market in March 2021 and got US$3 billion, which helped shore up the cedi. Everybody was riding on the assumption that we had all these injections of dollar borrowings.

And the fact that we were supporting the cedi meant that private actors could also borrow internationally because our inflation and exchange rate depreciation were controlled and reasonable. So, the real cost in dollar borrowing was minimized.

But for some crazy reason, the government then decided to break with the established tradition of going to the international capital markets once a year. Instead, they decided to go a second time within three months and started talking to investors around June 2021 about borrowing another US$3 billion.

In the face of skepticism, this was quickly brought down to US$2 billion, and then to $1.5 billion, sending ripples through the market. People started asking - What is going on in this country? Why are they borrowing so much? Investors started to take a good look at the books and realized that Ghana had become very exposed. The proportion of tax revenues allocated to debt service had exceeded 50%. The public wage bill was also around 30%.

So, there was no real fiscal room left, and the country was effectively playing a Ponzi scheme. We were bringing the money in from overseas and then recycling it. When investors saw that, everything went haywire. The spreads on Ghana’s bonds got much bigger - it was unbelievable. Around September of that year (2021), it was clear that Ghana had lost the confidence of the market that it had taken for granted.

Management of confidence was no longer a sufficient economic policy. In October, the government backed down on issuing the new bond, and that destroyed everything. Once it withdrew its plans to raise funds, it became clear that something bad was going on.

Around that time, the government went to Parliament, to try and introduce a very expansionary budget, based on enhanced revenue measures because they were not willing to back down on continued expansion of public financing. They wanted to borrow as much as they could, albeit not internationally. They introduced obscure revenue-raising measures, one of which was called the E-Levy.

The idea is that every time you transfer money on an electronic medium, you have to pay a tax. People had not seen this happen before in our history, and asked: Why should I give the government money just because I’m giving my mother money? This is a country where there are a lot of informal payments because that’s how the social system works. Everybody has 10 dependents for whom they’re paying things like school fees.

So, with this tax, they felt it and didn’t understand why every time they sent money to their mom, their aunt, their niece, or their nephew, they should have to pay a tax to the government. What has the government done to earn that tax? There was huge confusion and apprehension.

Let me add - after the 2020 elections, we have had a split Parliament. For the first time since 1979, Parliament was no longer a rubber stamp. The budget that was taken for granted in previous years became a matter of contest and debate. So, for three months, we had real uncertainty around whether the budget would be passed. Remember that this government had hinged its entire economic program on managing confidence.

Every aspect of confidence was under attack. All of a sudden, money started to leave the country, which had a huge impact on inflation and exchange rate dynamics. Eventually, the government, which had sworn never to go back to the IMF, had to go to them in July 2022, after an intense effort to raise funds from all kinds of other sources had failed.

At one point, the government was considering a 250 million Euro loan from a syndicate of private banks at a cost of roughly 25%. With the decision to go to the IMF made, the government threw everything in. They brought to bear their massive international reputational arsenal to try and fast-track the process.

The government of Ghana even bargained its UN Security Council seat for significant political leverage in Washington, to get an agreement for its provisional IMF program against all expectations on December 13, 2022.

What does this all say about development models in Ghana and more largely, in Africa? With the cumulative effects of COVID, the Russian invasion, inflation, and food security, what is the best way to rethink development models in middle-income African countries like Ghana?

We face a big vacuum now because the two consensuses that defined the global development paradigm are under threat. First, the Washington Consensus is more or less extinct. The idea that we have some clear ideas about macroeconomic orthodoxy, which if governments followed would make them robust and resilient is no longer really there.

The second is the Paris-Accra Consensus around international assistance and aid, which the world has also more or less jettisoned. In the intersection of those two vacuums, is the Ghanaian and African situation.

This means we have growing vulnerabilities. Nigeria is an example. I was looking at the recent budget, where they are talking about a 20 trillion Naira government budget on revenue of 10 trillion Naira. That doesn’t work, unless you’re the US and can print dollars, trading off your fiscal deficits for global stability of the dollar because you don’t want to rein in dollar circulation and constrict liquidity in the world’s only reserve currency.

The US is in a unique situation where you can have ridiculous debt numbers. Japan’s high debt numbers, on the other hand, are due to an incredible savings culture, which does not apply to Ghana. In a country where you have a mono-currency like Ghana or Nigeria, with a weak domestic savings culture, this scale of fiscal deficit is frightening. These vulnerabilities have arisen because we don’t have a clear macroeconomic orthodoxy anymore.

