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Govt outlines debt exchange programme: Seeks to reduce high public debt

BY: Maxwell Akalaare Adombila
Ken Ofori Atta, Minister of Finance
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The government has settled on a softer payment plan with institutions and individuals who have lent money to the country as part of efforts to reduce the burden the public debt stock puts on the economy.

The plan, which is in line with the government’s commitment to restore macroeconomic stability in the shortest possible time, involves the swapping of existing domestic bonds with longer-dated bonds that will take between four and 14 years to mature in 2037.

This means the extension of the repayment period for the bonds issued and held locally to allow for a staggered and phased payment of both the interest and the principal.

GDX

The plan, known as the Ghana Domestic Debt Exchange (GDX) programme, will see domestic bondholders being asked to exchange their instruments for new ones.

In a public broadcast last night, the Minister of Finance, Ken Ofori-Atta, said under the programme, existing domestic bonds as of December 1, 2022 would be exchanged for a set of four new bonds maturing in 2027, 2029, 2032 and 2037.

The annual coupon (interest) on all the new bonds would be set at zero in 2023, which meant that next year none of the bonds would receive interest payment due the holders until at maturity, he said.

However, in 2024, the bonds would assume five per cent interest and 10 per cent from 2025 until maturity, he added.

Mr Ofori-Atta said the coupon payments would be paid twice every year (semi-annually).

The extension of the maturity period (tenor) and the phased coupon payments are expected to create fiscal space for the government to be able to invest in productive sectors of the economy to spur growth.

It will also bring the country’s debt levels to the position required by the International Monetary Fund (IMF) for countries seeking assistance from it to rebalance their books.

It is also expected to complement both expenditure rationalisation and revenue-enhancing measures outlined in the 2023 Budget and enable the country to unlock the IMF programme disbursements, which is critical to mitigating the current pressure on public finances, the Ghana cedi and inflation.

No haircut

The minister indicated that the government had been working hard to minimise the impact of the domestic debt exchange on investors holding government bonds, particularly small investors, individuals and other vulnerable groups.

In line with that, he said, treasury bills had been completely exempted and all holders would be paid the full value of their investments on maturity.

“There will be no haircut on the principal of bonds. Individual holders of bonds will not be affected,” Mr Ofori-Atta said.

He said given that the financial institutions held a substantial proportion of the bonds, the potential impact of the exchange on the financial sector had been assessed by their respective regulators.

Working together, the regulators – the Bank of Ghana, the Securities and Exchange Commission, the National Insurance Commission and the National Pensions Regulatory Authority – had put in place appropriate measures and safeguards to minimise the potential impact on the financial sector and ensure that financial stability was preserved, Mr Ofori-Atta said.

The measures would ensure that the impact of the debt operation on financial institutions was minimised, using all regulatory tools available to them, he said.

Stability fund

Mr Ofori-Atta further announced that a Financial Stability Fund (FSF) was being established by the government, with the help of development partners, to provide liquidity support for banks, pension funds, insurance companies, fund managers and collective investment schemes to ensure that they were able to meet their obligations to their clients as they fell due.

“These are difficult times and we count on the support of all Ghanaians and the investor community to make the exercise successful,” he said.

He expressed the confidence that the measures would contribute to restoring macroeconomic stability.

“With your understanding and support and that of the entire investor community, we shall overcome our current difficulties, and with the help of God, put our economy back on the path of renewed and robust growth,” he added.

2023 Budget

The Minister of Finance first announced the programme when he presented the 2023 Budget.

He said a debt sustainability analysis (DSA) that was conducted had revealed that the public debt (excluding overdraft, state-owned enterprises (SOEs) and special purpose vehicles (SPVs), as a ratio of the gross domestic product (GDP), was 75.9 per cent as of the end September 2022.

Mr Ofori-Atta said the DSA analysed the country’s capacity to finance its policy objectives and service its debts, noting that the sustainability of the debt had been affected by the negative impact of exchange rate depreciation, particularly on external debt, as well as the crystallisation of significant contingent liabilities in recent years.

“The current debt sustainability analysis conducted reveals that Ghana is now considered to be in high risk of debt distress.

“Mr Speaker, in spite of the heightened debt levels, the government remains committed to ensuring that the debt is brought to sustainable levels over the medium to long-term.

“To this end, we will implement a debt exchange programme to address the challenges identified in the portfolio, in collaboration with all relevant stakeholders, including the Ghanaian public, the investor community and development partners,” the minister said in the 2023 Budget.

SOEs

Mr Ofori-Atta also pledged the government’s commitment to continue to strengthen its oversight of all SOEs, especially those in the financial and the energy sectors.

He expressed the hope that reforms and discipline at the SOEs would reduce potential fiscal risks from incidence of contingent liabilities.

Engagements

The GDX programme follows a series of engagements with key stakeholders on how to deal with the debt burden.

The Ministry of Finance and the Bank of Ghana (BoG), on October 12, this year, constituted a five-member committee to lead discussions with financial sector players on Ghana’s debt management.

The consultative committee, led by Albert Essien, with Simon Dornoo as Vice-Chair, also had Alex Asiedu, Mabel Nyarkoa Porbley and Peter Enti as members.

The formation of the committee was part of efforts to ensure orderliness and confidence in the government’s ongoing negotiations with the IMF.

“The committee will be consultative and will, among other things, lead discussions with the financial services industry and other stakeholders to provide industry-wide inputs and transmit industry concerns on debt management strategy to the MoF and the BoG,” the statement announcing the formation of the committee said.