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.
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