Explaining Ghana’s imminent debt restructuring

The term debt restructuring has been a serious issue on the media’s radar and a big case in the Ghana’s court of public opinion. This development occurred after the arrival of officials from the International Monetary Fund (IMF) in Ghana for the second time. 

The first time the Fund visited was about three months ago, in response to the government’s u-turn movement to seek an IMF bailout following a series of mass protests over the weakening economy. The government had sworn it was never going to the IMF early in the year

After agreeing to the programme, a team of IMF representatives, led by its Mission Chief, Carlo Sdralevich, arrived in Ghana on July 6, 2022, after home-grown efforts, such as cutting discretionary state spending by 30 per cent, reducing government ministers’ salaries by 30 per cent, and introducing a 1.5 per cent electronic transaction levy, had failed.

These institutional visits have primarily been to inform the government of its debt sustainability analysis and facilitate the negotiation process between the two entities.  The visits, among other things, aim to afford the Fund access to first-hand information about the country’s financial position to assess Ghana’s ability to repay its debts properly and to determine the country’s funding needs before the two entities reach an agreement. On the second visit, the IMF team is led by its Mission Chief, Stéphane Roudet, with the Ghana team and Ghana’s finance minister, Ken Ofori-Atta, at the negotiation table.

As the finance minister announced in a press release on September 26, 2022, the ongoing phase of the negotiation process, is mainly a debt sustainability analysis aimed at informing programme negotiations. In an emailed response to Bloomberg, an IMF spokesperson said: “In cases where a country’s debt is assessed as unsustainable, the IMF is precluded from providing financing unless the member [country] takes steps to restore debt sustainability, including by seeking a debt restructuring from its creditors.”

That is not to say debt sustainability analysis necessarily results in debt restructuring, as IMF Director of Communication, Gerry Rice, stated at a news conference in Washington DC, even though many have interpreted it as such.

“When a country requests financing from the IMF, we [the IMF] assess whether the country’s policies are consistent with debt sustainability as one of our requirements. We still need to conduct a thorough update of the debt situation in Ghana through our debt sustainability analysis,” Mr Rice said.

What is the prevailing situation?

Soon after the finance minister’s announcement of September 26, 2022, on Ghana undergoing a debt sustainability analysis, the media and public spaces began the conversation on debt restructuring, giving room for speculations which could potentially incite public fear of investment loss.

An example of this was when on Thursday, September 29, 2022, the Second Deputy National Organiser of the NDC, Chief Hamilton Nixon Biney, explained the anticipated governmental debt restructuring as a situation in which people who invest with the government in the form of treasury bills are expecting returns on their investment. The government will or can decide to pay them only half of their total investments, and the investors do not have any option than to accept it or risk losing their investments altogether.

Nixon quizzed rhetorically in Twi:“If you and I have invested money in the government in the form of T-bills, the government can say it is going to give us half of those investments. For example, if you invested GH₵50,000 the government will say it will give you, GH₵50,000, ‘accept the offer or I [the government) will cancel the money I owe you [the investor],’ and you cannot do anything about it. Have you ever witnessed a situation whereby someone has taken the government to the police station and won a case against it?” 

The NDC Second Deputy National Organiser made this statement on the Gumbe Show on TV XYZ. The video has since been shared to the TV station’s Facebook page, gathering some 4,000 views and more than 300 engagements. His interpretation is found from 1:26:50 to 1:29:22 time frame of the video.

There have been many similar misleading interpretations in the public domain. Therefore, this explainer is to put the discussions into proper perspective and adequately inform the populace on the meaning and implication of the country’s imminent debt sustainability programme with the IMF.

To do this, DUBAWA reviewed several authoritative documents and news sources and spoke to Dr Lord Mensah, a financial analyst and a professor of Finance at the University of Ghana Business School, who also envisages the imminent arrival of a debt restructuring programme in Ghana.

What is debt restructuring and its implication on the Ghana economy?

Debt restructuring is a process used by borrowers (individuals, companies, or countries) to avoid the risk of failing to repay existing debts (in the form of treasury bills, bonds, or equity) to their lenders (individuals, institutions, or businesses). In this case, the borrower is the Government of Ghana, and the lenders are the banks and other institutions that have, for example, subscribed to government bonds and bought its treasury bills.

Thus, in restructuring, Lord Mensah explains, if the IMF assesses Ghana’s financial situation and concludes the country is on a slippery debt sustainability threshold and its policies are not consistent with the Fund’s debt sustainability requirements, then Ghana will have next to zero option than to undertake a debt restructuring exercise. 

This option, experts say, is better than the alternative of possible bankruptcy, often a painful process as it may threaten the country’s macroeconomic stability and set back its development for many years. Lenders will not be left out in the repercussions of bankruptcy; they are likely to lose (all of) their investments, too. To avert such possibilities, the government may initiate a renegotiation process with the lenders to agree to a haircut.

Haircut, induced by debt restructuring, comes in varying forms. The government can get its lenders to agree to reduced interest rates on the loans or to extend the dates when it is due to pay its liabilities or both. In more practical terms, in the case of the first option (of getting lenders to reduce interest rates on their loans), Lord Mensah explains with an example:

“Let’s assume the government has contracted a loan at an interest rate of 26 per cent from a bank. In the likely event of restructuring, the government may propose a renegotiation process to the bank and ask it to accept 23 per cent, instead of the original 26 per cent. If the bank agrees to the 23 per cent, it will receive a three per cent haircut on its interest rate–minus the principal.” 

The principal is the consideration in the second option of haircut. In this option, the government may get the bank to agree to an extension of maturity from, for example, an original five to ten-year period to pay the principal.

The government can also get the bank to agree to a combination of the two options in a win-win situation.

Who is most affected by debt restructuring?

On who bears the hardest brunt in debt restructuring is largely reliant on the interest rate differentials, Mensah explains with an example:

‘If, on the one hand, the bank promised its investors (or depositors) a 20 per cent interest rate to invest with the government at an interest rate of 26 per cent and is now receiving 23 per cent due to the government’s debt restructuring renegotiation, the bank can easily absorb the difference of the three per cent, and, according to Mensah, the bank will likely absorb it. If, on the other hand, the bank promised the bank a 24 per cent interest rate, there will be a four per cent reduction. After absorbing the first three per cent margin within its control, the bank will have to pass on the balance to its depositors or investors,’ the professor explained.”

In a nutshell, contrary to the many inaccurate pieces of mediated information, it is established in this article that Ghana hasn’t yet reached the point in the ongoing IMF negotiation process whereby it has to restructure its debt. However,, experts say debt restructuring is an imminent prospect from the debt sustainability analysis. 

Again, when it happens, debt restructuring will not be a unilateral take-it-or-lose-all decision the government will impose on people who have invested with it. Debt restructuring will be a negotiation process, which will involve both the government, as the borrower, on one side, and its investors, as the lenders, on the other. Lastly, who gives what during debt restructuring depends on the interest rate differentials and other factors.

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