Deal or no Deal: US$ 3bn IMF Connundrum
Ken Ofori-Atta — Minister of Finance

Deal or no Deal: US$ 3bn IMF Connundrum

Government is inching closer to securing a US$3-billion budgetary support from the International Monetary Fund (IMF) following a breakthrough in negotiations with major key stakeholders affected by the government’s Domestic Debt Exchange Programme (DDEP).

The immediate question for many economy watchers is that it does not look like there will be a deal sooner, as was expected.

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An announcement in early January pointed to a firm deal with the IMF by mid-February. However, the new date announced is a month later, fueling rumours of a delay in the much-needed funds hitting the vault of the central bank.

Ghana is expected to finally conclude negotiations with the IMF following a staff-level approval in November last year to enable the country to access the US$3-billion budgetary support, as the country’s debt-to-Gross Domestic Product (GDP) is almost 100 per cent.

There are, however, lingering issues with especially individual pensioner bondholders, majority of whom want to be totally exempted from the entire domestic bond exchange.

Even though the government has been forced to ‘eat back’ its proposals by amending its DDEP on four occasions following further consultations, the proposal still does not sit well with especially individual pensioner bondholders.

The government last week said it had reached an agreement with the individual bondholders.

Per the new terms, individual bondholders who are below 59 will be offered instruments with a maximum maturity of five years, instead of 15 years, and a 10 per cent coupon rate.

All retirees (including those retiring in 2023) will also be offered instruments with a maximum maturity of five years, instead of 15 years, and a 15 per cent coupon rate.

For some multi-national insurance companies too, the deadline is too short, as regulatory and governance issues may delay their sign up.They cite the need for emergency board approval from the parent companies outside the country’s jurisdiction to enable them to have the backing of shareholders to sign on to the DDEP — a process they think may delay their meeting of the deadline of February 7.

The government had, earlier, announced that it hoped to present a full proposal to the IMF by the middle of February. However, with the deadline pushed ahead again for the fourth time, it was unlikely to meet its own deadline of February 15.

It is these delays that have served as a catalyst for speculators to run riot with the local currency from the beginning of the year, rising from an average of between GH¢8 and GH¢12 to a dollar over the past month. Some experts say there is a huge deficit in the government’s communications, a situation they point to as a major setback in the DDEP.

Meanwhile, at a meeting with the German Finance Minister last Friday, President Nana Akufo-Addo expressed high optimism of concluding negotiations with the IMF by March to stabilise the wobbling economy.

The financial services industry, mainly the banks, insurers and the collective mutual scheme industry, have come to the table and negotiated a deal that many experts say will position the government to conclude the IMF negotiations and access the badly needed bailout to salvage the economy.

On the back of the significant progress made in the negotiations of the DDEP, the cedi bounced back, making a marginal improvement against the US dollar on February 3, 2023, selling at GH¢12.50. That represented a 3.1 per cent gain to the dollar since last week.

The government says it needs to reach an 80 per cent threshold of the DDEP to qualify it for a minimum 55 per cent debt-to-GDP, a condition precedent to accessing the IMF deal.

Analysts believe with these sectors, which constitute about 50 to 60 per cent of the total DDEP, agreeing to the new proposals from the government, it provides the government a breathing space and makes a strong case for government’s readiness to access the Bretton woods funding, without which the economy is likely to tumble.

The government projects GH¢137 billion domestic debt exchange notes and bonds which are expected to be voluntarily exchanged for 12 new notes and bonds.

Experts say a successful domestic debt programme will smoothen the path for engagements with external creditors.

There have been reports of the country seeking debt relief from the Paris Club of Creditors.

Financial Sector Deal with government

Under the new arrangement with players in the financial sector, the government has agreed a five per cent interest payment on the new bonds in 2023 and subsequently a nine per cent single interest for the additional 11 bonds up until 2037.

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This was a compromised position from the government’s earlier proposal of zero payment on new bonds from 2023.

A statement issued by the Ghana Association of Bankers shortly after agreeing to a deal with the government said: “The GAB recognises the progress made and notes that participation of its member banks in the DDEP, per the new terms, is subject to each individual bank’s internal governance and approval processes.”

DDEP Background

On December 5, last year, the government announced an invitation to exchange all government bonds, which included ESLA and Daakye, for four new bonds, with coupon payments at 17 per cent for new bonds which will mature in 2027 and 2029.

Two other bonds maturing in 2032 and 2037 were at interest payments of 25 and 41 per cent in 2032 and 2037.

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Under a revised exchange programme, the government announced 12 new bonds replacing the bonds earlier proposed. However, there was not going to be any coupon payments from the end of this year.

The new exchange programme also included individual bondholders who were not initially included in the first government proposals.

In a s statement issued at the end of negotiations with the banks, the President of the GAB noted that “this is a significant milestone towards addressing our economic challenges, and will thus help restore macro-economic stability and accelerate Ghana’s economic growth”

Data available to Graphic Business indicate that as of September 2022, of the GHc160 billion total domestic bond issued by the Government of Ghana, banks were the largest holders of 32 per cent, firms and institutions - 25 per cent, others - 14 per cent, foreign investors - 11 per cent, Bank of Ghana - 10 per cent, pensions - 5.6 per cent, rural banks - 1.4 per cent, insurance companies - 0.9 per cent, the Social Security and National Insurance Trust (SSNIT) - 0.4 per cent, treasury bills - 16.4 per cent, medium tenor bonds (two to five years) - 49.5 per cent and long-tenor bonds (six years and above) - 34.2 per cent.

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Insurance sector analysts have suggested that 40 per cent of the industry investments, amounting to some GH¢4.6 billion, are directly exposed to government of Ghana securities, with an additional 10 per cent invested in licensed banks and fund managers.

Financial analysis for the third quarter of last year shows that assets of non-life insurance companies stood at GH¢4.92 billion, while those of life companies stood at GH¢6.60 billion, making a total to GH¢11.53 billion, out of which 40 per cent is at risk of being either lost or placed in the worst state.

Some experts had warned earlier that insurance companies might not be able to meet their obligations, with total liabilities amounting to GH¢5.96 billion under the then DDEP programme proposal.

Financial Sector Stability Fund

A key component of the DDEP is the government’s GHc15 billion financial sector stability fund. Experts had said that there was no clarity on the operationalisation of the fund.

This, however, seems to have been resolved. Additionally, the government agreed to a proposal to amend all clauses in its earlier exchange memorandum that empowered it to, at its sole discretion, vary the terms of the exchange.

The Bank of Ghana has subsequently noted that banks who sign up to the DDEP will be supported by the central bank’s own financial resources outside the financial sector stability fund.

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