A flurry of announcements this week was meant to signal that momentum was building towards a successful close of Ghana’s unorthodox domestic debt restructuring program (DDE). Banks, insurance firms and most capital market players have consented to revised terms for the orderly resolution of the country’s unsustainable domestic debt.

At a plush conference in the Ghanaian hinterlands, at a resort featuring Australian emus and llamas from Argentina, the Finance Minister had a literal spring in his step as he mounted the podium to praise the government’s commitment to “African prosperity”.

All this flourish might suggest the beginning of the end of the country’s most debilitating fiscal crisis in recent memory. Considering analyst unanimity about how harsh the Ghanaian DDE has been for domestic savers and investors, it is perhaps not too difficult to understand why the mere fact of some traction is enough to lift government’s spirits. Using the framework of its own advisors, Lazard, the government’s DDE offer definitely merits the investor-unfriendly tag.

Lazard’s model for assessing debt restructurings. Source: Lazard

And yet, here we are, on the verge of closure. A sober assessment of the situation, as I hope to explain in a second, would however recall Churchill’s famous statement in 1942 after the Allies blocked a massive Nazi incursion into Egypt and secured the vast oil fields of the Gulf in one of the most dramatic turns of World War II:

“It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

The deals agreed between Ghana’s Finance Ministry and the key financial market players, welcome relief from the stress and anxiety of recent weeks though they are, are significantly caveated.

In addition to the government revising its earlier stance of paying no interest on bonds this year and paying just 5% interest next year, it will instead pay 5% interest in 2023 and an effective rate of 9% (down from the roughly 19% weighted average rate on the old bonds) for the remainder of the term of the new bonds. Significantly, consenting domestic creditors are not getting a concession on the extended maturity of the reprofiled instruments, a major contributor to the Net Present Value (NPV) losses estimated by analysts.

To understand the provisionality of the agreements reached, one needs to carefully read the latest announcement, the one announcing a deal between the capital market operators (GSIA) and the Finance Ministry.

Just like the banks and insurance firms, the deal was brokered on the back of a promise by the government to set up a $1 billion Financial Stability Fund (FSF) to cushion any industry player that finds its solvency or liquidity threatened following the restructuring exercise.

As analysis of similar structures proposed for the European Union, and used in the Greek and Jamaican debt restructuring episodes, attests, a loan-based FSF is indeed the appropriate mechanism to use in these kinds of situations.

Comparative analysis of different fiscal support mechanisms.
Source: Misch & Rey/CEPR (2022)

The only problem is that the design of the proposed Ghanaian version of an FSF is entirely in the heads of mandarins at the Finance Ministry. So far, they have studiously refused to share any details about the interest rate, maximum term, collateral requirements, eligibility criteria, or, indeed, any of the major features one needs to know to properly asses a Fund of this nature.

At one point the Finance Minister even appeared to suggest that the Fund was for mere show because the Jamaican version ended up redundant. He ignored the Greek example, in which a decade after it was set up, the Greek FSF is still dealing with the lingering effects of the bank bailouts partially attributed to the country’s debt saga.

Worse still, there is no money as yet for the Ghana FSF. The government says it has approached the World Bank to cover 30% of the costs of the FSF. The World Bank operates within its strategic plan for Ghana. Making additional resources available is contingent on satisfactory progress on a whole host of pending issues about already committed resources. The other expected funders of the program, like Germany’s KfW, have elaborate processes for agreeing to new programs and disbursing funds and, at any rate, would also like to see this whole FSF embedded in a detailed economic recovery strategy, of which none has been forthcoming from the government.

In short, the FSF is pretty much conceptual at this stage. It is thus not clear whether the financial sector players expect incorporation of language concerning the FSF into an amended debt exchange prospectus. The answer will be interesting come Tuesday, the 31st of January, the deadline of the DDE.

On the GSIA front, the caveats are more striking. A good chunk of the holdings of these capital market operators are in Collective Investment Schemes (like mutual funds and unit trusts). The chains of exposure are quite complex, entangling some corporate treasuries as well as individuals. For example, the country’s fintech industry parks some assets using these and other bank custodianship arrangements. Under the terms of the provisional agreement with GSIA, government bonds owned by the Collective Investment Schemes (CIS), regardless of ultimate beneficial ownership, must be treated on the same terms as those owned by individual bondholders.

Any contingencies of the CIS kind imply that the creditor group concerned cannot sign a blanket DDE agreement on Tuesday. A revised document meeting legal muster must be prepared and reviewed before any prudent fund manager can proceed to sign.

But even if such agreements are signed in short order, they will still be subject to a fuller resolution of the caveated matters before actual immolation of the old bonds and issuance of the new bonds can proceed at the depository of the Ghana Fixed Income Market. It will be interesting how all this unfolds in the coming days, considering the government’s rush to have everything done and dusted in the first week of February.

And that is only in relation to the creditors signing on to the DDE. We can safely project that the vast majority of individual bondholders and offshore investors would not consent to the DDE by the 31st deadline. A significant number of corporate treasuries will also hold out. Taking that fact into account, and considering the earlier exemption of Pension Funds and the contingencies around the CIS holdings, one can also project a participation rate (on principal basis) in the DDE of about 65%, and debt service relief of less than 50% of the original expected amount.

