The repercussions of a sovereign debt default are seldom acknowledged. The hardships endured by nations that have defaulted are rarely discussed in countries facing economic strain. Recovery efforts, especially those involving austerity measures, tend to be undervalued or misunderstood.
Consider the following examples. In 2022, Ghana formally defaulted on its USD 30 billion external debt after announcing the suspension of most foreign debt-service payments in an effort to preserve its dwindling foreign exchange reserves. This default precipitated a profound economic crisis that manifested in various ways. Inflation surged to more than 50 per cent, reaching hyperinflationary levels. The Ghanaian cedi became one of the world’s worst-performing currencies, losing over 40 per cent of its value against the US dollar and rendering imports prohibitively expensive. International credit rating agencies downgraded Ghana’s long-term foreign-currency bonds to “selective default”.
The consequences for ordinary Ghanaians were severe. The resulting surge in the cost of living pushed nearly three million people into poverty. The government was compelled to undertake a sweeping debt-restructuring programme that imposed significant losses, commonly referred to as “haircuts,” on domestic bond holders. Overnight, many individuals saw their life savings evaporate. Funding for essential public services such as healthcare, education and infrastructure became sharply constrained, deepening social and economic distress.
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Ethiopian entered default after failing to make a payment due in December 2023. This prompted rating agencies such as Fitch to classify the country as being in “restricted default.” As a result, Ethiopia lost the ability to issue new sovereign bonds at viable interest rates or secure fresh commercial loans.
Inflation surged to 20 per cent, the national currency depreciated sharply and foreign-exchange reserves declined. Access to hard currency is now largely limited to essential imports and critical social expenditure. In response, the government has enacted stringent tax measures and raised public service fees. These burdens fall disproportionately on ordinary citizens, further straining household incomes and suppressing economic activity within the domestic market.
The Kenya Conference of Catholic Bishops (KCCB) has recently commended the Kenya Kwanza (KK) administration for stabilising the Kenya shilling, investing in infrastructure – particularly road development – advancing the recruitment of 24,000 teachers and expanding the construction of colleges. Until now, the KCCB has been sparing in its praise for the government, frequently issuing sharp critiques of the state of the economy without accounting for its broader context.
For instance, over the past three years, it has joined the chorus condemning the cost of living without acknowledging that this challenge was global in scope or that the KK administration had inherited a government teetering on the brink of debt default. Nor did it recognise the efforts undertaken to stabilise the economy through difficult but necessary tax reforms; measures that were essential prerequisites for securing support from multilateral lenders.
Perhaps the KCCB can now broaden its perspective to acknowledge that last month, credit rating agency Standard and Poors’ assigned Kenya a long-term sovereign credit rating of B with a stable outlook, upgraded from B- in August. While Kenya still faces challenges, the government is clearly taking steps to improve the country’s financing standing.
Mr Khafafa is a public policy analyst
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By Leonard Khafafa