When I look at the IMF negotiations with Ghana this time around versus the 1980s, there’s a stark difference. In the 1980s and 90s, there was greater policy certainty. Whether or not that certainty was right is a completely different debate, but there was a certainty that we understood what a country had to do for it to be considered macroeconomically orthodox.

There was then a period when we thought there’d be a new Beijing consensus, around state capitalism and the developmental state. Scholars like Ha-Joon Chang were pushing these theories, but they never really materialized. So, we have a serious lack of clarity today, from a normative standpoint, about how countries should run their economies in a way that builds resilience and robustness, and limits vulnerabilities.

Second, there is some confusion about the role of the international community in bailing out countries. What specific responsibility does the rest of the world have, if a country follows the rules, assuming there are such rules, and still falters macroeconomically? Those two vacuums are huge.

So, how far should we blame Ghana for macroeconomic incompetence, and against what yardstick? Domestically, most people blame the government for having bungled the economy. Internationally, most people subscribe to the government’s position that the causes were COVID and Ukraine. But we know for a fact that it was not primarily COVID and Ukraine.

First, we know how much money the government spent during COVID and can estimate its direct contribution to the fiscal deficit. It wasn’t very significant in the broader scheme of things. Secondly, Ghana is one of the countries in Africa that’s least exposed to Ukraine and Russia. The effect of Ukraine and Russia on us is indirect, through global commodity chains and imported inflation.

But that’s affected most countries more or less the same. The only reason why Ghana is worse off than Senegal, Kenya, Uganda, or Tanzania, and must do a major debt restructuring, both domestic and external, is because it has more vulnerabilities.

Its pace of debt accumulation was far more rapid and its cost of borrowing was much higher. Its appetite has also been bigger for investing in large public programs with virtually non-existent monitoring and evaluation safeguards, leading to severe budget overruns.

I know it doesn’t answer your deeper question as to how we organize a small economy that is more resilient in a volatile world economy, but we don’t have the accepted yardsticks anymore. In the past, if you subscribed to the Washington Consensus, then the West was responsible for papering over the cracks. If you subscribed to the Soviet model, then the Soviets were responsible.

Now, the whole world is responsible, but it’s not entirely clear what exactly it’s responsible for. Is it responsible, for instance, for creating conditions in which when a country like Zambia goes bankrupt, it shouldn’t take two years to figure out what to do about it?

When we look at the broader need for climate action, the need for reduction in greenhouse gas emissions, what do you see as the pathway for countries like Ghana that have significant oil and gas reserves? What might be the timeframe for them to manage that exposure? How might it best be managed, given that countries like Senegal, are just starting down a similar path?

First, Ghana has overrated its potential oil reserves, and production capacity which today is far lower than the estimates. In 2019, when Ghana was exiting the IMF’s tutelage, the government sought to validate the soundness of that choice by pointing to an imminent production volume of 500,000 barrels of oil a day.

But today, we are only doing 150,000 barrels a day and this figure is falling. Though there’ve been new investments to try and revamp the infrastructure, it eats into the revenue, because every time Ghana needs to increase its oil production, massive additional investments are required, with tax implications. Especially in relation to capital expenditure.

This means that Ghana’s revenue from oil is now about US$1.3 billion a year, in a country that typically borrows US$3 billion in a single go in the Eurobond market. The largest oil company has seen its total taxes fall from about $313 million in 2014 to just about $124 million today. Consequently, the transformative impact of petroleum is far from materializing.

Taking a more Pan-African view to your question, given Africa’s insignificant contribution to greenhouse gas emissions, we should set Africa’s contributions to emission reductions against Africa’s growth prospects. If Africa was to give up all its carbon emissions, it wouldn’t help the world very much. But if the world was to give Africa a somewhat bigger carbon budget, Africa’s growth prospects could improve massively due to a short-run, transitional, competitive advantage as certain investors look to arbitrage low carbon prices globally.

And when, as a result of growth, we might start to contribute more GHGs, we won’t emit much in the end because of new capacity for green growth. Right now, Africa doesn’t have this capacity, since the green economy requires more sophistication in macroeconomic management, infrastructure, and institutional design.

For instance, to do the circular economy well, you need to build massive reverse logistics across the economy. I’ve lived in Accra where trying to do recycling properly would require wholesale changes to the way local government works. We’ve designed our current sanitation program, including landfill management, rates, and comparative costs, in such a way that we need a fundamental redesign of governance systems, not just business models, to even begin exploring net zero.