A 65% participation rate would be the least impressive DDE performance in the world for a program that went to completion. It would certainly fall short of the government’s preferred target of 80%.

Holdout rates for DDEs around the world. Ghana’s DDE performance ( ~35% holdout rate) is set to underperform all others except those abandoned midway like Ukraine’s 1999 attempt.
Source: European Central Bank (2020)

The underwhelming results of the exercise can be entirely traced to the highly unorthodox approach taken by the Finance Ministry to launch consultations only after the debt exchange had commenced instead of before as has been the case with most DDEs undertaken elsewhere over the course of this decade, most of which saw participation rates above 90%.

When the exercise commenced in early December, this author said the following about certain financial industry players in Ghana:

Not only are they few in number, and their client base predominantly middle-class, but the government also wields massive regulatory power over banks and funds and expects them to do as they are told.

True to form, the government’s approach so far has been to ram the DDE down their throat. It was only after humiliating setbacks that it changed tack midway and grudgingly tried to do some co-creation. It goes without saying that launching consultations much earlier and mobilising a national consensus behind the DDE would have resulted in a higher participation rate and more debt relief whilst also spreading the pain more optimally. But even so, a 65% participation rate is comfortably above the 60% this author considers necessary for the program to have minimal viability.

It is important, moreover, to bear in mind that the resources freed up by the DDE, holdouts and exemptions notwithstanding, sum up to a figure just below the government’s largest revenue lines like Corporate Income Tax, Oil & Gas and Personal Income Tax. The DDE’s expected debt relief amount is considerably larger than proceeds from trade, energy and communications taxes etc. The banks alone may be “sacrificing” income of 15 billion GHS to the benefit of the government’s purse. Imagine attempting to haul that kind of dough through financial sector taxation.

So, where does all this leave us?

First, given the significant variance from the initial debt relief expectations, analysts expect some delays in finalising the full contours of the ECF before presentation to the IMF Board, likely straining the relationship between the IMF and the Finance Ministry. The government’s preferred timeline of IMF Board approval of March 2023 looks overly aggressive at this stage. In particular, earlier contentions by analysts that the fiscal consolidation component of the upcoming ECF program isn’t credible will be thrust back into sharp relief. Finance Ministry mandarins should not wait till the last minute before reworking the expenditure spreadsheets.

The IMF may choose to overlook the fact that the original debt sustainability strategy needs to be fully overhauled in view of the lower than expected debt relief and still present a program where the government only makes fiscal tightening pledges to the Board for approval. But doing this could dash the government’s hopes of the IMF frontloading tranche 1 disbursement, amounting to about $1 billion, to shore up the country’s forex reserves. Ghana’s reserve position is under unprecedented pressure, with gross reserves dipping below $4 billion, from nearly $10 billion a year ago, without even accounting for some not so liquid items on the Bank of Ghana’s balance sheet.

The IMF may in turn argue that any such disbursement should happen after successful completion of the first review of the ECF program, perhaps about three months after Board approval. It is highly unlikely that the Finance Ministry will consent to any arrangement that delays forex injection.

Which is why some analysts are beginning to ponder a scenario where government brings forward deferred domestic debt restructuring plans. Because the current DDE only covers 68% of the primary domestic public debt and less than ~56% of total public sector liabilities, the government may be tempted to initiate additional restructuring exercises earlier than planned in pursuit of additional debt relief.

The recent episode of Cocobod forcing a rollover of maturing debt (after the giant parastatal failed to raise a new facility to refinance expensive bills and the Bank of Ghana refused to step in) offers a clear hint of the government’s posture. Given that the country’s credit rating is already at rock-bottom, few restraints on debt repudiation remain. Apart from treasury bills and Bank of Ghana’s liquidity management tools, like swaps, every public liability in Ghana today is fair game.

External investors, keenly observing all these developments, are unlikely to agree quickly to total moratoria on debt service, as is the government’s wish. Trying to play total hardball may protract discussions and interfere further with the IMF Board approval timeline. It will be helpful for the government to be strategic this time around unlike in the leadup to the IMF engagement last July. That time, Ghana literally had to make a mad dash to Washington after a desperate attempt to hustle dollars from all manner of institutions between April and June failed to turn up even a dime.

Since then, everything has been a mad rush. It would be tragic if the government dilly-dallies with the outstanding creditor concerns until mid-March by which time the country’s forex situation would be completely dire before scrambling to pursue options that were obvious from the start (like abandoning zero percent coupon in 2023 during the DDE standoff).

It would be foolhardy in these circumstances for economic actors, and indeed the general public, to begin acting as though Ghana is nearly out of the woods. The rising chorus of governance reforms and the push for fiscal discipline should now intensify and not abate. The partial success of the current DDE is a mere lull in a storm that is still gathering.

All eyes should firmly remain on the foredeck, on the crew steering the ship of state, and no voice should stay calm if signs of rudderless maneuvering emerge.

