Debt service suspension bad for economy — Experts

BY: Maxwell Akalaare Adombila
Executives of the five local firms that help to issue the US$3bn Eurobond

Five indigenous financial institutions have defended the government's decision not to seek support under a global initiative meant to suspend the payment of interest costs on the public debts.

The specialists in debt structuring and capital market operations said the debt service suspension initiative (DSSI) by the Group of 20 Countries (G20) under the auspices of the World Bank Group (WBG) and the International Monetary Fund (IMF) posed negative challenges for the economy and the nation at large and any attempt to benefit from it would complicate matters for public finances.

The institutions -- Fidelity Bank Ghana Limited, CalBank PLC, Databank Brokerage Limited, IC Securities (Ghana) Limited and Temple Investments Limited -- were responding to Graphic Business enquiries on the implications of Ghana not participating in the debt suspension programme, meant to help create fiscal space for the economies of developing countries but returned to the International capital market (ICM) for a $3.025 billion loan at a time when interest cost on the debt stock had assumed record levels.

The enquiries followed the successful issuance of the 2021 Eurobond in March during which the five institutions, which are all 100 per cent owned by Ghanaians, were the co-managers.

Wrong signals

In the response sent to the paper, the firms said if Ghana participated in the DSSI, it would have sent the wrong signals to the international investor community that the country was either in debt distress or had difficulties servicing its debts.

That, they said, would have resulted in higher borrowing costs to the economy at a time when the country needed low cost debts to contain spending pressures and help moderate the pace of debt accumulation.

The co-managers explained that it would have also caused international rating agencies to downgrade Ghana's credit rating and that would have limited the government's ability to access additional finances from the ICM to support development, finance COVID-19-related expenses and retire costly existing debts.

Structure of debt

They added that the structure of the national debt stock made it uneconomical for the country to seek to benefit from the programme that was put together last year to provide debt repayment reliefs for developing countries in the face of the COVID-19 pandemic.

They, therefore, commended the government for the bold decision not to participate in the DSSI, which helped to freeze official bilateral debt repayments due in 2020 and 2021 to G20 nations and members of the Paris Club, a group representing major credit countries.

The initiative took off on May 1 last year and has since delivered more than $5 billion in reliefs to more than 40 countries globally, according to the IMF and the WBG.

Downgrade of rating

"A country’s participation in the DSSI or Common Framework is an indication of debt service difficulties or debt distress. This could result in a downgrade of the country’s credit rating by international rating agencies and significantly reduce the country’s access to international capital markets," the co-managers said in their response.

"Ghana is not currently experiencing any of those difficulties with debt service and certainly not in debt distress. Therefore, a decision to seek a DSSI would send the wrong signal to investors about Ghana’s creditworthiness and result in a higher borrowing cost to the public purse, "they added.

According to to the institutions, the DSSI was mainly aimed at easing difficulties with debt service and repayment challenges related to bilateral creditors.

They said while some of the country's peers on the continent had a high concentration of bilateral creditors within their debt portfolio, "Ghana’s bilateral debt is very low, accounting for less than five per cent of its total debt stock. This situation indicates that Ghana does not need to apply for the DSSI since the cost of participating in the DSSI may outweigh the benefits," they added.

Potential savings

The WBG said in October last year that Ghana could save about $354 million, equivalent to 0.5 per cent of 2019 gross domestic product (GDP), in interest cost under the initiative.

So far, Ethiopia, Cameron, Senegal, Chad, Cote d'Ivoire, Kenya and Angola are among the African countries to have participated in the initiative.

In mid last year, rating agency, Moody's, placed the credit ratings of Ethiopia, Senegal and Cameroon on a downgrade list, citing the impact of the DSSI on their respective private creditors and economies.


The country returned to the Eurobond market in March, this year and successfully raised a total of $3.025 billion in a four-tranched deal that was twice