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G hana’s Deputy Finance Minister John Kumah on 24 November made a surprise announcement that the government was considering asking its international bondholders to take a 30 percent haircut as the country embarks on debt restructuring. Kumah’s remarks on a local radio station followed an announcement hours prior from Finance Minister Ken Ofori-Atta during which he spoke about the risk of debt distress. The news of a potential haircut rattled creditors as they sought clarity from the government. This recent development will likely accelerate the mooted formalisation of an international creditors group that has been created to engage with the government.

The recent communications misstep about the nature of debt restructuring and unrelenting criticism from opposition parties about the government’s economic management will ply pressure on President Nana Akufo-Addo and his finance minister to finalise its plans. The race is on for the government to not only restore trust and confidence among creditors but get public acceptance for its fiscal consolidation plans.

It's complicated

The government has limited room to manoeuvre. Ghana’s economic challenges – 20-year high inflation; rising inequality triggering small localised protests; and debt management challenges – has forced the country to approach the International Monetary Fund (IMF) for a USD 3 billion economic support package over three years. Ghana’s rapid growth of seven percent per annum in 2017- 2019 was disrupted by the Covid-19 pandemic and its March 2020 lockdown. Policies and actions taken in 2020 to mitigate the impact of the Covid-19 pandemic came at a major fiscal expense. This, coupled with a decline in commodity exports and intermittent power disruptions has placed Ghana on the precipice.

Concerns have been growing over Ghana’s public debt sustainability; the IMF’s Debt Sustainability Analysis (DSA) has placed it at “high risk of debt distress”  for years. Ghana’s public debt increased from 65 percent to 80 percent of GDP during the pandemic and reached 78.3 percent of GDP in July 2022. Wavering investor confidence and non-resident investors exiting domestic bond markets contributed to credit rating downgrades and loss of access to international capital markets. Furthermore,  supply-chain shocks from the Russia-Ukraine conflict have contributed to a currency depreciation.

The Cedi depreciated by 54.2% in the first 11 months of 2022 against the US dollar. Currency depreciation and high inflation have driven up the cost of living, especially for food. This has placed great strain on household budgets, particularly low income earners. Rural farmers have also been affected through price increases for inputs such as fertiliser. It is against this backdrop that the government began engaging the IMF in July for a USD 3 billion, three-year extended credit facility program.

Courting

The Extended Credit Facility (ECF) for low income-income countries is the IMF’s main medium-term support tool for countries facing prolonged balance of payments problems. It is available for 3-4 years and is extendable to five years.  To determine whether a country has unsustainable debt, the IMF first evaluates the country’s capacity to carry debt and then the trajectory of revenues and repayments to see if in the medium-term the country will face debt distress or is already in distress.

Debt sustainability analysis classifies countries into four bands based on certain thresholds for key public debt indicators, namely low risk, moderate risk, high risk, and in debt distress. Ghana’s last analysis carried out by the IMF and the World Bank in mid-2021 classified the country as being at high risk of external debt distress and overall debt distress. The widely held consensus is that some form of debt restructuring will be a pre-requisite to IMF support. A Ghanaian delegation met with the IMF during 11-19 October and the latter stated that good progress had been made in “identifying specific policies that would restore macroeconomic stability and lay the foundation for stronger and more inclusive growth”.

Getting closer

Finance Minister, Ken Ofori-Atta. Image sourced from: My Joy Online

During his reading of the 2023 annual budget statement on 24 November, Ofori-Atta noted that credit ratings downgrades, challenging domestic financing conditions and higher borrowing costs led to the depreciation of the Cedi and have placed a strain on the government’s ability to service its debt. A month prior, the finance minister had said that rescue package discussions would be fast-tracked to ensure that key aspects of the programme were reflected in the annual budget statement. The recently read budget likely reflects fiscal consolidation measures supported by the IMF.

Some of the most significant announcements relating to debt management include raising value-added tax by 2.5 percent to 15 percent, placing a 12-month hiring freeze in the public sector, and the start of a debt exchange programme. Ofori-Atta was vague on details about the debt exchange programme, which may further stoke investor concerns. In his speech, Ofori-Atta hinted at a deal potentially being struck with the IMF by the end of the year; the government and the Fund have agreed on ”programme objectives, a preliminary fiscal adjustment path, debt strategy and financing required for the programme.”

A mooted IMF deal on the horizon is positive news but the size of the loan places pressure on the country’s debt-to-GDP ratio. Despite better-than-expected Q2 GDP growth figures, Ghana’s economic outlook remains muted. Large interest rate hikes and further currency depreciation will threaten the government’s ability to achieve debt sustainability in the short term; on 28 November the Bank of Ghana increased the benchmark interest rate from 24.5 percent to 27 percent – the highest in 19 years.

Making it official

Ghana is fifth on the list of countries that have nearly used up their total quota for IMF support. If the IMF approves the USD 3 billion request, Ghana will move to the top of the list. The IMF noted in the 2021 Ghana Debt Sustainability Analysis report that “debt sustainability can only be ensured by an aggressive and credible fiscal consolidation plan”. Public debt will be unsustainable if it continues to grow at current trends. The question is how, not if, debt restructuring will take place.

Ghana meets three out of the four conditions that determine whether domestic and external debt restructuring is required by the IMF. The conditions include public debt, domestic public debt, external public debt to private creditors, and domestic bank credit to the private sector – the only condition that is not met. Despite not meeting all four criteria, debt restructuring is expected. The country’s debt restructuring is likely to initially focus on domestic bonds, though external liabilities could also be included depending on how much Ghana would have to reduce its debt-servicing costs to achieve fiscal sustainability. Based on key topics discussed, both parties will want to ensure an increase in revenue, while protecting spending on education, health, and social protection.

Any form of domestic debt restructuring could severely threaten the local banking sector. In 2021, local commercial banks held about 30 percent of the domestic debt and 31 percent of the total banking assets. Consequently, restructuring the domestic debt without compensating policy action could leave the banking sector highly vulnerable to further distress. Furthermore, restructuring domestic debt focused solely on haircuts would severely affect asset quality, increase non-performing loans (NPLs) higher than the current 14.1 percent, and reduce private sector lending which is already under severe strain from 20-year high inflation. Other institutional instruments such as pension funds are also likely to suffer.

Regarding external debt, Ghana is locked out of the international capital markets due to recent sovereign debt downgrades. The country needs to regain access in order to refinance maturing bonds. Furthermore, there is a notable exchange risk created by the majority of the external public debt, which is held in foreign currency. Pressure on the Cedi is expected to remain in the medium term and foreign exchange reserves will continue to dwindle. Vice President Mahamudu Bawumia’s recent announcement that the country will buy oil products with gold instead of US dollars highlights the seriousness of the current situation and points to its likely trajectory.

Ghana’s President, Nana Akufo-Addo. Image sourced from: African Exponent

Akufo-Addo’s administration is on the backfoot following a recent corruption scandal involving a junior minister and calls for Ofori-Atta’s resignation over alleged unethical conduct. He has no easy options in his final term in office. However, he has an opportunity for his administration to take a short term popularity hit and enact debt restructuring that will put the country on more stable footing in the medium term. Sensitising both opposition parties and creditors about the short term pain and having a clear and unified communications strategy will quell some of the immediate stakeholder concerns, while building trust. The tone and the decisions must come from the top. For the sake of creditors and citizens, the hope is the Akufo-Addo seen during his first term in office steps back in to lead.