Debt Restructuring: Ghana’s debts to IMF, World Bank, AfDB cannot be restructured
Talks about debt restructuring as a prerequisite to securing an IMF deal by government has been rife in recent weeks.
Debt restructuring by Ghana has become necessary given its unsustainable debt levels which currently stands at 78% of Gross Domestic Product (GDP).
In debt restructuring, a country can decide to restructure its domestic debt or external debt, Ghana, finding itself in this difficult situation, has decided to take the easy route which is to restructure its domestic debt.
Regarding government’s decision to restructure its domestic debt, there have been concerns about the possibility of the solvency of banks being threatened in view of the fact that they are the most exposed to government’s domestic debt.
Already, the government through the Finance Ministry, has setup a 5-member committee to commence negotiations with institutional investors such as banks, pension funds and insurance firms who are exposed to its debts to determine how the debt restructuring will be carried out.
Regarding external debt restructuring, debts owed multilateral institutions such as the IMF, World Bank and the African Development Bank cannot be restructured.
Only debts owed official creditors like those belonging to the Paris Club, debts owed commercial banks and foreign bonds can be restructured.
Debts owed multilateral institutions cannot be restructured because debt reliefs by such institutions require the country to be a Highly Indebted Poor Country (HIPC) which Ghana is not. Ghana is presently a lower middle-income country (LMIC).
To restructure the other components of the country’s external debt, debt owed Paris Club members like the US, UK and Germany will require a dedicated programme which will require the convening of the donors to determine the terms of engagement and this can take many months.
With debts owed commercial banks, it is very unlikely that Ghana will try to default on its various Letters of Credit (LCs), bank-guaranteed supplier credit and conventional bank loans as that would impact severely on a wide range of infrastructure projects and resurrect dumsor (the country’s perennial power crises), posing an existential threat to the stability of the government.
Regarding Eurobond debts, the country’s Eurobond portfolio is where a lot of the emphasis shall be placed in any external debt restructuring. Ghana had about $13.1 billion of Eurobonds outstanding at face value at the end of 2021. By the end of this quarter, it should reduce to about $12.4 billion.
Besides constituting nearly half of the stock of Ghana’s external debt, eurobond issuances are also Ghana’s costliest external debt, increasing the temptation for restructuring. According to analysts, nearly $7.5 billion of the principal must be cleared by 2032 ($1.5 billion of which is due in just 3 years).
Of the 16 or so outstanding bonds, 14 have collective action clauses that makes it easier to convene “creditor committees” to negotiate a mass agreement.
Yet, the Eurobond debt service burden is still only about 12% of total revenues and thus just 20% of the overall public debt service burden. In fact, Ghana’s total external debt service burden is about 25% of the entire annual debt service burden.
In these circumstances, some analysts contend that viewed only from the point of view of the liquidity factor (instead of both liquidity and solvency considerations), the domestic debt, because it constitutes 75% of the annual debt payment burden, ought to be tackled with greater urgency.
