Last week we revealed that the World Bank broke its own rules to guarantee part of a high-interest – 10.75% – loan to the Ghanaian government.
Today, in an interview for the BBC World Service, the World Bank regional director has admitted that the Bank ‘waived’ its own rules to give the guarantee, but he then went on to make some misleading claims to justify this decision.
In March 2015 the IMF and World Bank assessed Ghana as at high risk of not being able to pay its debt, moving it up from the moderate risk assessment of the previous eight years. Seven months later the Ghanaian government borrowed $1 billion from international speculators, committing to pay 10.75% interest every year for 15 years, and the World Bank guaranteed $400 million of the payments.
The high interest and World Bank guarantee means that if Ghana pays the interest until 2024, then never repays anything else, including the principal, the speculators will still make a profit. World Bank rules are not to issue any such guarantees for countries assessed by them as at high risk.
The Bank has now justified the breaking of its rules by saying that the money from the loan was used to pay off debts owed locally at high interest rates. However, these “domestic” debts owed by the Ghanaian government are in the local currency, the cedi, rather than dollars. This makes a huge difference because the Ghanaian government controls the creation of cedis, and inflation in cedis reduces the size of the debt each year.
In contrast, to pay debts in dollars Ghana has to earn dollars from the rest of the world, through exports. And the relative size of debt owed in dollars can change rapidly when the cedi devalues against the dollar, as it has in recent years, falling by 50% against the dollar since the start of 2013.
The World Bank and IMF themselves say that the average real interest rate Ghana was paying on domestic debts in 2015 was 5.1%. So if Ghana borrowed the World Bank guarantee debt to pay off domestic debt, it doubled the interest rate they pay from 5.1% to 10.75%, and locked this in for 15 years. Furthermore, more debt is now owed in dollars, increasing the risk of the debt growing ever larger if the cedi continues to devalue against the dollar.
However, it is also misleading to suggest that the deal led to a reduction in Ghana’s debt. In 2015, according to the IMF and World Bank, Ghana’s total government debt increased from 71% of GDP to 78%.
Most fundamentally, the World Bank says they needed to guarantee the loan so Ghana could borrow to repay other debts. But there was another option – for Ghana to stop paying the high interest private external loans. The IMF says that when countries get into debt problems – as Ghana has because of the fall in commodity prices and rising value of the dollar – “debt restructurings have been too little and too late”.
The actions of the World Bank are ensuring that private speculators continue to make large profits out of Ghana whilst public spending is cut. The alternative is to stop bailing the speculators out, and force them to cancel some of the debt.
Read more
- World Bank broke its own rules over high-interest loans to Ghana, 9 October 2016
- REPORT: The fall and rise of Ghana’s debt: How a new debt trap has been set, October 2016