Introduction

A quarterly International Monetary Fund (IMF) report has revealed that as of July 31, 2023, Ghana ranks as the highest indebted country in Africa to the IMF.

With an outstanding IMF loan of $2.227 billion, the West African nation has the top spot as the continent’s largest indebted country to the financial agency. Page 40 of the Quarterly Report on IMF Finances for the Quarter Ended July 31, 2023 details this.

Ghana and the IMF relationship

Ghana has enjoyed a special relationship with the Bretton Wood institution since 1966 after the overthrow of President Kwame Nkrumah. The government led by the National Liberation Council (NLC) secured the country’s first ever loan agreement with the IMF in the sum of Special Drawing Rights (SDR) 36, 400.

The Special Drawing Right (SDR) is an international interest-bearing reserve asset created by the IMF to supplement its member countries’ official reserves. The value of the SDR is based on a basket of five countries – the Chinese renminbi, the euro, the Japanese yen, the British pound, and the US dollar.

Page 21 of the Quarterly Report on IMF Finances for the Quarter Ended July 31, 2023 shows that the exchange rate as of July 31, 2023, SDR 1 is equal to $1.34294.

The NLC, composed of four army officers and four police officers, assumed executive power in the first independent sub-Saharan African country.

From 1966 to 2023, the West African country has benefited from 17 IMF programs between the 57 years. .

The table below shows the list of approved IMF facilities for Ghana.

Ghana’s rising public debt

Data from the Bank of Ghana shows that Ghana’s public debt, excluding loans of state-owned enterprises, has dropped to GHS 434.6 billion ($40.4 billion) from GHS 575.7 billion cedis in December 2022. It further reveals that the drop represented over GHS 141 billion reduction of the country’s public debt stock, as seen on page 14 of the Summary of Economic and Financial Data for May 2023.

Explaining the factors responsible for the drop in Ghana’s public debt, the Governor of the Bank of Ghana, Dr Ernest Addison said the resurgence of the cedi against the dollar was crucial to the reduction.

Dr. Addison is reported to have stated at the 112th Monetary Policy Committee Press Conference held on May 22, 2023 that “Largely due to the exchange rate appreciation that we saw. You all know what happened at the end of last year [2022]. The very large depreciation of the Cedis was corrected somewhat in the latter part of the year, that helps in terms of the Cedi value of the debt.”

“It has to do with the issue of debt sustainability at the very heart of debt sustainability and the composition of our debts.

So, when half of your total debt stock is dominated in foreign exchange, a slight movement in your exchange rate will, and the sensitivity of your debt to exchange rate movement becomes paramount in the sustainability of that debt,” Ghana’s Central Bank boss added.

The politics of IMF bailout in Ghana

Discussions about an IMF bailout in Ghana have often been met with public denials, particularly by the political class.

Reports (here, here, and here) have shown that no Ghanaian government has publicly admitted going to the IMF for the country’s economic recovery until things got worse.

Some social commentators believe the reason for this development is that a public admission of an IMF support is seen as a sign of poor management of the country’s economy by the government of the day.

Once seen as a shining example of economic strength in the sub-Saharan region, Ghana has been struggling with high inflation since 2014, when the Cedi fell by 40% against the US dollar.

BBC reported that the country’s cedi became the world’s worst-performing currency.

Former President John Dramani Mahama denied claims that his government was going to the IMF for support. 

“I wish to take this opportunity to state with great emphasis that as President, I have not taken any decision to enter our country into an IMF programme; what we are concentrating on is the preparation of a home-grown strategy of fiscal consolidation,” Mahama said in May 2014.

“It is a tragedy of our very polluted and extremely partisan political environment that such a simple misunderstanding of the relevance of this document should become the basis of a major political player [NPP] to stay away from this important forum,” Mahama added.

However, four months later, reports (here, here, and here) showed that Ghana went to the IMF to seek a bailout to strengthen the West African nation’s currency.

Similarly, other reports (here, here, here, and here) showed that Akufo-Addo’s government denied returning to the IMF for a financial bailout at a time the country’s economy was getting worse by the day.

Ghana’s Finance Minister, Ken Ofori-Atta said in Feb. 2022, the country will not go for a bailout from the IMF, stating that “it is not in [our] plans.”

“We are a proud nation…I can say, we are not going to the IMF. Whatever we do, we are not…

So, let’s think of who we are as strong, proud people, the shining star of Africa, and we have the capacity to do whatever we want to do if we speak one language and ensure that we share the burden in the issues ahead,” the finance minister said.

Also, the Deputy Finance Minister, Dr John Ampontuah Kumah stated that the West African country will not seek any form of support from the global financial agency.

“The NPP [governing New Patriotic Party] government will not go to the IMF as long as we are in charge of the economy of Ghana, we will never go to the IMF,” he said.

However, with rising public debts and the cedi depreciating sharply against many currencies in the world, reports (here, here, here, and here) indicate that Akufo-Addo went to the IMF for support.

The big announcement by the IMF in 2022

The IMF Executive Board on May 17, 2023, announced its approval of a 36-month arrangement under the Extended Credit Facility (ECF) worth SDR 2.242 billion, equivalent to $3 billion, to Ghana.

“This decision will enable an immediate disbursement equivalent to SDR 452.4 million (about $600 million),” the financial agency said.

The IMF chief, Kristalina Georgieva congratulated Ghana in a publicised video.

“Congratulations to Ghana for a strong program of reforms to revitalize growth and reduce the country’s debt burden. I’m very pleased that the IMF Board has approved… a three-year, $3billion support for this program. We are proud to be partners with Ghana in addressing the difficult economic and financial conditions the country is facing,” she said in the video. 

On May 19, 2023, Ken Ofori-Atta confirmed the receipt of the first $600 million tranche of the $3 billion extended credit facility from the IMF.

The race to the top of IMF indebted list

IMF reports from 2022 to July 31, 2023, showed Ghana has continued to occupy the top spot as the top-most  African country indebted to the international financial body.

See page 41 of the October 31, 2022 report here and page 40 of the July 31, 2023 report here.

IMF data has shown that as of July 31, 2023, Ghana’s outstanding loan to the international body represents 10% of the total loan owed by African countries.

However, the IMF data revealed that the West African nation has repaid SDR 8 million, equivalent to $10.55 million of its outstanding loan to the IMF, the IMF data has revealed.

Directly following Ghana as the largest indebted countries in Africa are Democratic Republic of Congo, Kenya, Uganda, and Sudan occupying the 2nd, 3rd, 4th, and the 5th positions respectively. 

The rest of Africa is indebted to the IMF to the tune of SDR 11.32 billion, the report has revealed.

Conclusion:

Ghana currently tops Africa as the largest indebted country to the IMF as revealed by the international body’s July 31, 2023 report.

However, with the West African country determined to honour its commitments to the IMF under the three-year Extended Credit Facility (ECF), there are chances it might drop as the largest indebted African nation in the coming months.

The next quarterly financial report of the international financial agency is expected to be published on October 31, 2023.

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.