How Sweden Overcame its Economic Crisis; From 500% Interest Rate to 3.75%. – Lessons for Ghana

In the 1990s, Sweden encountered a profound economic crisis that posed a substantial threat to its economic stability. The crisis was characterized by a confluence of extraordinary factors that exerted a significant impact on the nation’s economy. Sweden’s financial system experienced a severe banking crisis, stemming from permissive regulatory practices and excessive lending. This lax oversight facilitated the rapid expansion of bank balance sheets, fuelled by loose credit policies, speculative lending, and the inflation of a real estate bubble. These circumstances amplified risks within the banking sector, ultimately contributing to the crisis.
Furthermore, Sweden confronted economic imbalances, notably encompassing elevated inflation rates, substantial fiscal deficits, and an overvalued currency. These imbalances eroded the overall stability of the economy, exacerbating the severity of the crisis. As a consequence, the country witnessed a sharp surge in unemployment rates, with figures peaking at approximately 10% during the zenith of the crisis in the early 1990s. The resulting burden on the labour market and public finances imposed significant strains on the economy.

The combination of these circumstances rendered the Swedish economy increasingly perilous for foreign investors, prompting a substantial capital outflow. As capital fled the country, borrowing costs experienced an unprecedented surge, propelling interest rates to extraordinary levels. In fact, interest rates reached an astonishing peak of 500%. This dramatic escalation in borrowing costs posed additional challenges for businesses and individuals, significantly impeding economic activity and exacerbating the prevailing crisis..

In spite of all these, through a series of bold and decisive measures, Sweden managed to stage a remarkable turnaround, rejuvenating its economy in a surprisingly short span of time.

This article explores the key factors that contributed to Sweden’s swift recovery and provides insights into how Ghana can replicate some of these strategies to address its own economic challenges, focusing on the export sector.

Crisis Response: Currency Devaluation and Export Focus

Currency Management:

Let us first demystify currency devaluation by looking at wealthy nations that deliberately devalue their currencies to become export-competitive.
Switzerland, not Sweden, known for its precision manufacturing and high-quality products, employs a deliberate currency management strategy to maintain the Swiss franc (CHF) at a lower value against major currencies, including the US dollar. This practice aims to enhance the competitiveness of Swiss exports in global markets.

By keeping the Swiss franc relatively weak, Switzerland’s exports, such as machinery, watches, and pharmaceuticals, become more price competitive. The country’s deliberate currency devaluation strategy has been instrumental in sustaining its export-oriented economy.

Japan’s Exchange Rate Policies:
Japan has a long history of implementing exchange rate policies aimed at keeping the Japanese yen (JPY) lower against the US dollar. A weaker yen enhances the competitiveness of Japanese exports, including automobiles, electronics, and machinery, by making them more affordable for international buyers.

Japan’s export-focused strategy, coupled with deliberate currency devaluation, has contributed significantly to its export-led economic growth over the years.
Returning to Sweden’s case, the adoption of a floating exchange rate policy and subsequent devaluation of the Swedish krona during the economic crisis allowed Swedish exports to become more price competitive globally. This strategy played a crucial role in driving the recovery, with the share of exports in Sweden’s GDP surpassing 40%.

Ghana can draw upon these examples to support the argument that although the Ghanaian cedi is fast depreciating, it could be met with an aggressive export-focused strategy, which can enhance its export competitiveness. By strategically taking advantage of the currency depreciation, Ghanaian agricultural produce can become more attractively priced in international markets, stimulating demand and supporting export-led growth. We do not need the Ghana cedi to be at par with the US Dollar to develop our country. In my point of view, that gaol is mathematically unattainable.

Fiscal Discipline and Structural Reforms:

The Swedish government’s response to the economic crisis involved the implementation of rigorous fiscal discipline and a comprehensive set of structural reforms. These measures played a vital role in restoring economic stability, enhancing competitiveness, fostering entrepreneurship, and encouraging innovation.

Fiscal Discipline:

To address the economic imbalances and reduce the budget deficit, Sweden embarked on a path of fiscal discipline. This involved implementing measures to control public spending and ensure responsible fiscal management.