Will ChatGPT Transform International Development?

After the spectacular failure of a 10-year project launched in 1982 by the legendary Japanese government agency, MITI, to dominate the global artificial intelligence (AI) landscape by developing systems suited to processing knowledge (rather than just data) in a user-friendly way, the country tried another approach.

In 1998, six years into the successor initiative, dubbed Real World Computing Program (RWC), publisher Ed Rosenfeld reported on an exhibition in Tokyo where the new project’s outcomes were on display. The goal, according to project managers, was to create a system to enable:

“humans to communicate easily with computers …[by the] implementation and refinement of “natural and smooth” interfaces through talking, facial expressions, and gestures.”

Fifth Generation Computer schematic. Source: Moto-Oka & Stone (1984)

Essentially upping the stakes on the earlier attempt. Unfortunately, RWC failed to charm, and soon slunk into oblivion. Japan’s 20-year AI domination strategy was nevertheless focused on two still-dominant narratives of the role of “thinking machines” in shaping our world. First, “expert systems” to solve human-defying problems and, second, “naturalistic interfaces” to make non-expert humans feel warm and fuzzy around a superior artificial intelligence. Some say that on both scores, ChatGPT has almost delivered.

ChatGPT’s triumphant launch thus resurrects the old dreams, debates and divisions that ensued when a political scientist called Herbert Simon, with no formal training in computing, helped set up a department at Carnegie Mellon University (then known as “Carnegie Tech”) that would become a pioneer in an early branch of practical AI called “expert systems”. In January of 1956, the year in which the Carnegie computing department was founded, Herbert stood before a class of wide-eyed students and proclaimed the invention of a “thinking machine”.

A famous picture of Herbert playing chess with his long-time collaborator, computer scientist Allen Newell. Source: CMU

But Herbert’s interests were far from confined to the logical construct of computing devices. His interests were in “psychological environments” and how these could be programmed to optimise human organisation for social change. When eventually he was awarded the Nobel Prize, it would be for his contributions to ideas at the root of today’s behavioral economics (despite not having been a trained economist), such as the optimisation of decision-making under uncertainty and other knowledge constraints.

“Expert systems” were the culmination of these concepts. Envisaged as holding large volumes of structured information assembled by knowledge engineers after extensive interactions with human experts, they would still operate within real world problem-definition constraints. Through complex, yet programmable, heuristics, such machines would solve problems faster and better than humans. But

Eventually, other branches of AI emerged where the rules of reasoning and analysis emerged from the body of assembled knowledge (or data, to be more liberal) itself instead of a compact heuristics or rules engine. One particular version of this AI model called “Large Language Models” (LLMs) power ChatGPT.

ChatGPT and other LLMs are a product of longstanding efforts to model human languages. Source: Okko Räsänen (2021)

LLMs take the “self-organising” concept to an extreme in the sense that massive increases in data scale appear to have a correspondingly massive effect on the AI system’s cognitive level, a marked departure from the original visions of Herbert and the other expert systems enthusiasts who believed that progress was in the direction of ever more sophisticated rules & heuristics engines.

Performance of Large Language Models is scale-variant/dependent.
Source: Julien Simon (2021)

What does all this mean for the future of knowledge-based social change? In the field of social innovation for development, where this author plies his trade, old conversations about how expert systems could turbocharge social and economic development have resurfaced.

In 1996, when US academic Sean Eom conducted a survey of expert systems in the literature, he found a field thoroughly dominated by business.

Sean Eom’s Survey of Expert Systems (1992)

Most of these systems targeted repetitive operational procedures. But a small subset was in use by consultants who focused on strategic open-ended questions, such as one may encounter in economic and social development contexts.

As the 90s unfolded, potential synergies among strategic problem-solving, expert systems and international development frameworks ignited strong interest in Western agencies.

For example, a review by Dayo Forster in 1992 for a major Canadian Aid Agency in the health context was motivated by the prospect of “maximum productivity” in the face of the appalling scarcity of resources in the developing world. Health has always been of great interest in the AI-for-Development community because of the importance of precise knowledge-based decisions, both at the public health level (example: what is the right interval between vaccine doses?) and individual health level (is this drug right for this woman given her or her family history?) For this reason, knowledge-enabled decision-makers make most of the difference in outcomes.

Then as now the promise of cost-effective thinking machines filling in the massive vacuum of local expertise in fields such as health, education, agriculture and planning is the most tantalizing prospect. Consider the case, for instance, of Liberia, which has just 300 doctors at home for a population of 5.3 million (up from 25 at home in 2000 when the population was ~3 million). There are two psychiatrists, six ophthalmologists, eleven pediatricians, and zero – yes a grand zero – urologists. Imagine the good that can be done if an expert system or similar AI could boost the productivity of each of these specialists ten-fold.

Sadly, this first wave of optimism faded slowly until a new turn in AI, anchored on Natural Language Processing (the umbrella group to which LLMs belong), started to produce the kind of results now on display in ChatGPT. The traditional concepts of expert systems were seen as a dead-end, and a ferment of new directions bloomed. ChatGPT’s wild popularity in 2022 marks it as a potential dominant AI design format, despite machine learning’s wider installed base and committed investments.

