Why Ghana's Proposed Loans Act Could Be the Fiscal Game-Changer the Country Needs

ACCRA -- Ghana's Finance Minister, Dr. Cassiel Ato Forson, has signalled the government's intention to introduce a new Loans Act, a piece of legislation designed to impose stricter controls on public borrowing and demand that every cedi of debt contracted delivers tangible returns for the Ghanaian economy.

It is a proposal that arrives at a critical juncture. After surviving its worst economic crisis in a generation -- a sovereign default in 2022, an agonising debt restructuring process, and the stringent conditions of a US$3 billion IMF Extended Credit Facility -- Ghana now faces a question that will define its economic trajectory for the next decade: can the country build permanent institutions to enforce fiscal discipline, or will it repeat the boom-and-bust borrowing cycle that brought it to its knees?

The Road That Led Here

To understand why this legislation matters, one must first understand the borrowing path that made it necessary.

In 2006, Ghana's public debt stood at a remarkably low 26 per cent of GDP. The country had just benefited from the Heavily Indebted Poor Countries (HIPC) initiative, which wiped clean decades of accumulated obligations. It was, by any measure, a fresh start.

That fresh start did not last. The issuance of Ghana's first Eurobond in 2007 opened the doors to international capital markets, and successive governments walked through those doors with increasing enthusiasm. Between 2006 and 2023, public debt did not merely grow -- it tripled, climbing from 26 per cent to a staggering 79.1 per cent of GDP.

The drivers of this accumulation are well documented: chronic fiscal deficits year after year, expensive energy sector bailouts, an ever-expanding public sector wage bill, and -- perhaps most critically -- the complete absence of any legal framework that tied borrowing to productive investment or set hard limits on how much the state could owe.

Ghana's Public Financial Management Act of 2016 envisaged sanctions for fiscal misconduct, but it never established binding debt ceilings. It never required that loans be channelled into projects that would generate the economic returns needed to service those loans. The borrowing continued, largely unchecked.

What the IMF Programme Has Achieved

Credit where it is due -- the IMF's Extended Credit Facility programme has delivered meaningful results since Ghana entered it in the wake of the 2022 default.

The numbers tell a story of stabilisation. Economic growth exceeded expectations in 2024, reaching 5.7 per cent. Inflation, which had spiralled out of control during the crisis, has been wrestled back within the Bank of Ghana's target band. International reserves, which had fallen to a dangerously thin 1.6 months of import cover in 2023, have been rebuilt to 3.3 months and are projected to reach over four months by 2030.

Most significantly, Ghana posted a primary fiscal surplus of 1.5 per cent of GDP in 2025 -- its first in several years. Public debt is on a downward trajectory, with projections showing it could fall to approximately 46 per cent of GDP by 2030 if current policies hold.

Revenue mobilisation is also improving, projected to rise from 15.2 per cent of GDP in 2023 to 17 per cent by the end of the decade, supported by tax administration reforms and restructuring of the VAT system. Capital expenditure -- the spending that actually builds roads, hospitals, and schools -- is set to increase from 2.3 to 3.4 per cent of GDP.

These are encouraging figures. But they come with a significant caveat.

The Election-Year Problem

Buried within the otherwise positive trajectory is a data point that should give every Ghanaian pause. In 2024 -- the year of Ghana's general election -- the primary fiscal balance deteriorated sharply, swinging to a deficit of 2.3 per cent of GDP. This was a dramatic reversal from the 0.3 per cent deficit recorded in 2023.

Election-year fiscal slippage is not a new phenomenon in Ghana. It is, in fact, one of the country's most predictable economic patterns. Spending surges in the months before polling day, revenue collection softens, and the fiscal accounts take the hit. The pattern has repeated itself across multiple election cycles.

The rebound to a surplus in 2025 is reassuring, but it also proves the central point. Fiscal discipline can be restored -- but it can also be abandoned the moment political incentives push in the opposite direction. This is precisely why a permanent legislative framework matters more than temporary programme conditionality.

Where Ghana's Borrowed Money Actually Goes

Perhaps the most troubling finding from recent economic analysis is not how much Ghana borrows, but what it borrows for.

Consider this: in 2025, interest payments on existing debt consumed 4.3 per cent of GDP. Capital expenditure -- the spending on infrastructure, education facilities, healthcare, and productive investments -- received just 2.3 per cent of GDP. For every cedi the government invested in building the country's future, it spent nearly two cedis servicing the debts of the past.

The public sector wage bill, running between 5.3 and 5.7 per cent of GDP, remains the single largest spending category. When you combine wages and debt service, the picture becomes clear: the vast majority of government expenditure goes toward paying people and paying interest, with relatively little left over for the investments that drive long-term economic growth.

Econometric analysis reinforces this concern. Studies using Ghana's data from 2000 to 2024 have found that neither capital expenditure nor recurrent expenditure shows a statistically significant positive effect on GDP growth. More pointedly, debt does not appear to cause growth in Ghana's case. In plain terms, the country has been borrowing extensively for over two decades, and that borrowing has not translated into the productive outcomes that would justify it.

