Politicking over the Shady Domestic Debt Swap Agreement, as Discussed by Amos Safo

Politicking over the Shady Domestic Debt Swap Agreement, as Discussed by Amos Safo

The Ghanaian government's domestic debt management strategy is sparking controversy, dripping with unpredictability. Finance Minister Ken Ofori-Atta boasted that Ghana wouldn't resort to the IMF for a rescue, only to do an about-face and initiate a bailout. The murky debt deal is as elusive as it is uncertain, with banks—key players in the plan—lamenting the lack of sufficient info to enlighten their clients. So why the secretive silence from the government on the debt plan?

When the finance minister heralded homegrown solutions to the economic crisis, was the current debt management plan all he had to offer? Economic analysts, such as Kwame Pianim, accuse Ofori-Atta of guiding Ghana into the current cash crunch.

Since the unveiling of the domestic debt exchange program, I've been tracking reactions from across the nation—and I must be frank with the finance minister and his team: Ghanaians aren't taking the hard-sell on the deal lying down. Individual and institutional bond and Treasury-bill holders are seething with anger at what they perceive as heavy-handed coercion to accept the offer or face consequences.

Deal Details

A total of 58 Government of Ghana (GoG) bonds, worth roughly GH¢121 billion and due between February 2023 and August 2039, are eligible for the exchange. Six Energy Sector Levies Act (ESLA) bonds, valued at GH¢8.3 billion, and three Daakye Bonds, valued at GH¢2.8 billion, are also on the exchange blacklist.

The plan involves:

• All eligible bonds maturing in 2023 will be swapped for new bonds with maturities of 2027 to 2033.
• A 2% cash tender fee will be paid on the principal amount of such eligible 2023 bonds.
• All eligible bonds maturing after 2023 will be swapped for new bonds with maturities of 2027 to 2038, but there will be no cash tender fee paid.
• All interest accrued on eligible bonds (2023 and post-2023) but not yet paid will be capitalized and added to the eligible bond principal amount, then swapped for new bonds.

Public Reaction

I recently encountered a video where a woman shared her husband's ordeal. He invested all his retirement funds in government bonds and Treasury bills, only to be told he'd have to wait till 2024 to earn interest, while having no access to the capital until 2037 and beyond. According to the woman, since the announcement her husband has turned quiet and has sleepless nights. Another 65-year-old man invested all his redundancy benefits, earned from the financial crisis, in bonds and Treasury bills, believing in the hitherto solid and secure government bonds.

Many bond holders feel it's unfair for the government to freeze their investments in bonds, which were once considered the safest investments for individuals and institutions, including banks. The entire financial sector holds over 50% of Ghana's overall bonds and securities.

Impact on banking sector

The Ghana Institute of Bankers predicts that, with the current debt exchange plan:

• 17 out of the 23 banks could drop below a capital adequacy ratio of ten percent.
• Banks would require new capital of more than GH¢16 billion.
• Bank losses could reach as high as GH¢14.5 billion.
• Many banks will likely cut staff to sustain portfolios, regardless of the deal's outcome.
• There could be a credit squeeze and increased borrowing costs for the private sector.
• Some banks could halve their balance sheets from 2023 and beyond if the current deal is pushed through.
• Portfolio performance would be severely impacted, as both portfolios have over 91% exposure to GOG, LG&SA, and Daakye Bonds.

Liquidity Challenges

The forecasts suggest that non-payment of coupons and maturities might lead to liquidity issues for banks, with potential illiquidity problems and a potential collapse of the financial sector. The perceived risk-free reputation of Government of Ghana bonds could take decades to restore.

This explains why all banks have declined to sign the deal in its current form. I urge them to stand firm for the nation's overall financial health. The current government, which orchestrated a banking bailout to save the economy from crisis, would find it unfathomable to let the banking sector succumb to a domestic debt restructuring collapse. Banks must innovate and prioritize lending to the private sector for economic growth rather than merely trading in government securities for short-term profits.

Economic Confidence

This debt plan, if not revised, could undermine trust in government bonds and securities. Even if the government scrapped the entire plan, its poor communication and sloppy rollout are causing unease among current and future investors. The promise of "no haircut" isn't easing concerns, with a total freeze on withdrawals from investment banks.