Public Spending Control: The Swedish government scrutinized and curtailed public expenditure, focusing on eliminating wasteful expenditures and prioritizing essential areas such as infrastructure development, social welfare, and education. This disciplined approach helped to stabilize public finances and reduce the budget deficit.

Revenue Enhancement: In addition to controlling spending, the government explored avenues to increase revenue generation. This involved measures such as tax reforms, closing loopholes, and broadening the tax base to ensure a fair and sustainable revenue stream for the government.

Long-term Fiscal Sustainability: The Swedish government prioritized long-term fiscal sustainability by implementing policies to manage public debt and ensure intergenerational equity. This approach aimed to create a favourable environment for sustainable economic growth and stability.

Structural Reforms:

In conjunction with fiscal discipline, Sweden undertook comprehensive structural reforms across various sectors of the economy. These reforms aimed to enhance competitiveness, encourage entrepreneurship, and foster innovation.

Labour Market Reforms: Sweden implemented labour market reforms to improve flexibility, moderate wages, and reduce unemployment benefits. These measures aimed to enhance labour market efficiency, stimulate job creation, and address the high unemployment rates that prevailed during the crisis. By creating a more flexible and dynamic labour market, Sweden facilitated the reallocation of resources and improved productivity.

Deregulation and Privatization: The Swedish government pursued extensive deregulation and privatization initiatives to promote competition, encourage entrepreneurship, and foster innovation. Removing barriers to entry, simplifying business regulations, and reducing government intervention in the economy created a conducive environment for private sector growth and innovation.

Market Liberalization: Sweden pursued market liberalization policies, promoting open trade and competition. By removing barriers to trade, facilitating market access for both domestic and foreign enterprises, and embracing international economic integration, Sweden aimed to enhance efficiency, encourage investment, and expand export opportunities.

The combination of fiscal discipline and structural reforms in Sweden created an enabling environment for economic recovery and sustainable growth. These measures helped restore confidence, attract investments, stimulate entrepreneurship, and foster innovation, positioning Sweden for long-term economic success.

Financial Sector Restructuring:
Sweden’s response to the economic crisis also included comprehensive reforms aimed at addressing weaknesses in the banking sector. These reforms played a crucial role in restoring confidence, stabilizing financial institutions, and ensuring the long-term stability of the financial system.

Temporary Nationalization and Recapitalization:

In the face of banking sector vulnerabilities, Sweden took decisive action by temporarily nationalizing troubled banks. This involved the government assuming control over these banks and assuming responsibility for their debts and assets. Nationalization helped restore confidence in the financial system by ensuring that depositors’ funds were protected and preventing a complete collapse of the banking sector.
Simultaneously, viable banks were recapitalized to bolster their financial position. Recapitalization injected fresh capital into these banks, enabling them to meet regulatory requirements and restore their lending capacity. This measure aimed to strengthen the overall stability of the banking sector and ensure the availability of credit for businesses and individuals.

Establishment of a “Bad Bank”:

Sweden established a state-owned entity commonly referred to as a “bad bank” to manage the toxic assets held by troubled banks. This entity, known as Securum, assumed responsibility for managing and disposing of these distressed assets in an orderly manner. By separating the toxic assets from the balance sheets of viable banks, the bad bank helped minimize their negative impact on the overall economy and supported the recovery process.

Implementation of Stringent Prudential Regulations:

The unreal economic boom in Sweden in the late 80s which led to the painful bust in the 90s was partly due to a grossly unguarded financial liberalization. In response to this, contractionary policies were put in place. First, to enhance transparency and risk management practices, Sweden implemented stringent regulations in the financial sector. These regulations aimed to prevent future crises and foster a more resilient banking system. Key areas of focus included:
Transparency and Disclosure: Stricter reporting and disclosure requirements were enforced to provide greater visibility into the financial health and risks associated with banks. This increased transparency helped restore confidence among investors and depositors.
Risk Management Practices: Banks were required to strengthen their risk management frameworks, ensuring that they had robust systems in place to identify, assess, and manage risks effectively. This included implementing more stringent lending standards and conducting rigorous stress tests to assess banks’ ability to withstand adverse economic conditions.

