Ghana: Fitch warns of rising interest costs on domestic debt despite IMF programme
Ghana has received a warning from credit rating agency Fitch regarding the escalating interest costs on its domestic debt, even after securing a program with the International Monetary Fund (IMF). Fitch’s assessment raises doubts about the country’s overall debt sustainability in the medium term.
Interest rates on Ghanaian Treasury bills (T-bills) have experienced an upward trajectory since plummeting to around 18% in March 2023, down from a high of 35%. This sudden surge has sparked apprehensions about a potential restructuring of short-term securities.
During a recent webinar on the topic of Africa Sovereigns Amid Financing Crunch, Toby Iles, Senior Director for Emerging Markets at Fitch, cautioned Ghana and other African governments about the mounting interest costs associated with domestic markets. Iles emphasized that the proportion of interest costs on domestic debt has been steadily increasing, casting doubts on the sustainability of Ghana’s domestic debt obligations.
Iles further commented that although debt restructuring might offer short-term liquidity benefits, it does not address the broader issue of debt sustainability over the medium term. The country must undertake fundamental improvements in fiscal consolidation to achieve long-term stability.
In a separate analysis, Fitch highlighted the considerable losses that Ghanaian banks would have incurred in 2022 if a flexible treatment had been applied to the Net Present Value (NPV) calculation. The intervention by the Ghana Association of Banks helped curtail the anticipated losses for financial institutions.
The Domestic Debt Exchange Programme resulted in banks reporting net losses of approximately ¢6.6 billion in 2022 due to significant write-offs attributed to bad debts. Recognizing the effectiveness of the Bank of Ghana’s forbearance measures, Mahim Dissanayake, Senior Director of Financial Institutions responsible for Europe, the Middle East, and Africa at Fitch, commended the central bank for its proactive measures in mitigating the impact on the banking sector.
These warnings from Fitch underscore the urgency for Ghana to address the escalating interest costs associated with its domestic debt and prioritize fiscal consolidation to ensure long-term debt sustainability. The support provided by the Ghana Association of Banks, coupled with the Bank of Ghana’s forbearance measures, has helped alleviate some of the losses experienced by the banking sector. However, the nation must remain steadfast in its commitment to financial stability as it navigates these challenging times.
