Debt sustainability implications of sovereign green bonds in Ghana’s energy transition

Abstract Sovereign green bonds are increasingly proposed as a climate-finance solution for debt-constrained economies, yet their fiscal sustainability implications under macroeconomic risk remain insufficiently quantified. This study assesses whether sovereign green bond issuance can be integrated into Ghana’s energy transition financing strategy without undermining debt sustainability. This is a forward-looking simulation exercise, not an empirical evaluation of actual issuance, as Ghana has not yet issued a sovereign green bond. Using an IMF-consistent debt dynamics framework embedded in a Debt Sustainability Analysis (DSA) with scenario-based stress testing, validated by a Bohn-style fiscal reaction function, the analysis shows that under the baseline scenario Ghana’s debt-to-GDP ratio declines from approximately 79 percent in 2025 to 56 percent by 2035. A sovereign green bond programme equivalent to 1 percent of GDP annually for five years raises the debt ratio by approximately 4.5 percentage points above the baseline by 2030 and 4.3 percentage points by 2035, while the overall declining trajectory is preserved. Stress tests reveal significant vulnerability: growth and interest-rate shocks push debt 8–10 percentage points above the baseline, while an exchange-rate shock produces a near-term jump of approximately 15 percentage points. The fiscal reaction function confirms a positive and statistically significant primary-balance response to rising debt, consistent with conditional sustainability. Green bonds are fiscally viable only at modest scale, within a stable macro-fiscal framework, and when financing high-quality investments.