Domestic debt restructuring results in 100bps reduction in debt-to-GDP
In recent years, the global economy has experienced a number of significant challenges, including the COVID-19 pandemic and resulting economic slowdown, geopolitical tensions, and shifts in trade policies. These factors have had a profound impact on the financial health of many countries, particularly those in the developing world. One such country is Ghana, which has seen its public debt-to-Gross Domestic Product (GDP) ratio rise significantly in recent years.
According to rating agency Fitch, the present value of Ghana’s public debt-to-GDP ratio stands at slightly above 100%, even after a substantial redemption reprofiling and significantly lowered interest rates. Fitch arrived at this conclusion using the standard 5% discount rates that apply in the International Monetary Fund/World Bank debt sustainability framework for low-income countries.
Fitch further noted that the domestic debt exchange has increased Ghana’s debt-to-GDP ratio by 0.6 percentage points, due to payment-in-kind coupons corresponding to an increase in the face value of the new bonds compared with the face value of tendered bonds. While this may not seem like a significant increase, it underscores the challenge that Ghana faces in reducing its debt burden and achieving fiscal sustainability.
The rating agency went on to say that the IMF support for Ghana will likely depend on the government’s ability to show a path towards bringing the present value of debt to 55% of GDP over the forecast horizon, based on the IMF/World Bank debt sustainability analysis. Additionally, the ability of official bilateral creditors to provide financing assurances in the context of the Common Framework external debt restructuring that authorities have requested will also play a critical role.
It is worth noting that while discussions have started among some official creditors, the official creditor committee responsible for providing financing assurances has not yet been created. As a result, Fitch does not expect the provision of financing assurances, which are necessary for an IMF Board approval of the Extended Credit Facility (ECF) arrangement and for a new debt sustainability analysis to be published, before the end of the second quarter of 2023.
These challenges highlight the difficult balancing act that Ghana and other developing countries must undertake as they seek to manage their debt levels and pursue economic growth. On the one hand, these countries must take steps to address their debt burdens and pursue fiscal sustainability, which may require difficult policy choices and structural reforms. On the other hand, they must continue to invest in their economies and promote economic growth, which is necessary for reducing poverty and improving living standards.
Ultimately, the key to success for countries like Ghana will be finding the right balance between these competing priorities. This will require strong leadership, bold policy choices, and a willingness to work collaboratively with international partners and creditors. Only by working together can we hope to overcome the challenges facing the global economy and build a brighter future for all.