The positioning of Expert Systems & the NLP Bloom that led to LLMs, Transformers and eventually ChatGPT. Source: Chethan Kumar (2018)

Echoing the hopes of times past, a recent McKinsey report by the global consultancy claimed that “[t]hrough an analysis of about 160 AI social impact use cases,” they have “identified and characterized ten domains where adding AI to the solution mix could have large-scale social impact. These range across all 17 of the United Nations Sustainable Development Goals and could potentially help hundreds of millions of people worldwide.”

Until ChatGPT’s dramatic entry into the popular consciousness, investment commitments and revenue forecasts for AI heavily emphasised machine learning applications far more relevant for the Global North than the Global South.

AI investment commitments worldwide. Natural Language Processing (of which LLMs are a subset) significantly lag Machine Learning in this area. Source: Statista

ChatGPT’s “expert systems” – like behaviour in the perception of the lay public however now throws into sharp relief the prospect of low-cost NLP-powered general problem solving solutions, a kind of multipurpose social development consultancy in a box.

Prospects for Gambia, Liberia or Laos dramatically boosting human resource potential by deploying LLM-powered bots to social service frontlines are suddenly looking exciting again. Or are they?

Below I present a very condensed argument of why ChatGPT and other big-data driven models, monumental technological feats though they are, lack some vital attributes to make much of a difference soon. These concerns are not addressed by improvements in accuracy and efficiency expected in GPT-4 or later models because they go to the very roots of the philosophy behind such tools. They can only be solved in the technology governance layer.

Expert systems are heavily weighted

LLMs and similar big data-driven systems are about statistical averages. They take snapshots of internet-scale caches of data and then make safe bets as to the most likely answer to a query. The best experts are, however, top-notch for the very reason that they generate insights in the tails of the distribution. It is still too risky to introduce strong-weighting in LLMs to generate positive biases since the goal is to minimize bias in general.

Knowledge Engineering is tough

For any complex assignment, a schema of multiple parts involving multiple strands of enquiry produces the most sophisticated outcome. One needs to orchestrate multiple prompts to get ChatGPT to generate the right sequence of answers and then piece them together. This requires higher order, not lower order, cognition. Costs thus shift from expensive specialists to expensive generalists.

For example, a detailed review of ChatGPT’s recent performance on a Wharton MBA test emphasised the critical importance of “hints” from a human expert in refining the bot’s responses. As will be shown later such “prompt loops” cannot be woven unless the expert has strong generalist competence in the area of inquiry.

Factual Precision is less useful than Contextual Validity

Whilst there is a lot of general information available on the internet and from other open sources, a great deal of the world’s contextual insights are still in proprietary databases and in people’s heads. LLMs need extensive integrations to access true insights into most socioeconomically important phenomena. In a 2019 working paper, this author broke down the generic structure of modern computing systems into “data”, “algorithms” and “integrations”, and explained why integrations are the real driver of value. Yet, integrations also limit quality data growth in LLMs like ChatGPT and introduce risks whose mitigations constrain automation efficiency.

Much has been made of ChatGPT successfully passing exams set for advanced professionals such as medical license assessments. In actual fact, a standardised exam taken under invigilated conditions is the worst example to use in the analysis of real-world expertise. First, exams of that nature are based on a syllabus and wrong and right are based on well defined marking schemes designed to approximate statistical yardsticks of performance. It is considerably easier to span the universe of knowledge required to pass an exam and to reproduce “standard quality” answers than it is to operate within the constraints of a turbulent environment such as field hospital in Liberia. Whilst we use such exams to screen humans for similar jobs, the confidence arise from implicit assurances of their social adaptability in knowledge application.

Proprietary data is expensive

To address the proprietary data and tacit knowledge issues, LLMs will have to compete aggressively for integrations, raising their costs of deployment and maintenance, and thus lowering accessibility for the poor. Already, several Big Data-AI companies like Stable Diffusion are facing lawsuits for trying to externalize their costs. And ChatGPT has been excoriated for using sweatshops in Africa. The politics of data mining will constantly outstrip the capacity of individual companies to manage, just as is the case with natural resources.

As individual corporations get better at building their own unique knowledge-bases and at sourcing algorithms to address internal issues, the edge of internal-scale utility operators like OpenAI (owners of ChatGPT) will start to erode and the real opportunity will shift to enterprise consulting in a balkanised AI business environment. It bears mentioning that becoming a viable competitor to Google’s LLMs in the general knowledge search category is not a socioeconomically transformative step for ChatGPT as the real gap is in specialised knowledge brokerage.

A new kind of “naturalistic fallacy”

Many of the most genuine knowledge breakthroughs are highly counterintuitive. Some clash with contemporary human sensibilities. The more a bot is made contemporaneously human the lower its ability to shift cognitive boundaries. This is hugely important when a bot must make predictions and projections based on judgement-soundness rather than mere factual-accuracy.

