Is Ghana the First Sign of the Next Global Debt Crisis?
I have previously written on this website about the crushing debt crises that characterize the underdeveloped world. You can find that discussion on the Development Page of this website – with the title “Another Global Debt Crisis May Be Coming Soon.” (https://www.samuelcohn.net/global-debt-crisis)
These debt crises occur in regular cycles. The earlier essay discussed historical econometric work in both traditional conservative monetary economics (Kenneth Rogoff and Carmen Reinhart) and Marxist sociology (Christian Suter) that both show international financial debt crises that occur every twenty to thirty years. Just in terms of ordinary calendar timing, we are due for another one. These crises are always based on rich countries loaning more money to poorer nations than those poor nations can afford to pay. The levels of debt in developing nations becomes higher than the economies of those nations can possibly sustain. There is a financial wipeout that leads to huge losses for banks in the Global North and roughly a decade of crippled economic growth in the Global South.
Current statistics on levels of indebtedness in the Global South suggest that this train is going to arrive right on time. UNCTAD has recently reported (unctad.org) that global public debt has ballooned from 17 Trillion US dollars in 2002, to 92 Trillion US dollars in 2022. Global debt has risen fivefold. Global GDP has only risen threefold. You can not pay for a fivefold increase in debt with a threefold increase in the ability to generate economic value. The rate of debt increase has been twice as fast in the Global South as it has been in the Global North. External debt represents over 60% of the GDP of the developing world.
Worse – global debt is denominated in the currency of the rich nations. Debt payments have to be made in the currency of the original loan. The foreign currency used to pay the interest and principal of loans comes from exports. UNCTAD reports that in 2021, debt payments in the Global South were 112% of what the poor countries were able to earn by exporting goods and services. In simple terms, the poor countries are not earning enough to make even minimum payment on their debts. This has been the case since 2018. Financially, this is not sustainable.
The New York Times reported on September 18 of this year, that Ghana was in a state of crisis because of its debt. The government is essentially bankrupt. Development projects have stopped because contractors have not been paid in months. School teachers are not being paid. Doctors and nurses in government hospitals are not being paid. Ghana has had to go to the IMF for the 17th time since 1957 to ask for emergency financing to avoid defaulting on its previous loans. Ghana was debt free in 1954. Since 1957, it has never been able to get out of debt.
What makes this situation particularly ominous is that Ghana is one of the best administered governments in Sub-Saharan Africa. It also had one of the most promising rates of economic growth. Ghana essentially exports cacao, with smaller amounts of gold and oil. While all African countries struggle to convert economies based on agriculture and extraction into manufacturing economies, Ghana has been more successful in diversifying its economy than has much of the rest of the continent.
None of that counted for much.
Economies in the Global South are fragile by nature. Adverse price trends in commodities can gut an agricultural economy. Shocks to demand can have the same awful effects. Ghana was hit by low prices in cacao combined with the dropoff in economic activity that was associated with the COVID pandemic. This would have been survivable with lower rates of external debt. However, Ghana was mortgaged up to the hilt with loans made under the assumption that the good times associated with its previous high rates of economic growth would continue. When the short term disruptions hit – which short term disruptions always do – Ghana was in no shape to financially survive these.
Ghana is hardly unique in this regard. Reuters reports that the G-20 met this July to discuss the impending debt crisis in the Global South. One of the urgent cases being discussed was Zambia which has been in default for the last three years. The G-20 was incapable of settling on a solution. (https://www.reuters.com/world/un-agency-says-no-breakthrough-debt-talks-g20-grave-concern-2023-07-17/)
Note that not all countries with unsustainable debt levels relative to their GDP are underdeveloped. There are relatively wealthy nations with dangerous-looking levels of public debt as well. Here is a table of the countries with the highest levels of debt relative to their GDP in 2023:
The economy of Singapore might be robust enough to carry this extreme level of external indebtedness. Japan, although it has low unemployment now, and Italy and Greece, with much higher levels of current unemployment, all have fundamental structural problems with their economies. These limitations may not be consistent with riding out external shocks. The Sudan, Lebanon and Eritrea are war zones. Venezuela is a poorly run oil economy. Cape Verde is a well-run oil economy with the same reputation for outstanding economic management that has been associated with Ghana.
The reader can see that debt problems can affect nations that are rich and nations that are poor, nations that are at peace and nations that are at war. Regardless of the competence of a country’s leadership team, external shocks have the potential for wrecking an economy that is in a high state of debt based fragility.
Rogoff and Reinhart, and Suter all argue that major global recessions come from crises in international debt. The difficulties in Ghana and other highly indebted poor nations suggest that the trigger point for the next worldwide economic slowdown may be coming sooner than we would like to think.
Of course, it would have been nice if the richer nations had done their underwriting of debt a little more carefully. But historically during flush times, the banks in wealthy nations lend and lend and then they lend some more. Many bankers have a hard time turning down the syndication fees and short-term profits that come from the initiation of large-scale international loans.
In an ideal world, poorer nations would choose to limit their internal spending to avoid becoming dependent on foreign creditors.
In an ideal world, banks would reduce their exposure to high-risk economies in which short term shocks can cripple their ability to pay.
But the world has neither ideal creditors not ideal debtors.
So, the world gets decade-long financial crises that immiserate millions of people in rich and poor countries alike.
The next crisis is probably coming, so plan ahead.