Last week we published an article on how debt crises happen, focusing primarily on Ghana's current debt composition. We argued that Ghana has been increasing its debt rapidly, and the category of creditors it's been acquiring has made its debt more expensive and unsustainable. This situation explains why Ghana has approached the International Monetary Fund (IMF) for a bailout. Since the late 2000s, Ghana’s debt composition has changed from being composed mainly of multilateral organisations (like the World Bank and IMF) and the Paris club to more commercial loans from the capital market.

Key takeaways:

  • Domestic debt in Nigeria and Ghana has been increasing at an alarming rate following the influx of investment into the continent in the early 2000s. Beyond the domestic debt stock, both countries' near-debt crisis is also driven by the quality of creditors. 

  • Nigeria’s debt has been heavily funded by the CBN’s ways and means which fueled the country’s already rising inflation and put the bank’s independence at risk. 

  • On the other hand, Ghana has been relying on foreign investors to buy its securities, which puts its foreign reserves and obligations at risk—especially if the foreign investors exit. 

This shift implies that Ghana's loans are now majorly commercial. Granted, these loans are easier to obtain because they have fewer conditionalities. However, they can be costly—especially when the country is facing severe macroeconomic downturns like Ghana is at the moment. The result, therefore, has been a worsening credit risk and the possibility of a debt default. 

But I admit that the story was incomplete because it focused more on foreign borrowing with barely any discussion about domestic borrowing. This article brings the other side of the story—how domestic borrowing, especially in the capital market, can make a country’s fiscal position precarious. To explain this, we’ll use Nigeria and Ghana as case studies because even though Ghana is seeking a bailout from the IMF, Nigeria’s debt situation is also quite dire.

By the end of this article, we should be very clear about why