The IMF’s call for domestic borrowing - A menace or economic remedy? (Final Part)
To be able to achieve the objective of domestication of government debts, the government as part of its strategies has considered it necessary to develop the domestic debt market.
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This gives an indication that the plan has been well thought out to the extent that successive governments have put in a lot of resources to make this possible through the establishment of the Ghana Fixed Income Market.
With the establishment of the Ghana Fixed Income Market, players in the Ghanaian debt market are guaranteed a secondary market for debt instruments acquired.
It is also necessary to point out that the benefit of the Ghana Fixed Income Market will help the government a lot in its quest to raise enough domestic debt. However, the question still remains as to the activity level of the market and how best the market players can come together to improve activity, liquidity and transparency in the operations of the market.
The government should also consider the possible implications the developed debt market will have on the equity market. Will the equity market continue to facilitate the raising of funds for companies if the domestic debt market is well developed? Also, another question that need an answer is whether or not the domestic debt market has the depth in participants and volumes to replace external government borrowing or is the government planning to reduce borrowing altogether.
It is critical to note that the major domestic players in the domestic debt market are institutional and pension funds who are mandated either by law or regulation to invest a percentage of their funds in government of Ghana securities.
It is critical to note that the major domestic players in the domestic debt market are institutional and pension funds who are mandated either by law or regulation to invest a percentage of their funds in government of Ghana securities.
Foreign parties were allowed in that Ghanaian domestic debt markets for two-year tenure issues and above and as can be seen, their activities remain significant within the entire domestic debt market. A break-down of the holders of Ghana’s total domestic debts show that, aside Individuals and Foreign sector investors, who in total hold 28.2 per cent, all other participants are required in one way or another to hold debt of the governments.
It is not surprising that the foreign sector is allowed to participate in the domestic market which highlights the true state of the real domestic debt market. Another issue that relates to the domestic debt market is the tenure that domestic debt holders (without foreign sector players) are ready to hold debts. This is shown in the table below
Threat to the strategy
Whereas resident domestic debt holders prefer short term debt instruments, their foreign counterparts prefer long term bonds. This trend possesses a threat to the overall strategy of the government as the continual existence of non-residents in the domestic debt market is contingent in their foreign exchange risk as well as coupons on the debt. The foreign investors can be considered to have analysed the issue and are ready to bear the foreign exchange risk on the local debt instruments for a very long time considering the exchange rate volatilities in the Ghanaian market.
The government might be confident in the success of this strategy but the risk should be well assessed and guarded against.
An assessment shows that, whereas domestic dates are positively correlated to foreign exchange, the external debt has a negative relationship with foreign exchange which is similar to the public debt. This trend possesses a lot of risk to the investor but it helps the government to save itself from that risk, as well as the refinancing risk the resident domestic debt holders bring on board.
The foreign exchange rates expected to prevail in the market has a larger impact on the overall productivity of the nation especially, in an instance where the country is highly reliant on imports like Ghana. The depreciation of the cedi has a greater impact on the economy and will form a good trade-off for consideration if they are to consider the domestic market for borrowing. Even though the Bank of Ghana can use open market operations and tools to reduce the impact of the debt on the foreign exchange, the task ahead with respect to the management of foreign exchange risk when the government sources its funds from the domestic market is high.
Even though the Bank of Ghana can use open market operations and tools to reduce the impact of the debt on the foreign exchange, the task ahead with respect to the management of foreign exchange risk when the government sources its funds from the domestic market is high.
Also, the government seek to use the borrowings from the domestic market as a tool to reduce their borrowing cost. This strategy is theoretically laudable but the practical implementation leaves a lot to be desired as the local investor is generally biased to short tenure debts and cannot provide the required volumes except foreign parties are invited where longer term bonds are to be issued in line with the governments objective to reduce refinancing risk. The
The over-reliance on the domestic market has a tendency to increase cost of domestic debts on the domestic market based on the simple assumption of demand and supply. This phenomenon has a tendency to crowd out the private sector which will at the end of the day lead to high cost of debt instruments in instances where it is available to the private sector. This generally has the tendency of stifling growth in the private sector while increasing cost of operations with its attendant problems.
Public debt and treasury bill rates
A statistical analysis of the relationship between public debt and treasury bill rates shows that, there is a positive relationship between domestic debt, external debt and total public debt on the various tenure of interest rates considered (91-day T-bill, 182-day T-bill and one year notes). Hence, the government is on the right path to consider it necessary to exit the external debt market to be able to safe guard raising Treasury bill rates which is usually used as a benchmark to set various borrowing cost in the private sector.
From the above, the policy of the Government of Ghana like any other policy initiative has various alternatives that has to be considered throughout the implementation stage to ensure that like many other strategies employed by successive governments, it does not fail to achieve the full benefit of the strategy. It is hence recommended that, the government considers: the impact of developed domestic debt markets on the equity market; the impact of the reliance on the debt markets on the interest rates to be charged by investors; the ability of the government to induce resident investors to invest over much longer tenure; the ability to reduce interest rate risk that foreign investors in the domestic debt market to enhance their continuous participation and the crowding out effect on private sector entities should the government of the day rely to a large extent on the domestic debt market.