Confusion in this area caused Soviet and Chinese theoretical marxists to declare AI a reactionary science well into the 70s. Whilst the Cuban revolutionaries saw only industrial automation and thus embraced AI (popular then as “cybernetics”), the more ideological marxists understood the challenge it posed to the idea of human transformation itself, on which perfected communism will depend. In that sense truly groundbreaking LLMs would have to be more unfettered in their probing of human sensibilities than current political ethical boundaries can contain.

Experiment

To practicalise the above analysis, the author engaged ChatGPT to discuss the prospect of decentralized finance enabling financial inclusion in the developing world. The argument’s vindication is self-evident but a few annotations have been interspersed with the screenshots. The short version is that statistically summarised knowledge drawn from open internet resources is constrained to mimic garden-variety coffee-break conversation rather than serious expert handling of judgement-heavy, high-stakes, decision-making.

When ChatGPT is asked standardised exam type questions requiring the ability to parrot generally received contemporary wisdom, it tends to excel,
The inquirer now ups the stakes by asking for decision-making assistance in respect of an interconnected web of strategic challenges in the regulation-vs-innovation context.
ChatGPT does not skip a beat. It continues to parrot the same general platitudes, this time about enlightened co-regulation. It struggles to detect many loaded contexts and not finding many open-internet resources about West Africa – specific crypto regulation debates attempts to bloviate around the subject. Whilst this would be fine when delivered from the stage at a general business conference, it is practically useless from a real decision maker’s point of view. Improved efficiency in gathering data on the web and enhanced semantic search will not overcome these limitations. The inquirer’s efforts using prompt-enhancement to improve on the quality of the responses depended greatly on the inquirer’s own growing understanding of this LLM limitation suggesting the need for a new breed of, likely expensive, professionals to maximise this tool’s utility.

Friday, 13th January 2023. Jubilee House, Ghana’s presidential palace. In attendance: the movers and shakers of public and commercial finance in the country.

Arrayed on one side was the government, led by the Vice President, in his capacity as “Head of the Economic Management Team” (EMT). On the other side was a motley crew of finance industry representatives, from the insurance, securities, banking and related industries. The agenda: Ghana’s tottering domestic debt restructuring exercise.

Five and a half weeks since the Finance Minister announced a move to default on Ghana’s domestic debt by persuading creditors to exchange their current bonds for new, significantly lower value, versions, the program seemed hopelessly stuck. The EMT’s goal for the meeting was thus to break the logjam. Why, though, is the program stuck?

In an earlier essay, we catalogued a list of defects in Ghana’s debt restructuring/exchange model, but the focus was mainly on broad strategic issues. At the Friday meeting in Jubilee House, tactical considerations took center-stage.

When on 5th December the government announced its offer to domestic creditors to turn in their current bonds and come for new ones guaranteed to lose them billions of Ghana Cedis (GHS), it gave them two weeks to comply. No serious prior negotiations had taken place. Nothing had been agreed in principle, not to talk of anything approaching even the most high-level consensus among the biggest creditors on general terms.

Near as we can tell, no government on Earth has succeeded in pulling off such a fast turnaround as Ghana tried to achieve last December. Even the fastest restructurings, such as those of Ecuador and Argentina, have in recent decades typically taken between four and five months of consultations before the formal launch of the actual exchange process, which is then treated as a formality.

Ghana’s style is more reminiscent of Argentina’s 2020 default, which initially consisted of a series of unilateral offers and amendments in a take it or leave it fashion. At every round, bondholders rejected the offer and subsequent amendment. Not even the intervention of Pope Francis made a difference until the right set of concessions allowed the main bondholder groups to consent.

Seeing as Ghana’s main advisor, Lazard Freres, has advised Ecuador too, the likelihood of a protracted stalemate in the absence of concessions should have been clear to the government side from the outset, so why have things panned out like Argentina’s?

It would appear that Ghana’s Finance Ministry has been counting on a “divide and conquer” strategy. It has so far been nonchalant about calls to support the formation of a joint creditors’ negotiating group. Given the costs involved in obtaining top-notch legal and financial modelling advice, creditor coordination has long been a daunting prospect in sovereign debt restructurings.

The government apparently believes in keeping the creditor front fragmented and uncoordinated as a way of minimising resistance. Unfortunately, such “divide and conquer” strategies are only effective if the government could also make differentiated offers to different creditor groups or engage in selective defaults of specific classes of bonds. Neither option is open to the government in Ghana’s context, thus rendering a divide-and-conquer approach a complete waste of everyone’s time.

That fact was amply evident on Friday when the different industry groups converged to confer with the EMT. It soon became apparent to everyone in the room that the government, as of that morning, had zero concrete commitment from any major creditor group to the debt exchange.

The securities industry representatives (the folks running the mutual funds, independent brokerages and various collective investment schemes) said they were willing to step up and accept the latest amended offer if the government will countersign on a covenant promising to upgrade their settlement to match any better terms eventually given to any other group. A point which illustrates the futility of the divide-and-conquer strategy: you get an assortment of contingent proposals from every creditor group playing a “wait and see” game. The game theory analog is the famous stag and rabbit/hare hunt where agents attempt to balance the benefits of individual moves with the higher payoffs of social cooperation.