Since December 2022, I've made two unsuccessful attempts to withdraw funds from Ecobank Transnational Corporation (EDC) and Databank—these requests are still pending. My queries indicate that there's a freezing of trading in bonds, causing uncertainty about numerous investments. This injustice affects all investors and bond holders.

Many investors rely on their reserves built through personal discipline as a future safety net. The essence of savings and investments is to depend on them in difficult times. Retirees, widows, widowers, and pensioners who solely rely on government coupons from their investments in government bonds are particularly vulnerable.

Cutting unneeded expenditure

In addition to the overall debt management process, the government could consider reducing some unnecessary expenditure through staff reductions at several ministries, departments, and agencies. There are public concerns that there are too many government hangers-on, including at Jubilee House. Government must also address tax evasion, with big corporations and the wealthy being the primary culprits.

Political implications

This debt exchange plan might well be the ticket to booting the government out of power in 2024. In 2024, Ghanaians will be left to choose between two "devils," and either way, the economy will likely continue to struggle. The question is, which of the two—the New Patriotic Party (NPP) or the National Democratic Congress (NDC)—is the lesser evil? Is it better for the NPP to reinstate the economy or for the NDC to try and reverse the catastrophe? Ghana's current financial burden stems from the NDC's former economic management. Last week, Bank of Ghana Governor Dr. Ernest Addison revealed that a large chunk of Ghana's foreign currency is used to service debts originating from energy sector debt agreements signed under the John Dramani Mahama administration[2].

To be honest, I wish Ghana had an alternative for economic management apart from the NDC. Former President John Dramani Mahama once asserted that his government didn't just eat the meat—they ate the bone to the marrow. This prelude to seeking policy credibility from the IMF was laced with nail-biting conditions, including a net freeze on employment[1].

Let Ken Ofori-Atta and the economic management team be aware that public sentiment is vehemently against this debt management plan as it stands. Things will only improve for the country's economy and financial health if they listen to public opinion. Long live Ghana.

• The writer is a Development and Communications Management Specialist, and a Social Justice Advocate.

[1] https://www.modernghana.com/news/1029380/jdm-weve-eaten-the-meat-and-the-bone-to-the-marrow.html[2] https://www.myjoyonline.com/business/2023/January-19th/large-portion-of-foreign-exchange-used-to-service-energy-sector-debts-addison.php[3] https://www.jstor.org/stable/24464417[4] https://www.sciencedirect.com/science/article/pii/S2542519621000027[5] https://www.sciencedirect.com/science/article/pii/B9780128215461000436

1. The Ghanaian government's controversy-ridden domestic debt management strategy has led some to accuse Finance Minister Ken Ofori-Atta of guiding the country into a cash crunch.
2. The debt exchange program has sparked outrage among bond holders, who feel it is unfair for the government to freeze their investments in once-secure government bonds and securities.
3. The plan involves swapping numerous bonds and bonds from the Energy Sector Levies Act (ESLA) and Daakye Bonds for new bonds with varying maturities, with some bonds incurring a 2% cash tender fee.
4. There are concerns that the government's communications about the plan have been poor, causing unease among investors and leading to a freeze on withdrawals from investment banks.
5. The predicted impact on the banking sector includes 17 out of 23 banks dropping below a capital adequacy ratio of ten percent, banks requiring new capital of more than GH¢16 billion, and bank losses reaching as high as GH¢14.5 billion.
6. To address these issues, the government could consider cutting unnecessary expenditure through staff reductions at several ministries, departments, and agencies, and addressing tax evasion by big corporations and the wealthy.
7. This debt plan, if not revised, could undermine trust in government bonds and securities, potentially having political implications for the 2024 election, where the economy and financial health will likely be key issues.
8. A video shared by a woman described her husband's predicament—he invested his retirement funds in government bonds and Treasury bills, only to have his access to the capital delayed until 2037 and beyond.
9. The entire financial sector holds over 50% of Ghana's overall bonds and securities, and many investors rely on their savings and investments as a future safety net, particularly retirees, widows, widowers, and pensioners.

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