Ghana’s public debt as at June 2022 stood at GH¢393.4 billion (almost $40 billion) and equivalent to 78% of GDP. This figure is huge, but largely meaningless without the proper context. And so before I explain what restructuring is and how it could affect your investments, I will give a simple explainer of why Ghana’s debt is such a problem.

Every government has to borrow to finance its activities. It is not feasible for a government to wait for tax revenue or revenue from natural resources to flow into the treasury before it undertakes the critical task of maintaining infrastructure, paying public service workers, national defence, waste management and so on. Therefore government has to borrow from both domestic sources and foreign sources.

In Ghana, government borrows from domestic sources through the money market and the capital market. The money market is a fancy way of saying short-term securities such as treasury bills and the capital market involves long-term securities such as notes and bonds. The actual mechanism through which this is done will be discussed later in this post, but for now just know that when you buy treasury bills or bonds from your bank or broker, you are ultimately lending to the government for a fixed period of time at a fixed interest rate.

Ghana’s government also borrows from foreign sources through concessionary borrowing and commercial borrowing. Concessionary borrowing can best be described as cheap borrowing. This is when government borrows from multilateral organizations such as the World Bank, IMF, African Development Bank; or when it borrows from other nations such as Japan, USA or China. These loans are usually at very generous terms because they come tied to a project or with many conditions that the government has to meet. Commercial borrowing on the other hand is where government borrows from private lenders who charge commercial interest rates. Over the past 15 years, Ghana’s governments have taken large commercial loans (named Eurobonds) because they are able to borrow much more than they would get from concessionary borrowing and also because there are no restrictions on what they can do with the money.

The size of a country’s debt does not matter as long as investors are convinced that it can pay back the debt. That is why the USA has a debt to GDP of over 120% yet people are willing to buy US bonds with an interest rate of 3%. They simply believe that the USA will not default on its debt. Some metrics that investors look at when examining whether a country can pay its debt includes interest payments to revenue, fiscal deficit and the primary balance. Interest payments to revenue is a measure of how much of a country’s revenue is going into paying interest on debts. The higher the ratio, the less likely a country is to be able to repay its debts. This ratio is 55% in Ghana (as at June 2022) and 15% in the USA. This means that GH¢55 out of every GH¢100 generated by the government in tax revenue, natural resource sales or any other type of revenue was used to pay interest on debt. This is a critical level and represents a deterioration from the 34% in 2017 and 2018, the 38% in 2019, the 46% in 2020 and even the 49% in 2021. The fiscal deficit represents the difference between all government revenue and expenditure, which was GH¢24.6 billion (4.9% of GDP) in June 2022. And the primary balance is government revenue less every expenditure except debt payments. This figure is supposed to be positive if your debt is sustainable, however, the figure as at June 2022 was a negative GH¢7.6 billion (1.5% of GDP).

Not surprisingly, foreign investors have become unimpressed by our debt sustainability and have therefore refused to lend us any more money. This came as a big blow to government as it had borrowed $3 billion in 2019, another $3 billion in 2020, and yet another $3 billion in 2021. These inflows had been crucial to reducing the pressure on borrowing on the domestic market, keeping the exchange rate relatively stable, and financing a fuel import bill ranging from $2 billion – $3 billion a year. Credit rating agencies, who are institutions who rate the ability of various debtors to be able to pay their debts, downgraded Ghana’s debt (here, here and here) thus taking our debt out of consideration for many investors abroad. With the lack of access to international markets, and foreign investors in the domestic market frantically selling their holdings and repatriating their earnings in dollars, the cedi has depreciated significantly and is now the second-worst performing currency in the world so far this year.

With the situation spiralling out of control, government’s options were limited. In an ambitious move to raise tax revenue, government introduced the e-levy, a 1.5% tax on electronic transfers that has so far generated GH¢93 million compared to the GH¢1.4 billion envisioned. Government has been forced to borrow more in the money market, thus raising treasury bill rates to 30% from 12.5% at the start of the year. On the capital market, investors have been unwilling to lend to the government long-term as they have lost confidence in the government’s ability to repay. This has led to the government canceling some planned bond issuances. With no other option, it wrote to the IMF, seeking funds and a program to restore debt sustainability.

It’s important that you understand the debt crisis situation in order to understand what the government may do next, and that is restructuring. Restructuring simply refers to changing the terms of the repayment of a debt. For example, given the challenge government is facing in repaying debt, it can propose to investors to accept a haircut or a stretching of the repayment period. A haircut is where creditors forgo a portion of their loan or a portion of the interest payable. This may or may not be in exchange for receiving payment upfront. Stretching the repayment period involves an investor agreeing to give the debtor much more time than initially envisioned to repay.

If Zambia’s restructuring plan is anything to go by, the IMF will expect some form of restructuring arrangement to be reached between Ghana and its creditors before it can agree a program with the country. I do not mean for this to be a policy post, so I will not talk about the feasibility of restructuring external debt vs restructuring domestic debt. I will instead speculate on what it would look like if government sought to restructure domestic debt to reduce its sky high interest payments ratio.

Earlier on I had said that I would explain how government borrows from domestic markets. This is done through auctions held by the Bank of Ghana on behalf of the government. At these auctions, selected banks and brokers bid for government treasury bills, notes and bonds at various interest rates with government selecting the most favourable bids to sell its debt securities to. These banks and brokers then sell these securities to their customers. As at July 2022, the holdings of government’s domestic debt of about GH¢190 billion was as follows.

• Bank of Ghana – 5.66%
• Commercial Banks – 34.29%
• Firms & Institutions – 24.12%
• Insurance Companies – 0.88%
• Rural Banks – 1.31%
• SSNIT – 0.76%
• Pension Funds – 5.95%
• Others – 12.08%
• Foreign Investors – 14.96%

Given this distribution, it is clear that commercial banks and firms would be the most hit by a restructuring arrangement. This is a contributing factor to the recent downgrading of 3 Ghanaian banks by Fitch Ratings. The explanation for the downgrade was that a restructuring of local debt would significantly affect the income of these 3 banks who rely on interest from sovereign debt holdings.

A haircut in exchange for upfront payment would have been welcomed by investors, as many are already seeking to sell off their bonds at steep losses in exchange for immediate liquidity. However, government lacks the money to pay off investors at the moment. Therefore, the most likely course of action could be a haircut without upfront payment and the stretching of a payment period. As an illustration, let’s say an investor purchased a GH¢1 million, 10-year bond at an interest rate of 20%. The government could propose that the bond is extended to 15-years, that the face value is reduced to GH¢500,000.00, that the interest rate is reduced to 10%, or any combination of the three.

Should this happen, and it is not yet 100% certain that it would, the losses would be painful given the high inflation environment we are in. The damage to investors’ confidence could also set back the nascent domestic investment industry for decades. You can be sure that no decision would be taken without extensive discussions between government and industry actors. Nevertheless, it would be impossible for Ghana to escape the debt crises without some sort of pain that would be felt across vast sections of society, and the investment community is no different. I will be watching the developments of the discussions with the IMF closely, and I suggest you do too.