Ghana is struggling with managing its debt, 20-year high inflation, a weak forex, and rising inequality. For instance, inflation rose to 33.9% in August 2022 from 9.7% a year earlier, whereas the cedi has depreciated by 41% year-to-date against the US greenback. These vulnerabilities have been worsened by the aftershocks of the ongoing Russia–Ukraine war and the COVID-19 pandemic.
These challenges have pressured Ghana’s government to approach the International Monetary Fund (IMF) for an financial help package deal. Part of the engagement will contain a brand new assessment of the sustainability of the country’s debt.
Debt sustainability analysis classifies countries into 4 bands: low danger, reasonable danger, high danger, and in debt misery. This relies on sure thresholds for key public debt indicators. Ghana’s last analysis, carried out in mid-2021, categorized the country as being at high danger of exterior debt misery and general debt misery. The assessment was carried out collectively by the IMF and the World Bank.
If the new assessment concludes Ghana’s debt ranges aren’t sustainable, the country will have to take steps to restructure its debt to qualify for IMF help. The Fund states that it received’t lend to countries which have unsustainable money owed until the member takes steps to restore debt sustainability, which may embody debt restructuring.
Recently, Zambia had to negotiate with all its exterior lenders, together with bilateral and industrial collectors, as a pre-condition for accessing IMF funding. The process lasted virtually two years.
Ghana wants to tackle its present disaster by tackling two issues.
Firstly, the restructuring of its debt. Here a superb option can be to restructure its exterior debt in addition to some restricted home debt restructuring.
And secondly, it wants urgently to take six steps on the home entrance to get its monetary home so as. This consists of placing an finish to profligacy in government spending and making certain it lives inside its means.
Ghana’s public debt dynamics
A country’s debt dynamics consists of both exterior and home debt, and debt accruing to state-owned enterprises and its maturity construction. All want to be thought of when contemplating any debt restructuring.
Ghana’s whole public debt as of June 2022 was US$54.4 billion (GHS393 billion or 78.3% of GDP) from US$32.3 billion (GHS143 billion or 55.5% of GDP) in 2017, in accordance to central bank and finance ministry data.
Of this, exterior debt was US$28.1 billion (GHS203.4 billion or 40.5% of GDP), whereas home debt issued in cedis was US$26.3 billion (GHS190 billion or 37.8% of GDP).
Regarding exterior debt, the portfolio consists of debt owed to multilaterals akin to the IMF and World Bank, bilaterals, industrial loans akin to Eurobonds, and other export credit. The exterior debt additionally contains of mounted (86.5%), variable (13.1%) price and some interest-free (0.4%) debt. As of 2021, about 72% of the exterior debt was additionally dollar-denominated.
In 2021, the government spent US$2.2 billion in whole exterior debt service, together with principal repayments, curiosity funds and expenses.
Of the home debt, Ghana’s government sourced as a lot as 85% of its home debt in 2021 through the market. This included monetary securities and devices traded on the secondary market. This signifies that Ghanaian banks, people and institutional traders, akin to pension funds, purchase and sell government securities akin to treasury payments and other mounted deposits.
In 2021, Ghana’s banking sector cumulatively held 50% of the whole home debt inventory comprising industrial banks (30%) and the Bank of Ghana (20%). The non-bank sector comprised corporations and establishments (22.6%), particular person traders (9.2%), rural banks (1.1%), insurance coverage firms (0.6%) and the Social Security and National Insurance Trust (0.3%). Foreign traders held 16% of the remaining home debt.
There have been suggestions that Ghana would prioritise restructuring its home debt. But this begs the query: what does a debt restructuring entail and the place does the burden fall particularly if haircuts – which may embody a discount in excellent curiosity funds – are a part of the policy combine?
Ghana’s industrial banks held about 30% of the home debt and 31% of the whole banking sector assets in 2021. Thus, any try to restructure the home debt with no compensating policy motion might depart the banking sector extremely susceptible to additional misery.
Restructuring home debt targeted solely on haircuts would severely have an effect on asset high quality and improve non-performing loans a lot larger than the current 14.1%.
It would additionally cut back private sector lending, already under extreme pressure from 20-year high inflation. Pensions and other institutional investments are additionally probably to undergo.
When it comes to exterior debt, Ghana must first search to restructure it under the rules of the G20 Common Framework. Ghana delayed in making use of to be a part of the Framework throughout the pandemic for fears of dropping market entry.
The country was finally locked out of the worldwide capital markets anyway after a number of sovereign score downgrades.
Ghana has a chance to treatment this and supply a collaborative and constructive platform to have interaction on exterior debt restructuring.
There are six steps Ghana must urgently take to get government funds so as.
Firstly, it must implement the law when it comes to fiscal duty and impose arduous sanctions on the finance minister and other ministries who flout it. Ultimately, Ghana must be certain that it lives inside its means and maintain politicians to account to present funding plans for his or her political campaign guarantees.
Secondly, Ghana must implement the Integrated Financial Management System as a part of the broader public financing administration reforms and be certain that each transaction is totally captured in the predominant accounting system. Media studies point out that solely a few third of government transactions are totally captured. This creates many avenues for collusion and corruption.
Thirdly, the government must restrict borrowing from the home market to compensate for the lack of entry to the worldwide capital markets.
Fourthly, President Nana Akufo-Addo must lower down the dimension of the government by way of a reshuffle to take away a lot of those that are usually not performing and cut back public expenditure. The President doesn’t want to inform Ghanaians that his ministers are “outstanding”, as the residents would realize it if cost of residing is certainly bettering.
Fifth, the government must urgently convene a broader national stakeholder forum on the economic system with all key representative teams together with labour, civil society, inter-faith teams, political events, and business associations, amongst others.
In 2014 the then opposition ridiculed the concept of a forum. But platforms like this may be invaluable for producing new concepts for financial reforms. It will additionally guarantee stakeholder buy-in of any proposed reform programmes.
Lastly, the government must be clear in its dealings with Ghanaians and the IMF. All data must be totally and transparently disclosed, particularly the indebtedness or exposure of the state-owned enterprises and other parastatals.
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