Ghana debt-restructuring risks increase as IMF agreement far from certain

President Nana Akufo-Addo on 1 July announced an about-turn and told finance minister Ken Ofori-Atta to open negotiations for an IMF programme, after previously pledging not to borrow from the fund.

Securing an IMF deal will be no easy task. Mark Bohlund, senior analyst at REDD Intelligence in London, says he is “very sceptical that Ghana will be able to secure either a staff-level agreement or an executive board approval for an IMF programme.”

The country’s public debt is “clearly not sustainable and relations with the fund were “frayed” during much of the most recent IMF programme from 2015 to 2018, Bohlund tells The Africa Report.

While it is possible that the government will try to continue to service its debt even without IMF support, the “likelihood of the government initiating a debt restructuring, for instance through a consent solicitation among bondholders for suspending debt-servicing payments, in the second half of this year has risen substantially,” Bohlund says.

• “I think it is essentially inevitable that Ghana will start the process for a debt restructuring before its eurobond maturities pick up sharply in 2025.”

Ghana’s limited financing alternatives to international debt issuance leave it “exposed to a sustained loss of market access that would precipitate a debt restructuring”, Moody’s analysts led by David Rogovic wrote in a report in June. Among sub-Saharan sovereigns rated by Moody’s, Ghana and Kenya are the most vulnerable if they are unable to rollover maturing bonds, because of low current reserve coverage for repayments due between 2022 and 2026, Moody’s says.

• Any IMF deal would likely take time before resulting in lower borrowing costs, according to Moody’s.
• Still, the absence of immediate eurobond maturities gives the government “time to deliver on promised fiscal consolidation, restore investor confidence and regain market access,” Rogovic wrote.

Endless cycle

The government announcement is the seventeenth time that Ghana has turned to the fund since 1966, says James Dzansi, an economist at the International Growth Centre in Accra. He sees the process as necessary and even desirable. The latest announcement has already had a positive impact on the cedi, and talks with the IMF will put the government in a stronger position to resist demands from public-sector unions for higher wages, he argues.

The government should have turned to the fund much sooner, and is now in a “very weak bargaining position,” Dzansi says. The government has “absolutely no other option” but to secure an agreement and stick to it. “The credibility that comes from the IMF is what they need the most.”

The risks of a default are “very high” without a deal, while agreement would “calm the nerves of international investors,” Dzansi says. The government has insufficient political capital to get the country’s finances under control by itself, he argues. “The fact is we tend to pull our act together with the IMF,” with the progress made then usually squandered at election time.

The IMF, Dzansi argues, has evolved since the 1970s and 1980s when policy prescriptions were laid down in return for financial support. These days, he argues, the IMF is more likely to ask the government how it plans to address the situation.

• He likens the relationship between Ghana and the IMF to that between the UK and the European Union before Brexit. EU membership, he argues, gave UK governments “someone to blame” for unpopular decisions.
• That pattern of convenience, of course, unravelled with Brexit. It’s not a path that Ghana can afford to imitate, Dzansi says.
• “This is not going to be the last time. We will be going in and coming out” of IMF programmes. “The reality is we need the IMF to be watching over our shoulder.”

Bottom line

Ghana may be willing to countenance an endless cycle of bailout programmes – but the IMF may not see it the same way.