Ghana’s economy has been enjoying a high rate of economic growth for the past decade. In 2006 the rate of growth exceeded 6%, and is forecast to increase during 2007. The spur for this growth can be attributed to rising commodity prices, fuelled by the expanding demand of a healthy global economy. Some are comparing today’s economic climate with the ‘golden years’ of the post war boom. It seems only fair that this time around the world’s poorest economies share in the spoils.

The result of over a decade of continual expansion for Ghana is that its economy is today 50% larger than it was in the mid 1990s. In order to continue to grow Ghana is looking to provide more electricity, more roads, an expansion of sanitation facilities and telecommunication networks, and much more besides. Ghana is seeking large scale investment to expand its infrastructure. This scale of investment cannot be funded from tax revenues and is unlikely to come from private funding. But without it the Ghanaian economy will suffer.

It is in this environment that many campaigners in the West are attempting to hold the leaders of the G8 countries to their promises to increase aid to the developing world. The slow progress in increasing development spending to the target figure of 0.7% of donor country’s Gross National Income (GNI) is a fair criticism. Especially as this target was originally set by the UN over 30 years ago. But what is more worrying is the way in which the promises of the G8 are acting to restrict funding available to developing nations such as Ghana.

Due to various rounds of debt relief Ghana now enjoys a healthy balance sheet, supported by a marketable credit rating. At a time when credit is cheap and plentiful, these are major advantages for a developing nation with an expanding economy in need of investment. Debt relief has helped open the way for Ghana to access the world’s debt markets. Those who have argued for debt relief are now keen to see that this door is shut in Ghana’s face.

Today Ghana is in the process of preparing to issue sovereign debt that will total $500m. Ghana’s decision to follow this path, rather than rely on the promises of the G8, represents more than disillusionment with unpredictable and unreliable aid flows from G8 countries. Ghana is attempting to realise the benefits that the various rounds of debt relief have promised. They are replacing the old debt with new debt. This is not what the leaders of the rich world had in mind when cancelling debts, and is a strategy they are keen to prevent.
Oxfam, among others, has drawn attention to the fact that debt relief figures mislead the public. The criticism levelled, that debt relief is financed from current aid budgets is correct, but doesn’t go nearly far enough. The way debt relief is measured is far more problematic. Current aid figures that include the present value of debts reduced or cancelled imply vastly greater aid flows to the developing world than are actually taking place. The reduction in annual spending to service debts (interest payments) is a much smaller figure than the present value of the total debts forgiven. Developing countries need large amounts of cash now, not small savings in interest payments over the course of a generation.

It is dishonest for world leaders to continually quote the present value of debts forgiven, as if all this money is now available to spend on new roads or power stations. It isn’t, and the lack of additional cash to spend on investments means that developing countries are beginning to look elsewhere for funds to support investment.
The benefit to be derived from debt relief has never been the reduction in one year’s service payments. Reductions in debt service payments can be negated by the whims of the international community, as annual aid spending increases of decreases due to factors outside of the control of developing nations. A decrease in funding or demands for cash will immediately wipe out any benefit from savings on debt service payments, just as any increase in funding will provide a great deal more money to spend than is released by debt forgiveness. The real benefits to be gained from debt relief arise from the ability of developing countries to issue new debt.

The recent case of a vulture fund demanding Zambia honour a debt originally issued by Romania may have the effect of wiping out much of the current year’s cash benefit Zambia has received from debt relief. Donegal International bought the debt off Romania for $3.2m and successfully sued for payment by Zambia in the UK courts, finally settling for an amount of $15.5m.i

This resulted in much moral hand wringing in the media, aid agencies and among governments. Donegal International were criticised for making obscene profits by exploiting one of the world’s poorest countries. None of the moral condemnation changes the fact that the benefit Zambia derived from lower service payments has vanished overnight.
But countries like Zambia are now facing a benign economic environment, where commodity prices have increased dramatically along with demand, where their economies are expanding, demanding investment, and where credit is cheap and creditors are looking for new areas in which to invest.

It is the combination of these factors along with the improvement to the balance sheet of the country provided by debt relief that means Ghana is soon to lead the way in issuing new sovereign debt. In doing so, Ghana will begin to realise the value of debt relief that is quoted in development statistics – the present value. The present value of debt relief is not a cash amount, but is a calculation of how much richer a country is after it has had its debts forgiven. By issuing new debt, Ghana is turning this calculation into cash. Cash that can be used to build roads and power stations and supply clean water to its population.

This has donor nations worried. Paul Rawlings, a senior director at the credit ratings agency Fitch warns that ‘donors are wary about this – they didn't wipe off the debt so that Ghana could rush out and borrow’ adding ‘but Ghana needs to do it.’
The question we should put to the leaders of the G8, is not ‘when will you honour your promises’ but ‘why are you worried about developing countries having access to cash to invest in their economies?’