The Stag or Rabbit Hunt.
Image Source: Jensen and Riestenberg

Attempts by the Finance Ministry to solicit respect for the January 16th deadline went nowhere. Obviously, different creditor groups with their separate sets of concerns can obviously not resolve them at such a meeting when no prior efforts had been made to coordinate their claims and issues into a uniform negotiating position. Said differently, it is pointless for the government to encourage separate negotiations and yet when faced with a time crunch try and push for a quick joint resolution in a common forum.

Unsurprisingly, therefore, the Finance Minister’s offer for the creditor groups to accept the finality of the 16th January deadline and be granted a few additional days to tidy up the paperwork failed to persuade.

What is fascinating about all this is how respectful the creditor groups have been despite the casual treatment they have received to date. As anticipated from the outset, banks and “savings & loans” companies are the most susceptible to the quiet force of the government’s enormous regulatory power. So, at this point, all that separates the banks and the government from a deal are five relatively surmountable blocks:

  • The banks want the government to get concrete on the “regulatory forbearance” it has been promising so far by agreeing to a discount rate for valuing bonds as part of capital determination. The banks want a lower discount rate to reduce the valuation gap between the new and old bonds. They are inclining towards 7.5% (contingent on further engagement with the Institute of Chartered Accountants in Ghana). The Bank of Ghana insists on 12%. The choice of discount rate or factor will establish the present value of the bonds the government is tendering to replace the old bonds.
  • Linked to the above are disagreements over the “expected credit losses” from the impairment of bank assets (in the form of government securities in this case, not loans or advances) being occasioned by the proposed debt exchange.
  • Obviously, until the government and the banks can agree on how to quantify losses as a result of the exchange they cannot move on to settle the issue of tangible effects on the bank’s income statements and balance sheets. As far as the banks are concerned, the expected financial impacts are: pretax losses of $1.2 billion, liquidity shortfalls of $1.6 billion, and a capital shortfall of $1.3 billion (using retail exchange rate). Essentially, massive hits to the bottomline with troubling implications for their capacity to keep issuing credit, maintaining jobs and investing in financial infrastructure. Worst-hit financial institutions may have to let 40% of their workers go. 17 of the 23 licensed “deposit money banks” will see their capital adequacy ratio fall below the regulatory minimum. And 9 of them will experience negative equity. In short, the government is refusing to acknowledge the full impact of the debt exchange on the financial sector; yet, without convergence on this point countermeasures cannot be agreed.
  • The banks cannot countenance the stepped-up coupon (interest rate) model for the new bonds with its zero payment (and no deferral) payout structure for 2023. The banks require a simple uniform structure of equal payments across the life of each instrument. Furthermore, this uniform rate is, in their view, best set around 12.5% per annum.
  • Government’s new bond offering comes with a well known Trojan Horse: legal clauses that would make it easier for it to vary the terms of the bonds in the future. The banks want these clauses expunged.

Beyond these 5 main demands, there are a number of other areas where confusion still prevails. One such is the treatment of the bonds denominated in US dollars, whose status remain uncertain. The second is the vaunted “Financial Stability Fund” (FSF).

The government has tried to bloviate around these matters, and made many vague assurances of monies committed by the World Bank to cover 30% of the $1 billion fund size. Sources at the World Bank suggest various contingencies must first be met before any such disbursement will happen. Meanwhile, the other claimed sources of the rest of the money: the Germans (KfW), the Paris Club of rich western nations, and the African Development Bank have so far not commenced any formal negotiation of any agreement to offer any cash to this facility. Pressed to the wall, Ministers responded airily that the debt exchange cannot be held hostage by such matters and that banks should first sign up before being told even basic things such as what interest rate borrowing from the facility would attract. The industry pushed back on eligibility criteria.

At this point, the Finance Minister tried another tact. Why don’t the banks publicly announce their consent to the debt exchange program and then request a date extension to hammer out a few outstanding issues? Naturally, the bank representatives demurred. They weren’t born yesterday. They insisted on an agreement on the key outstanding issues first.

At which point, Lazard Freres barged in and sought to gaslight the eminent company. An extension can’t be contemplated without wrecking the credibility of the whole debt exchange program and furthermore threatening the IMF deal. After much handwaving, they calmed down, loosened their tie, sipped some seltzer, and grudgingly faced the reality of a no-deal on Monday the 16th of January.

All of the above is to say, the government went into what was billed as a crunch meeting to close a deal to allow an announcement one working day away when it had made very little effort to grapple with these very compact issues for two weeks now. As has been repeatedly mentioned on these pages, the government’s job has been far easier than in many comparable national contexts in similar circumstances.