We need massive institutional reforms for a country like Ghana to become green and we don’t have the resources or capacity now, and the incentives to accumulate them don’t exist. People say we have the advantage of backwardness and can leap-frog. But I don’t see any advantages - not with the way that the new green economy is being designed globally.

I’ll give you an example. Take printed circuit boards, as a subset of electronic waste, and look at how you recover gold and the like from them. If you work out the economic numbers, it’s not surprising that in Nigeria, no one will invest in advanced precious minerals recovery from e-waste.

Informal markets can do it at a low cost, but this leads to massive pollution. Why? The increased miniaturization of printed circuit boards leads to less precious minerals found in e-waste, which is escalating the technological requirements to recover the metals.

If I cannot recover precious minerals from the e-waste, the business model for recycling doesn’t work. I need to extract the gold, platinum, and palladium with increasing efficiency in order for me to spend the money on the non-recyclable part of the waste, which takes sophisticated capacity to recycle.

The investment decisions and talent availability for going in such a direction are highly responsive to smart policy, efficient complementary institutions, and risk management as payoffs can be very long-term.

The kind of economic model you need to facilitate such shifts requires institutional levers that poor countries don’t have. When we look at the numbers, the comparative advantage of Ghana investing a lot in its institutions to go green, versus following a brown industrialization model for a while to build that capacity and create jobs is a no-brainer.

What is the net benefit to the rest of the world of Africa removing its 3% to 4% of emissions? What does Africa get in return? Everyone talks about “climate finance”, but there’s no such thing in practice. Either they’re going to increase aid overall, and then allocate more to climate, or shift what they are currently giving in humanitarian and other aid to climate.

So how will Ghana pay for greening? Or any other country in Africa? The alternative is to boost general investment in Africa, which doesn’t require major institutional changes (because we already have the absorptive capacity to take more money), and then hope that as Africa becomes richer, it can start greening its economy. I don’t see any other trade-off. The numbers just don’t add up.

Ultimately, however, even the green economy needs some clear standards to facilitate resource flows, whether in aid or investment, to low-capacity regions like Africa based on perceptions of investment readiness. But as I have said above there is considerable uncertainty, even a vacuum, about and around these norms, constricting the flow of the necessary capital.

A final question about the reform of multilateralism: In this global context, how do you think multilateral institutions can be best reformed in order to better serve the interests of African countries?

It’s a hard question. On the whole, in this crisis, the IMF has been on the side of poor countries, in part to show that the existence of the IMF paradigm makes sense. So, there is a rush for validation and vindication of the international multilateral model, with the IMF, UN, and others having to prove that they are relevant.

However, I don’t think the rich world is ready for multilateral institutions to take on a stronger economic mandate. For instance, I’m not convinced that the United States government feels that massive reallocations of SDRs and the empowerment of the IMF is the path to follow, nor do I think the Europeans are going to agree to this anytime soon.

And when other multilateral institutions try and compete, they find out very quickly, that the EU plays a dominant role across the global scene. There are too many global corporations that would rather do what the EU says on something like privacy or data protection (cue: GDPR) than what the ITU or WHO says.

In such a context, the question then becomes, what will developing countries do? In my experience, they will go where the money is. They would rather do deals with the EU using templates like everything but arms (EBA), EPA, and various EU-AU arrangements, than invest much in the WTO, in matters of trade for instance.

I don’t see the WTO getting back to the stature of another Doha development round anytime soon; so, forget global trade as one of the pathways out of the current malaise. The EU has been way more effective in the way it deploys its lobbying arsenal across the Pan-African institutions and individual countries. I don’t see an African country that wants to go and bat instead for the WTO to push for the prioritization of another global trade round (there hasn’t been a breakthrough WTO agreement since 2013).

Even the WTO’s trade appellate structure is now paralyzed; an EU-dominated alternative mechanism is gaining ground. Will African countries invest much in resuscitating the WTO? I don’t believe that.

When I look at specific arrangements, I see increasingly that it is not multilateral but plurilateral arrangements that work—such as doing mega trade deals with big regions like Asia where there’s a lot of harmonization of rules. I’m in the camp that believes that the medium-term future of the world is plurilateral, containing multiple arrangements that find a common interface with each other.

I don’t think the traditional multilateral model will continue to be influential going forward, because they just don’t have the resources. And they lack the trust of both the big countries and the small countries. So, I’m very doubtful of the strength of multilateralism over the next decade.

Perhaps, the worst thing about this pessimistic view is that it also constrains the prospects, in the short term at least, of addressing the breakdown of the global development consensus I talked about, the downstream effects of which are being felt across Africa, and certainly in Ghana.