Ghana: Akufo-Addo’s ‘no bond haircut’ promise met with skepticism

Rumours about a possible haircut on government bonds owing to the country’s IMF negotiations sent Ghana’s financial market into a tailspin in October. Citizens marched to banks and forex bureaus to buy US dollars as the cedi tumbled further to record lows – depreciating by 9% in the week beginning 10 October.

The cedi gained 4% against the dollar in the week ending 28 October. Currently, the exchange rate is ¢13.60 to the dollar.

In his first major national address on the economic downturn, President Akufo-Addo told bondholders to rest assured they will not lose their money.

“No individual or institutional investor, including pension funds, in [the] government treasury bills or instruments will lose their money, as a result of our ongoing IMF negotiations. There will be no haircuts,” he said.

There will be no “haircuts”, so I urge all of you to ignore the false rumours, just as, in the banking sector clean-up, Government ensured that the 4.6 million depositors affected by the exercise did not lose their deposits. #HopeForGhanaEconomy #ResolvingTogether pic.twitter.com/7ELLBdWxFs

— Nana Akufo-Addo (@NAkufoAddo) October 31, 2022

Public debt stock

Ghana’s public debt stock stood at GH¢402.4bn ($28.62bn) as of July 2022 representing 68% of GDP, according to the central bank. However, the World Bank’s recent ‘Africa Pulse Report’ projected the debt to GDP ratio will reach 104.6% by the end of 2022, describing Ghana as a high debt distress country.

Our analysis is that it will lead to serial restructuring

Even though the IMF conducts a debt sustainability analysis to ascertain Ghana’s debt status before agreeing to a bailout programme, the government is drawing up a domestic plan to restore debt sustainability and reduce total public debt stock.

“Our analysis is that it will lead to serial restructuring,” says Bright Simons, vice president at Imani Africa, an economic and social policy think-tank. “A future restructuring is likely to be inevitable, in the current fiscal context, if the government doesn’t reduce the actual principal in any initial restructuring.

“Another method open to the government is the use of coupon maturity extensions but on the whole they tend to increase the overall burden and drag out the insolvency situation. They are also costlier,” he says.

Limited choices

According to Dr. James Dzansi, the country economist for the International Growth Center, without a haircut on bonds, the government will be left with fewer choices to reduce its debt to sustainable levels.

“The statement that those who have government bonds and treasury bills will not lose their principal is good, but the president should have announced a program for the reduction of the number of ministers, deputy ministers, and special assistants across the ministries and dealing with the bloated government size,” he says.

In a series of tweets, Tim Jones, the head of policy at Debt Justice UK, argued that “it would require mass public spending cuts and tax increases, that would crash the economy,” if the government does not restructure its debt while stabilising the economy.

/9 Ghanaian civil society organisations have called for there to be large scale debt cancellation, rather than IMF loans being used to fund mass profit for speculators, while the debt crisis worsens / ends#CancelTheDebthttps://t.co/IbfAaoJpUG

— Tim Jones (@tim_jones6) October 31, 2022

Haircut is inevitable

Former deputy finance minister Cassiel Forson said previously that Ghana cannot avoid debt restructuring because its debts are unsustainable and the government will likely go back on its assurances. “There would be some form of a haircut. Clearly, someone is not briefing the president properly or probably the writing did not come out well,” he said on local TV Joy News.

According to Akufo-Addo, the government is hoping to reduce total public debt to GDP ratio to 55% by 2028 with the servicing of external debt pegged at not more than 18% of total annual revenue by the same year.

“We are aiming to restore and sustain macroeconomic stability within the next three to six years, with a focus on ensuring debt sustainability to promote durable and inclusive growth while protecting the poor,” the president said.

Meanwhile, the government says it is doing its best to reach an agreement for a $3bn lifeline from the IMF before the end of the year.