Capital Adequacy Standards: Sweden enforced higher capital adequacy standards to ensure that banks maintained sufficient capital buffers to absorb potential losses. These standards were designed to enhance the resilience of the banking sector and protect against future shocks.
Although, Sweden is far more advanced than Ghana, the financial system of Sweden in the 1990s are architecturally similar. Both are not complex, as they are not intertwined with several other international instruments, complex derivatives, and massive unregulated hedge funds. Ours is simple and can therefore be perfected by replicating the Swiss approach.

Results

After implementing the various measures to address the economic crisis and facilitate recovery, Sweden experienced significant improvements in several key economic metrics. Let’s explore some of these metrics from the time of recovery until today.

GDP Growth:

Following the implementation of fiscal discipline, structural reforms, and financial sector restructuring, Sweden witnessed a remarkable rebound in GDP growth. In the years following the crisis, the Swedish economy experienced robust economic expansion, characterized by sustained GDP growth rates. The recovery phase was marked by increased investment, export growth, and improved business confidence, contributing to the overall economic expansion.

Unemployment Rate:

During the crisis, Sweden faced a sharp increase in unemployment rates, reaching approximately 10% in the early 1990s. However, as the economy rebounded, unemployment rates gradually declined. The labor market reforms, flexibility, and measures to stimulate job creation played a significant role in reducing unemployment and facilitating a more favorable employment situation.

Stability of the Financial System:

The financial sector reforms implemented in Sweden were instrumental in restoring stability and resilience to the banking system. The temporary nationalization of troubled banks, recapitalization of viable banks, and the establishment of a bad bank helped cleanse the banking sector of toxic assets and strengthen the overall financial system. This led to increased confidence in the banking sector, improved liquidity, and a more stable financial environment.

Competitiveness and Exports:

Sweden’s focus on export-oriented policies and currency devaluation contributed to enhanced competitiveness in international markets. The share of exports in Sweden’s GDP surged to more than 40% during the recovery period, indicating the success of these strategies. Increased export activity and a diverse range of competitive industries allowed Sweden to tap into global demand and boost its economic growth.

Public Finances:

Budget Deficit and Public Debt:
During the crisis in the early 1990s, Sweden faced significant budget deficits. The deficit reached a peak of around 12% of GDP in 1993. However, as a result of the fiscal discipline measures implemented, Sweden was able to gradually reduce the budget deficit over the years. By the late 1990s, Sweden achieved a budget surplus, indicating a significant turnaround. The surplus continued to increase, reaching around 5% of GDP by the early 2000s!
In terms of public debt, Sweden witnessed a similar trend. The debt-to-GDP ratio rose sharply during the crisis, peaking at approximately 80% in the mid-1990s. However, through prudent fiscal management and sustained economic growth, Sweden managed to reduce its public debt levels. As of 2020, Sweden’s debt-to-GDP ratio stood at around 35%, indicating a significant improvement and a commitment to long-term fiscal sustainability.

Revenue and Expenditure:

Sweden’s fiscal discipline measures focused on both revenue enhancement and expenditure control. The government implemented tax reforms to increase revenue, broaden the tax base, and ensure a sustainable revenue stream. Simultaneously, the control of public spending was a crucial element in restoring stability.
While specific revenue and expenditure figures can vary over time, the overall objective was to align revenue and expenditure to achieve a balanced budget and reduce the budget deficit. The successful implementation of these measures led to a restoration of stability in public finances and laid the foundation for long-term economic growth.

To conclude, Ghana can draw valuable lessons from Sweden’s experience in overcoming its economic crisis of the 1990s. Sweden’s swift recovery was fuelled by a combination of strategic measures, including currency devaluation, export focus, fiscal discipline, structural reforms, and financial sector restructuring. These lessons can provide insights and guidance for Ghana as it seeks to address its own economic challenges and foster sustainable growth.

Hubert Baidoo
Co-founder of Afria.io
Email: [email protected]