When is Ghana Going to Join the Municipal Bond Market?

Black Star Square, Accra, Ghana

Accra, Ghana//-Ghana’s ballooning sovereign debt of ¢391.9 billion as of the end of March 2022 is one of the major reasons why the country is heading to the International Monetary Fund (IMF) for policy credibility to enable it access the international financial market.

But one area that the West African country is not taking advantage of is the multi-billion dollar municipal bond market that affords it the opportunity to raise funds to put its infrastructural ‘dead’ cities in order.

In 2017, cities in the United States (US) raised over $111 billion to fix their infrastructure, pension obligations and other critical needs in the country.

What is a municipal bond?

A municipal bond as defined by Investopedia is a debt security issued by a state, municipality or county to finance its capital expenditures, including the construction of highways, bridges or schools.

In other words, a municipal bond is a debt obligation issued by a nonprofit organization, a private-sector corporation or another public entity using the loan for public projects such as constructing schools, hospitals and highways, supply of public utilities, among others.

Municipal bonds are exempt from government or federal taxes and most state and local taxes, making them especially attractive to people in high income tax brackets, according to economists.

Whereas cities in Ghana and other Sub-Saharan Africa countries are constantly struggling to mobilize revenues to fix their cities, their counterparts around the world especially those in the US, UK and Europe have been financing their long-term investment needs through municipal bonds for centuries.

The first recorded transaction took place in Genoa, a port city and the capital of northwest Italy’s Liguria region in 1150. Since then, the municipal bond market has never experienced a dull moment.

Comparatively, few cities in sub-Saharan Africa (SSA) have raised less than 1% of the US amount since 2004. Only a handful of local governments have successfully issued municipal bonds, almost all of them in South Africa, a lecturer in Emerging Markets Finance at Johns Hopkins University, Jeremy Gorelick said.

However, many cities in the SSA region including Accra, Kumasi, Sekondi-Takoradi, Tema all in Ghana, Abuja and Lagos also in Nigeria are desperately begging for infrastructure.

Ghana’s Minister of Finance, Ken Ofori-Atta recently revealed that the country alone needed over GHS30 billion to bridge its infrastructure gap in areas such as roads, water supply, bridges, electricity, hospitals, and sanitation.

While the SSA region according to recent estates put its infrastructure financing gap at a historic $41.6 billion.

Ken Ofori-Atta, Minister of Finance, Ghana

Experts including Mr Gorelick argued that municipal bonds, originated for urban infrastructure, would go a long way to addressing this gap.

Why Ghana and other SSA cities are not using municipal bonds?

SSA cities are not able to join the municipal bond market due to challenges such as the lack of local capacity, low technical capacity, inadequate or lack of regulations, municipal leaders or mayors lack interest and unstructured projects.

All these challenges stem from the long-held conviction that civil servants in Ghana, Nigeria and other SSA countries are not exposed to international financial practices in this 21st century. They are unwilling to comply or subject themselves to these international financial best practices.

In some metropolitan, municipal and districts in the SSA region, they are focused on solving sanitation and sewage challenges to the neglect of looking for funds for infrastructural development.

Apart from getting small funds from the central governments and their own internally generated funds through levies, most cities are not getting support from any other source.

For regulations, some SSA countries have started thinking of coming out with laws to regulate the untapped municipal bond market. But they are delaying.

For instance, checks indicated that Ghana’s efforts to issue its first municipal bond would not be materialised.

This is because the law that would authorise the various metropolitan, municipal and district assemblies (MMDAs) to issue bonds to fund their medium and long term investments has still not been passed by Parliament.

This simply means that the MMDAs in Ghana as in other SSA countries would continue to struggle to finance their numerous development projects in the old fashion.

However, the Head of Ghana Fixed Income Market (GFIM) of the Ghana Stock Exchange (GSE), Augustine Simons at a recent capacity building workshop organized by the Institute of Financial and Economic Journalists (IFEJ) for its members, said: “The country is working on a law to allow the various MMDAs to raise funds from the GSE”.

Head of GFIM, Augustine Simons

Another problem making it impossible for the cities to raise the municipal bonds is the lack of leadership. Most of the city leaders are appointed by the political authority making their stay in office tied to changes in government.

Furthermore, poor financial skills and ignorance on the part of the leaders and civil servants of the city authorities is making it problematic for SSA cities to issue the bonds.

So what is the real problem?

“If the issue doesn’t stem from creditworthiness, technical proficiency, or financial market readiness, there must be another factor limiting municipal bond issuance”, Mr Gorelick argued in his paper.

The paper attributes the lack of bond issuance not to the municipality or potential investors, but to limiting behaviour of national governments.

While they devolve substantial responsibilities to cities, they limit their ability to raise funds. This is often driven by a fear on the part of sovereign leadership to allow cities to have a hand in holding their own purse strings. This power can ultimately lead to less dependence on the national government, he maintained.

“A closer look at a number of cities shows that only those in highly centralised countries – like Cameroon – or highly decentralised countries – like South Africa – have been able to successfully issue bonds.

The argument for the success of bond issuance in decentralised economies is well-understood in the African context and more broadly around the world.

But the case for success in countries at the other end of the spectrum is less-considered but equally valid”.

Cities in heavily centralised countries are not provided with autonomy for decision-making. Instead they are positioned as direct participants within an administrative machine governed by decisions from the capital.

Any financial obligation entered into by a city in this political ecosystem is viewed as one explicitly guaranteed by the central government, Mr Gorelick added.

He noted that South Africa provides a good example of how enabling legislation can help municipalities raise money. In 2004 the country passed a law – The Municipal Finance Management Act – that sets out clearly what financial activities cities can and can’t undertake. Cities are prohibited from borrowing for operational expenditures and, instead, can only borrow for long-term investments.

The law has made it safer for pension funds, insurance companies and other investors to lend to city governments. They know that municipalities cannot issue bonds without being in full compliance with existing regulations that are not subject to different types of interpretation or changes in political will, the lecturer explained.

 This is the right time

Africa’s growth momentum in the past 25 years if not recently interrupted by the COVID-19 pandemic and the Russia-Ukraine had been remarkable by historical standards.

Overall, the recovery of growth has been faster than envisaged, especially among non-resource–intensive economies, according to reports.

With this, Ghana, Nigeria and the other SSA countries have no reason to blame their absence on the municipal bond market on their economies.

What they need to do is to promulgate the laws and strengthen their institutions to enable them to cash in on the bond market.

By Masahudu Ankiilu Kunateh, African Eye Report

Email: mk68008@gmail.com