Ghana’s financial landscape is dominated by a single, powerful player: the government. Its insatiable appetite for borrowing, reflected in consistently high claims on domestic assets exceeding GH₵ 110 billion throughout 2024 and peaking at GH₵ 130.1 billion by December, is creating a challenging environment for private sector growth. This dominance effectively crowds out private businesses, limiting their access to crucial funding and driving up interest rates. The government’s borrowing activities, while intended to finance essential expenditures, have inadvertently created a financial bottleneck, leaving businesses struggling to secure loans and expand their operations. This dynamic raises fundamental questions about the long-term sustainability of Ghana’s economic model and the potential for achieving robust, private sector-led growth.
The mechanics of this crowding-out effect are straightforward. The government, perceived as a safe and reliable borrower, attracts significant investment from banks and financial institutions seeking secure returns. These institutions, flush with government securities, have less capital available to lend to private businesses. This scarcity of available funds creates a competitive market for loans, pushing interest rates higher. Consequently, businesses face a double whammy: limited access to credit and significantly increased borrowing costs. This situation makes it difficult for businesses to invest, expand, and create jobs, stifling the very engine of economic growth.
The impact of this government borrowing extends beyond just access to capital. The high demand for funds from the government sets a benchmark for interest rates across the economy. To attract investors, the government must offer competitive returns on its bonds, which in turn forces other borrowers, including businesses and individuals, to accept higher interest rates on loans. This ripple effect increases the cost of borrowing for everyone, impacting both businesses and consumers. For businesses, higher interest rates translate to reduced investment, scaled-back expansion plans, and potentially job losses. For consumers, it means higher prices for goods and services as businesses pass on the increased cost of borrowing to their customers.
This financial squeeze is particularly acute for small and medium-sized enterprises (SMEs), which are the backbone of Ghana’s economy and a major source of job creation. These businesses, often lacking the financial clout of larger corporations, are disproportionately affected by the limited access to credit and high interest rates. Their struggles to secure financing hinder their ability to invest, innovate, and expand, ultimately limiting their contribution to economic growth and job creation. This creates a vicious cycle where the very businesses that are crucial for driving economic prosperity are hampered by the government’s borrowing practices.
The government’s reliance on domestic borrowing is driven by the need to finance essential services, including public sector salaries and critical infrastructure projects. These expenditures are undoubtedly important for the functioning of the state and the well-being of its citizens. However, the overreliance on domestic borrowing to fund these activities creates an imbalance in the financial ecosystem. While government borrowing serves a legitimate purpose, it is essential to strike a balance that allows the private sector to thrive. Excessive government borrowing starves the private sector of the resources it needs to invest, expand, and generate economic growth.
The long-term implications of this imbalance are significant. A vibrant private sector is crucial for sustainable economic development. It is the engine of innovation, job creation, and wealth generation. When the private sector is stifled by limited access to capital and high borrowing costs, the entire economy suffers. Reduced investment, job losses, and slower economic growth become the norm. The government’s borrowing, while necessary to fund essential services, must be managed carefully to avoid crowding out the private sector and undermining the very foundation of a healthy and dynamic economy. Finding a sustainable balance between government borrowing and private sector access to credit is essential for Ghana’s long-term economic prosperity. This requires a careful recalibration of fiscal policy to ensure that government borrowing does not come at the expense of private sector growth. Only then can Ghana unlock its full economic potential and create a more prosperous future for all its citizens.
