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World Bank broke its own rules over high-interest loans to Ghana

Lender accused of guaranteeing profits for speculators

The World Bank has been accused of helping to fuel a new debt crisis in Ghana after it was revealed it has broken its own rules against lending to countries with high-risk debts. The Bank gave a $400 million guarantee to a high-interest private loan to the country, the first such guarantee it has given for 15 years.

The revelation comes in a new report on Ghana’s debt released by UK and Ghanaian groups including Jubilee Debt Campaign (UK) and the Integrated Social Development Centre (Ghana), ahead of elections in the country in December, and just weeks after the country sold $750 million of Eurobonds at an interest rate of 9.25% with a maturity of just 4-7 years.

Independence Arch in Accra, capital of Ghana (Joe Ronzio / Flickr)

Independence Arch in Accra, capital of Ghana (Photo: Joe Ronzio/Flickr)

The report, The fall and rise of Ghana’s debt: How a new debt trap has been set, shows how Ghana is in a new debt crisis just a decade after having significant amounts of debt cancelled by international lenders. While debt cancellation in 2004 and 2005 gave the country breathing space to increase spending on public services, the commodity price crash and currency shocks since 2013 have seen debts rapidly building up once again.

Ghana’s new debt crisis is the result of a gradual increase in lending to the country following the discovery of oil and the boom in commodity prices since the mid-2000s. More money was then borrowed to try to cope with the impact of the commodity price crash since 2013, whilst the Ghanaian currency, the cedi, has halved in value against the dollar, increasing the relative size of the external debts. Around 30% of government revenue is now being spent on external debt payments each year. Such huge payments are only possible because more money is being lent by institutions such as the IMF to pay private lenders, as happened in Greece after 2010.

In October 2015, seven months after the IMF and World Bank assessed Ghana as at ‘high risk’ of not being able to pay its debts, the World Bank guaranteed $400 million of payments on a $1 billion bond sold to private speculators under English law, with a 10.75% interest rate. Under World Bank rules, it is not meant to provide such guarantees to countries assessed as at high risk of debt distress. The high interest rate and World Bank guarantee mean that the speculators will still make money even if the Ghanaian government never repays any of the principal, and only some of the interest.

In response to the debt crisis, Ghana, as part of an IMF programme, is planning to cut public spending by 20% per person on 2012 levels by 2017. All the high interest lenders to Ghana continue to be paid in full. Elections will be held in Ghana on 7 December 2016.

Sarah-Jayne Clifton, Director of the Jubilee Debt Campaign, UK, said:

“The underlying causes of Ghana’s new debt crisis are that neither borrowers nor lenders have learned from past mistakes, and that its economy remains reliant on primary commodities, leaving it extremely vulnerable to the recent global commodity price crash. The people of Ghana should not have to suffer through yet another debt crisis while lenders who speculated on their economy reap huge profits out of high interest loans guaranteed by the World Bank.

“Ghana’s debts need to be reduced or restructured to escape another prolonged debt trap, while regulation of lending, more responsible borrowing, and tax justice are essential to end this cycle of debt crises once and for all.”

Bernard Anaba from the Integrated Social Development Centre in Ghana, said:

“Debt should not be a bad thing, but if money is borrowed in the name of poor people, not spent well, and people are slapped with austerity as a result, that is a gross injustice.”

The World Bank further broke its own rules by giving 93% of its finance to Ghana as loans between May 2007 and February 2015, at a time when it assessed the country as at medium risk of not being able to pay its debts. Under World Bank rules, only 50% of finance to medium risk countries is meant to be loans, 50% grants.

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Jubilee Debt Campaign is a company limited by guarantee, number 3201959
Jubilee Debt Campaign's registered charity number is 1055675