Ghana’s inflation soared to 54% by the end of 2022, accompanied by a government debt default and a significant weakening of the Ghana cedi.
This severe economic downturn resulted from a combination of factors, including persistent fiscal pressures and the government’s inability to secure external financing. The rising cost of living impacted all Ghanaians, making everyday essentials more expensive. Political factions offered differing explanations, with some attributing the crisis to global events like COVID-19 and the Russia-Ukraine war, while others pointed to six years of unchecked fiscal spending.
The economic challenges of 2022 fit into a pattern of increasing fiscal strain in Ghana. By the end of 2021, interest payments on government debt became the largest budget item, consuming GHS 33.52 billion. This surpassed government employee compensation, which stood at GHS 31.7 billion. Combined, these two categories absorbed 93% of the total revenue of GHS 70 billion, forcing the government to borrow GHS 41.3 billion to maintain its programs. This meant the state spent about 60% more than it earned, pushing Ghana's interest-to-revenue ratio above 48%, significantly higher than the 25% benchmark for emerging market stress.
During the parliamentary debate on the 2022 Budget, the National Democratic Congress (NDC) minority, led by Haruna Iddrisu, questioned the government’s revenue forecasts. They criticized the ruling New Patriotic Party (NPP) administration for not acknowledging the underlying economic issues. The government had projected expenditures of GHS 135 billion against a revenue target of GHS 100.5 billion, a 21% increase in spending. Achieving the projected 40% revenue increase would have required a much higher average inflation of 31% and an exchange rate of GHS 8.70 per US dollar from GHS 6.15 per US dollar.
The government's continued reliance on ambitious revenue targets that often fell short created a cycle of increased borrowing. This approach became unsustainable when investors shut out Ghana from the Eurobond market in January 2022. Subsequent credit rating downgrades further complicated matters. This forced the Bank of Ghana to intervene, expanding financing to suppress bond yields and ensure the government could meet its obligations. This expansion of money supply, often called “money printing,” led to an even weaker currency and rapid depletion of foreign exchange reserves. This dynamic typically continues until the government acknowledges the need for debt reduction, a process known as deleveraging. Deleveraging means slowing debt growth compared to income growth until interest costs reduce and the debt-to-GDP ratio improves. The initial step usually involves fiscal tightening, which means increasing taxes and cutting spending.