Till date, domestic institutional creditors have accepted the principle of significant losses. They have also not demanded several of the concessions that elsewhere others have extracted, like negative pledge clauses, buyback transparency terms, future upside sharing and other contingent windfalls, enhanced protection etc. They even seem to have backed down on initial requests for the government, in its issuer capacity, to underwrite the legal and other advisory service costs of creditor coordination. They seem to be operating with far less legal ammo than should be the case in a situation with such large amounts of money involved. And some of them, especially the mutual funds and asset managers, are even willing to sign up provided they are granted “pari passu” assurances. And yet the government has still failed to clinch a deal.

The recalcitrance of the government about deepening consultations and accelerating coordination among creditors is completely bizarre considering its lack of options should holdouts remain above 40%. Should an industry group collectively refuse to sign the exchange papers, all the punitive measures at the disposal of the government become useless as it cannot crush a whole industry. And any attempt to default on the holdings of any significantly large group risk setting off contagion that can ruin entire sectors without sparing those who consented to the exchange.

The meeting with the institutional shareholders thus ended with a commitment to engage further through correspondence this week. It is safe to say that the government will not be able to announce any program success rate tomorrow because frankly at this stage it has no firm commitments from any major creditor group.

After the institutional creditor representatives departed, the government side retired to deliberate on the now politically explosive situation of mobilising individual bondholders.

In a previous essay, IMANI raised a caution about individual bondholders as follows:

Whilst households and individuals hold just about 13% of government debt, they are also the most politically significant group. They are the ones most likely to bring class action suits against the government and mount political agitation to stop the process as they are not as exposed to government pressure to the same extent as the banks, institutional funds and treasury departments of large companies.

From all indications, the Vice President and key allies of his in government recognises the scale of the political blowback that reneging on the promise not to add individuals and households to the debt exchange program has triggered. Whilst the Finance Minister is at this stage focused purely on securing enough liquidity relief so that his already fragile fiscal program for 2023 does not fall apart, and, even more vitally, the IMF program is not derailed, the Vice President has a somewhat more strategic perspective in mind. Unsurprisingly, the mood in the government is tilted towards restoring the exemptions for individual bondholders, notwithstanding the discomfort of the Finance Minister and his technical advisors.

As we have frequently said on this site, the Finance Ministry’s lack of political economy savvy, now compounded by overdependence on foreign technical advisors with zero awareness of how social consensus is achieved in Ghana, is a major threat to both the debt restructuring effort and the IMF program.

It is actually a miracle that both programs are still technically on track and are likely to survive in highly constrained forms. The total amount of liquidity relief likely to be generated by the debt exchange program is now estimated to be lower than 40% of what the government set out to achieve. To preserve the credibility of the IMF program, additional fiscal consolidation in the form of expenditure cuts is now inevitable. Even after exempting pension funds and contemplating re-exempting individual bondholders, the government still faces wildcat litigation risk because offshore investors who hold local bonds are unwilling to take the deal on offer.

The adamant refusal of the government to mobilise national sentiment behind its economic recovery strategy and to build a broad social and bipartisan consensus behind the measures has led to highly suboptimal outcomes guaranteeing a significant delay in Ghana’s effort to exit the country’s biggest economic crisis in 40 years.

The President of Ghana has assured the nation that the controversial “National Cathedral” will be ready by March 6th, 2024. That is to say, barely a year away.

This is of course an engineering impossibility, unless the idea is to launch an uncompleted project. The National Cathedral is not just the cathedral; it also includes a bible museum and extensive “biblical gardens”, among other structures. In fact, the proponents of the cathedral have promised no ordinary museum but the “biggest bible museum in the world“.

There is an obvious reason why bible museums aren’t all that common: artifacts and antiquities to adorn them are fiendishly expensive, at least if genuine, and almost impossible to legally obtain from the Holy Land. The current principal consultant to the National Cathedral, Cary Summers, used to run the US-based Museum of the Bible, which has admitted to obtaining fraudulent, illegal, and even fake bible antiquities.

To secure enough genuine antiquities for the museum, build out the complex engineering required for a world-class museum environment, and then move on to the equally complex task of landscaping a garden and planting exotic plants from a faraway clime etc., would definitely take more than one year. We do not even need to delve into the labyrinthine network of laws and regulations governing the international movement of antiquities.

To give readers a rough hint, here is a super-basic 3-year development timeline for a typical museum borrowed from Mark Walhimer, Managing Partner of consultancy, Museum Planning LLC.

Suffice it to say that as at this morning, the vast majority of these activities have not even commenced for the bible museum.

Some readers may wonder whether the cathedral project could be viewed as modular and thus launchable next year so long as the primary building (let’s call it “the cathedral proper”) itself is complete, even if the museum and gardens hadn’t commenced by then. No such luck. The cathedral proper is also embroiled in complex legal squabbles and stalemates.

To start off, land (about 90 plots), with all structures on it demolished, in the prime Ridge district of Accra worth over three hundred million dollars has already been committed to the project by the State. But the government has refused to settle residual claims by some private real estate companies leading to litigation.

Furthermore, the original $100 million budget for the cathedral proper was eventually bloated to over $400 million after extensive negotiations with the primary contractor, Rizzani de Eccher, acting through a local joint venture entity, Ribade. The cost escalation came about because multiple projects (ranging from hospitals, shopping complexes and schools to art galleries and the multi-level 5000-seat auditorium) were bundled up for strategic reasons (some would say for crony-commercial reasons). The resulting complexity has led to significant project development challenges and conflicts among various contractors. It is now common knowledge that the main contractors have left the site and would require hefty “mobilisation” payments to return.

