African leaders are in Washington this week for the White House–sponsored U.S.–African Leaders Summit, a meeting of nearly 50 African heads of state meant to promote trade and investment. But for Ghana, the optimism surrounding the conference and a second U.S. aid compact have been drowned out by economic troubles at home.
One of West Africa’s most stable and democratic countries, Ghana has seen its economy expand over fourfold since 2004, leading to a near halving of the poverty rate. Optimism over Ghana’s growth was again compounded in 2007 when large deposits of oil were discovered off the West African country’s coast. In 2010, when oil started flowing, some hoped that Ghana’s institutions and experience with other commodities would shield it from the corruption and fiscal mismanagement that has plagued other oil-rich countries.
Ghana hasn’t proved the exception. The country’s leaders have capitalized on the anticipated oil revenue by taking on more debt, issuing the first overseas sovereign bond in 2007. This year the International Monetary Fund (IMF) projects that Ghana’s debt load will have more than doubled from its level in 2007 to nearly 66 percent of gross domestic product (GDP). Meanwhile, falling oil revenue, capital flight, and a declining currency have made fiscal pressures unbearable, forcing the government to look to the IMF for help.
Ghana’s fiscal troubles are indicative of what may come for other African economies. Over the past decade huge deposits of oil and other natural resources have been discovered across the continent. These countries should resist the temptation to spend their newfound spoils before they are extracted. Indeed, the IMF and Standard and Poor’s have both warned this year that rising debt levels, fiscal imbalances, and increasing servicing costs could have negative consequences on African economies.
Investors have been paying attention to large resource deposits in four countries in particular—Kenya, Uganda, Tanzania, and Mozambique. Of these four, only Mozambique has remained fiscally prudent; the other three increased their debt loads by 7 percent to 12 percent of GDP between 2007 and 2012. According to the Index of Economic Freedom, co-published by The Heritage Foundation and The Wall Street Journal,government spending has been eating away at economic freedom in all four countries except Uganda since 2007.
African countries, especially those endowed with newly discovered resources, should tread lightly lest they follow Ghana’s lead. This week’s summit may be a time to celebrate the continent’s “rise.” But if leaders aren’t careful, future trips to Washington could prove less celebratory.