This is the strongest argument for the Loans Act's central requirement -- that every loan must be linked to high-impact, value-for-money investments with published cost-benefit analyses.

Can Legislation Do What IMF Conditionality Cannot?

The historical evidence reveals a clear pattern. During periods when Ghana has been under IMF programme supervision, fiscal outcomes tend to improve -- average deficits narrow by roughly 1.5 percentage points compared to non-programme years. External discipline works. The regular reviews, the quantitative performance criteria, the ever-present possibility of programme suspension -- these mechanisms produce results.

But here is the problem: IMF programmes end. And when they do, Ghana has historically reverted to deficit spending with remarkable speed. The most recent example is instructive -- within four years of the previous ECF programme concluding, Ghana was in sovereign default.

This is the core economic logic behind the Loans Act. If a domestic legal framework can replicate even a portion of the disciplining effect that IMF conditionality provides -- and do so on a permanent basis, not just for the duration of a three-year programme -- it would represent a genuine structural improvement in Ghana's fiscal architecture.

Cross-country evidence from a panel of ten African nations supports this logic. Research shows that the fiscal balance is the most robust and statistically significant determinant of debt dynamics. Every one-percentage-point improvement in the fiscal balance is associated with a 2.4 to 3.0 percentage point reduction in the debt-to-GDP ratio.

Without a structural anchor, statistical tests confirm that Ghana's debt follows what economists call a "non-stationary process" -- meaning it drifts without converging to any particular target. It is a random walk, and without intervention, it will continue walking in whatever direction political winds blow.

Learning from Global Experience

Ghana is not the first country to attempt legislated fiscal discipline, and the global record offers both encouragement and cautionary tales.

Brazil's Fiscal Responsibility Law of 2000 succeeded in dramatically reducing subnational debt, but it has been increasingly circumvented at the federal level through creative accounting practices. Kenya's Public Finance Management Act established debt ceilings that proved too generous and too weakly enforced to constrain borrowing meaningfully. The European Union's Stability and Growth Pact -- designed to keep member states' deficits below three per cent of GDP -- was routinely violated by its largest members, including France and Germany, without meaningful consequences.

The success story that Ghana should study most closely is Chile. The South American nation's structural balance rule is widely regarded as the gold standard in fiscal legislation, and it succeeded not because of the elegance of its statutory language but because it was supported by three critical pillars: an independent fiscal council with genuine authority, a transparent and publicly understood methodology, and broad political consensus that the rule should be respected.

Five Elements the Loans Act Must Include

Based on the empirical evidence, economists have identified five essential design features that would give the proposed Loans Act the teeth it needs:

A legislated debt ceiling. A hard cap on public debt-to-GDP, set around 55 to 60 per cent, with an amber warning zone at 50 per cent. This provides meaningful constraint while preserving space for development borrowing.
A primary balance floor. The current IMF target of at least a one per cent primary surplus should be written into law, ensuring fiscal space for debt reduction continues even after the programme concludes.
A borrowing purpose test. Every loan -- whether domestic or external -- must be tied to a specific capital project accompanied by a published cost-benefit analysis. This directly addresses the evidence that Ghana's borrowing has not been productively channelled.
An escape clause with an automatic sunset. Severe economic shocks, such as a GDP contraction exceeding three per cent, should allow temporary suspension of the debt ceiling. But the suspension must expire automatically after two years, preventing crisis provisions from becoming permanent loopholes.
Independent oversight. The law must establish or empower a fiscal council with the statutory authority to monitor compliance, publish assessments, and publicly flag deviations. Without independent enforcement, the Act risks joining the long list of well-intentioned but ultimately toothless fiscal legislation.

The Window Will Not Stay Open Forever

Ghana finds itself at a genuine crossroads. The post-restructuring recovery is real. The IMF programme is delivering tangible results. Macroeconomic fundamentals are moving in the right direction. But anyone who has followed Ghana's economic history knows that these windows of opportunity do not remain open indefinitely.

The proposed Loans Act addresses a structural gap that has existed in Ghana's fiscal architecture for decades -- the absence of a binding, enforceable legal framework to govern how the state borrows and what it borrows for. The evidence from 25 years of data, from IMF programme performance, and from the experience of countries across Africa and beyond all point in the same direction: fiscal discipline matters more than any other factor in determining whether debt remains sustainable, and external conditionality alone cannot provide that discipline permanently.

The real test will not be whether Parliament passes the Loans Act. Laws are relatively easy to write and vote on. The real test will be whether the Act is designed with the enforcement architecture -- the independent oversight, the transparent reporting, the credible sanctions -- that separates legislation that transforms from legislation that decorates.

Ghana has been here before, standing at the threshold of fiscal reform with the wind at its back. What it does with this moment will determine whether the economic crisis of 2022 was a turning point or merely an intermission.

This article draws on economic analysis by Dr. Stephen Lartey, a development economist specialising in institutions, fiscal policy, and macroeconomic governance. The underlying research utilises World Bank WDI data, IMF ECF 5th Review findings (Country Report No. 25/343, December 2025), and econometric modelling spanning 2000 to 2025.