Accra, Ghana//-Ghana remains embroiled in a severe debt crisis that continues to be a blight on the lives of Ghanaians and a drag on economic growth.
The West African country has been facing the challenge of debt sustainability and servicing its debt obligations.
Although Ghana is not the only developing country facing this challenge, its own is beyond the capacity of the current managers of the economy.
Recently, the government has defaulted on its debt obligations and went ahead to launch an unpopular domestic debt exchange programme (DDEP) in its effort to secure a $3 billion bailout from the International Monetary Fund (IMF) to address the problem.
Presenting the 2023 budget statement and economic policy of the country, the Minister of Finance, Ken Ofori-Atta painted a gloomy picture of Ghana’s debt situation.
He said at paragraph 275: “… our internal Debt Sustainability Analysis (DSA) shows that the public debt position in the medium-term is unsustainable and requires immediate redress.
The analysis identified a number of risks including cost of funding risks, rollover/refinancing risks, elevation in market risks, contingent liability risks, operational risks, liquidity risks and legal risks.”
He then proceeded to announce a “debt operation programme” at paragraph 276 thus: “… to sufficiently address these risks and bring the debt stock to sustainable levels, the government is embarking on a debt operation programme”.
The debt operation programme among other measures will address the internal and external imbalances in the economy.
Indeed, Mr Ofori-Atta only used the phrase “debt exchange programme” once in the 2023 Budget in one of the concluding paragraphs when he indicated that the government would execute a debt exchange programme.
On 5th December 2022, the finance minister in announcing the commencement of the debt exchange programme [without engaging necessary stakeholders as promised in the 2023 budget statement] gave a sad report of Ghana’s debt situation.
“The Debt Sustainability Analysis (DSA) demonstrated unequivocally that Ghana’s public debt is unsustainable, and that the Government may not be able to fully service its debt down the road if no action is taken.
Indeed, debt servicing is now absorbing more than half of total government revenues and almost 70% of tax revenues, while our total public debt stock, including that of State-Owned Enterprises and all, exceeds 100% of our GDP.
This is why we are today announcing the debt exchange which will help in restoring our capacity to service debt.”
DDEP’s impact on the financial sector
Ghana’s financial sector which is a section of the economy is made up of firms and institutions that provide financial services to commercial and retail customers.
This sector comprises a wide range of industries including banks, investment companies, insurance companies, and real estate firms.
The sector has shown significant development over the past decade. But the recently concluded DDEP according to experts would further exacerbate the sector.
A leading banking consultant Dr Richmond Akwasi Atuahene admits that the country’s banking sector’s ability to withstand losses is still low due to impacts of the DDEP on capital and liquidity.
He adds that the banking industry’s capacity to manage losses is insufficient, saying: “The capacity of the banking industry to absorb losses is lower – not where it is well-capitalised to absorb estimated losses from the debt exchange programme”.
Dr Atuahene says domestic banks will need recapitalisation from the government if they incur losses.
“Ghanaian banks will not be able to absorb losses without having to resort to recapitalisation from the government; the fiscal consolidation and/or burden-sharing by other creditors required to restore debt sustainability will be smaller”.
Banks in the country he acknowledges are expected to hold onto their government exposures for an extended period with reduced coupon rates, thereby limiting the banks’ ability to lend to the real economy because of estimated losses in the DDEP.
So, some institutions are predicated to experience material combined losses from the DDEP transaction – and second‐round shocks with potential for capital shortfall below minimum regulatory requirements inclusive of insolvency.
Furthermore, based on the discount rate of 19.3 percent which averages at a coupon rate of 9 percent on outstanding bonds, analysis of the data estimates losses using net present value of GH¢41.3billion. This the banking consultant maintains will negatively impact the solvency of 23 banks in the country.
Although he did not the specific banks, Dr Atuahene says: “Bank B with bond holdings of GH¢9.11billion, it is estimated that with a discount rate of 19.3 percent using weighted coupon rate of 9 percent NPV the losses resulted in GH¢7.44billion from the total shareholders’ equity of GH¢2.85billion (December, 2021), thus giving the negative net worth of GH¢4.45billion and making the bank insolvent”.
It has been estimated that at least five banks are likely to experience mild losses, which may be due to a combination of coupon or interest rate reduction and maturity extension with below-market coupon rates.
“Any losses of the banking sector would likely have negative multiplier effects on solvency, GDP growth, employment, shortage of credit delivery to the private sector, output and poverty – which will in turn impact negatively on domestic revenue generation”.
The capital shortfalls are more likely to emerge for a group of weak banks and a few others because of their higher share of exposure to government domestic debt relative to their capital, Dr Atuahene explains.
Additionally, the 2021 audited financial statement of 22 commercial banks disclose that over 50 percent of the total assets of six commercial banks are exposed to government bonds and Treasury bills.
While over 70 percent of six commercial banks’ total deposits are exposed to investment securities in government bonds and Treasury bills; and that overall, a minimum of two-thirds of total deposits are exposed to government bonds and Treasury bills across half the commercial banks operating in the country.
Minority Members of Parliament (MPs) insist: “The last thing Ghanaians would want is a total collapse of the financial sector by a government which went haywire on a borrowing spree.
The future sustainability of our insurance companies cannot be guaranteed under this poorly crafted Debt Exchange Programme”.
DDEP’s impact on private sector
Members of the Ghana National Chamber of Commerce and Industry (GNCCI) are not oblivious about the impact of the DDEP on the private sector and wider economy.
Although the Ghana Financial Stability Fund is being set up for the financial services sector with an extra layer of safeguarding for the banking sector through the central bank’s exclusive liquidity arrangements, they say attention is not given to the programme’s expected impact on the private sector.
The GNCCI’s president, Clement Osei-Amoako, notes: “Nonetheless, the extent to which the private sector and wider economy will be impacted has not received the needed attention.
Further, businesses must be informed of the impact and adapt appropriate business strategies”.
It is therefore obvious that the DDEP will create extreme hardships for millions of Ghanaians and existing financial institutions.
It is also quite clear, that it was entirely avoidable had the government heeded wise counsel from the opposition and Civil Society on prudent management of its finances and economy.
The government which put the country into that ditch is transferring its responsibility to address the debt burden it has created through reckless borrowing and populist fiscal policies to only innocent Ghanaians and the financial services sector.
For instance, the 2023 budget projects a primary surplus of only 1% which means that the government will be reducing the public debt by only 1% of GDP this year.
This also means that not enough expenditure cuts are being made by the government at a time when it is almost forcibly asking bondholders to forfeit interests and principal payment due them.
Way forward
In a bid to strike a delicate balance to mitigate inherent losses on the back of the DDEP, players in the private sector are calling for adjustments to fiscal and monetary policies that will be decisive going forward.
A successful implementation of the DDEP must consider the specific and overall impact on the Ghanaian economy, they add.
The state of Ghana’s economy has been a major concern for stakeholders. This demands that pragmatic steps are undertaken to achieve lasting solutions to these structural and cyclical issues: high inflation; rising interest rates; cedi depreciation; ballooning debt levels; and tightening policy rate, among others.
Also, civil society organisations and the private sector demand further demonstration of responsibility from government through more substantial cuts in non-essential expenditure and a reduction in the humongous size of government
Bottom line
Indeed, the Debt Exchange Programme as proposed and implemented now cannot be in the interest of our financial institutions and insurance companies. It certainly is not in the best interest of Ghanaians.
By Masahudu Ankiilu Kunateh, African Eye Report