IMANI Ghana analyses potential sovereign debt restructuring in Ghana
Regarding its existing debt stock, the government of Ghana is presented with a number of Hobson’s alternatives.
- Should it restructure the debt or persist in the hope that the signalling effect and maximum inflows of a potential 3-year $3 billion IMF deal will make it possible to push the debt can farther beyond the road?
- Should it restructure only the domestic debt (debt owed to Ghanaians who have bought government securities such as treasury bills) or only the external debt (debt owed to foreigners who have bought Ghana’s Eurobonds and given out various loans for various projects? Or both?
- Should it try to bring all creditors together in a single decision-making forum (such as a “creditor committee”) or attempt to engage them in informal consultative conferences and surveys?
- Should it attempt to address the debt issues purely through contractual negotiations or should it complement negotiations with legislative support (make laws to ease its way)?
These questions present some of the most formidable analytical challenges the Ghanaian government has ever faced. IMANI’s analysts wonder if the government recognises this fact if it has the leadership to mobilise the nation behind the choices it makes and whether it has the temperament to manage inevitable dissent, especially from the official political opposition and the country’s highly vocal civil society movement.
Context: IMF Engagement
The speculations about a potential debt restructuring by the government of Ghana arose in the context of the commencement of formal negotiations this week between the government and the IMF on a possible bailout package through the so-called “extended credit facility” (ECF). (Side note: the government’s attempts to solicit views and inputs into this whole effort have been perfunctory at best in line with a general disinterest in building national consensus on critical issues).
The IMF’s policy when designing a bailout for a country that has serious debt challenges can be summed as follows:
In determining whether a country has unsustainable debt, the IMF evaluates, first, the country’s capacity to carry debt and then the trajectory of revenues and repayments to see if in the medium-term the country will face debt distress or is already in distress.
Here is how the IMF assesses whether either condition has been met during the so-called Sovereign Risk & Debt Sustainability Analysis:
So is Ghana’s Debt Sustainable?
As indicated above, the starting point for deciding if a country can continue servicing its debts without defaulting in the medium term or triggering economic collapse is to look at the country’s capacity to carry debt. In the IMF world, this is done through the Country Policy & Institutional Assessment (CPIA) which is led by the World Bank. If the results are stellar, the country is classed as having high capacity. If it is good but not stellar, the country is said to have “medium” capacity. “Low” is the obvious bottom rating.