Africa: What Happens When an African Country Declares Bankruptcy?

There is a report from the international financial experts showing that a number of African countries are facing the real risk of becoming bankrupt.

For example, it is reported that Ghana which is facing severe financial difficulties due to its high both foreign and domestic debt obligations last desperately month had to seek for an immediate loan bailout of $3bn from the IMF. Ghana is now the world’s most indebted country to the IMF.

Ghana’s National Debt in relation to her Gross Domestic Product (GDP) for the year 2023 stands at 98.7%. This percentage figure is up from the 88.7% that was recorded in the year 2022 and also from the figure of 79.6% that was recorded in 2021.

It is reported that in Ghana, the government owed $63.3 billion at the end of 2022 not just to foreign creditors but also to homegrown lenders — pension funds, insurance companies and local banks. This debt figure is definitely going to be much higher in 2023.

It is further reported that the Ghanaian government owes independent power producers $1.58 billion and is in danger of experiencing widespread blackouts.

The cause of this Ghanaian crisis is that the government of President Nana Akufo Ado borrowed extensively from both international and domestic lenders to undertake its programs, pay huge debts to independent power producers, and make up the revenue shortfall from abolishing and reducing 18 taxes and levies.

The real danger now is that Ghana will most likely not be able to meet its repayment obligations to the international lenders when the Ghana’s Bond falls due in May 2024.

This dire situation and the risk of going bankrupt is not only faced by Ghana, but also with others like Tunisia, Zambia, Kenya and Egypt.

The common thread that runs through as the major cause of this crisis in all the countries that are starring at going bankrupt is the excessive borrowing that governments do in order to fund government spending on public projects and lack of frugality in government expenditure which in most cases is exercibated by financial indiscipline and outright corruption in government.

What happens when a country goes bankrupt or defaults?

For ordinary people, a default means higher food costs caused by inflation, as the government prints money to cover its costs. It means that there will be increased unemployment, as businesses and government agencies cut spending. And it means reductions in delivery of essential services by the government such as health care and education. All this inevitably increases political pressure on the government to resolve the difficult as rapidly as possible, because government’s don’t enjoy much latitude to declare a country bankrupt due to the financial difficulties being faced.

Actually a country cannot simply declare bankruptcy as a private business might do. Instead, when the government is faced with the situation of bankruptcy or of not being able to meet both its foreign and local debt obligations, what it does is to start a restructuring process, meaning renegotiating the contract terms of its debt with all its creditors, sometimes individual, sometimes with groups.

One of the first steps is usually to call in the International Monetary Fund, which works with the World Bank so that the affected government can agree on a plan to help a country get its finances working again which involves often providing emergency funding.

This is exactly what the Ghana government did in August this year with the IMF extending to Ghana an emergency loan facility of $3bn. Many other African countries have done this and continue to seek the bailout of the IMF.