In short, not only is a timeline of March 6th 2024 unrealistic, there is now a growing likelihood that the project may not even be completed in the life of the current administration. In such an event, what should the next government do?

Not to put too fine a point on it, the current site of the National Cathedral is an eyesore.

Image Source: Accra FM

The site cannot be left as it presently is. So the new administration would have a clear choice to make: complete the project based on the original concept of a frighteningly expensive “national cathedral” and a fantastical bible museum (with all the murkiness surrounding the antiquity sourcing strategy) or redeem it completely.

Considered carefully, the choice is not that hard. The current government adamantly refused to invest in a national bipartisan consensus behind the project. Consistent with its general posture since coming into office it has done everything to polarise sentiments regarding its strategy. There is thus no groundswell of positive affection for the original concept, though many Christians are generally well disposed to some kind of official national recognition for the country’s largest faith community. All said therefore, the new administration would not feel bound by the current commitments.

Worse, the national cathedral concept is now mired in perpetual controversy. Right from the outset, besides failure to mobilise nationalist sentiment, narrow profit-making considerations took centre-stage. Instead of using national design contests in the most transparent fashion to appoint the various designers, architects, project administrators, marketers, engineering firms etc., the government opted for shady, opaque, and highly nepotistic sole-sourcing and underhand procurement arrangements, whereby proximity to the presidential family and its acolytes became the main calling card for all those profiting from the scheme.

Not a week passes by without hearing of some profiteering twist to the already sorry saga. The latest is a murky situation involving the Secretary to the National Cathedral.

It has now come to light that a pastor in one of the churches owned by the said Secretary, a clergyman, is, together with his wife and another related party, the owners of a business, JNS Talent Centre, which from 2017 to 2020 was only a small daycare center for young children. As the World Bank poured funding into Ghana as part of the COVID-19 response, all manner of small businesses with links to officialdom managed to transform themselves into contractors and stake a claim to their share of the largesse. Thus it was that in the last week of August 2021, the Controller & Accountant General paid 3.5 million Ghana Cedis (GHS) into the account of JNS. JNS promptly, just three days later, granted a “loan” to the National Cathedral Secretariat upon receiving a letter from the latter requesting funds on August 26th. That loan, granted within 24 hours, was then ostensibly “paid back” to JNS later. The sheer incongruity of the conducts, contexts, coincidences and contracts involved here besides, there is an untidiness about a religious project becoming embroiled in such murky related-party commercial transactions.

A similar confusion involves the Nehemiah Group, which is ostensibly a contractor to the National Cathedral, even though its founder, Cary Summers, is also a trusted, independent, advisor. Considering that the National Cathedral secretariat at formation was merely an extension of the Presidency, it is unclear when the Nehemiah Group began billing the country. But it is now known that it has succeeded in extracting ~$6 million (at prevailing exchange rates) from Ghana under the pretext of guiding the country in sourcing antiquities and funding and for creating a “concept” for the museum. Apparently, Ghana owes it even more money.

None of these payments and others amounting to nearly $60 million were for services tendered openly, transparently and above board in a manner befitting the high ethical standards of a religious undertaking of this magnitude. In fact, leaks and briefings suggest even more underhand commercial transactions are yet to come to public light.

Having become so mired in a perception of venality and poor governance, it would take a momentous effort to retrieve the reputation of the National Cathedral from its current level, the earnest efforts of some of the eminent clergy promoting it nonetheless. In some ways, by failing to publicly denounce these practices and actively seek to demonstrate true openness, accountability, inclusivity and tolerance for dissenting views, the proponents of the cathedral have lost some of the gravitas they could have lent to the project.

The next government must thus seek a completely clean break from the past. It must gingerly go over the careful policy analysis of IMANI. And it must solicit views from far and near.

If the new administration does all this, it would discover a need to repurpose the precious real estate commandeered by the current government for what has become a thoroughly discredited initiative. It must, in these circumstances, convert the site to a National Civic Center.

The Christian faith can definitely be given prominent recognition in the revamped blueprint. The Chaplaincy of the Armed Forces of Ghana could be invited to manage a smaller, more elegant, ecumenical Christian site at the center (by the way, the very idea of a “non-denominational cathedral” is an ecclesiastical absurdity since Ghana is not an episcopal country and thus can have neither a “national bishop” nor a “national cathedral”). Such an edifice could be constructed along the lines of Nigeria’s, which cost less than $30 million and was fully funded by the faithful, not the state. A multimedia center charting the translation of the bible into native languages, which paved the way for the indigenisation of Christianity in Ghana, would also be useful to both the faith and scholarly community.

Other religions could be recognised as well. Adherents of Ghana’s marginalised native faiths and the various Islamic traditions could be engaged to contribute monuments celebrating their own contributions to the country.

But there is much that goes beyond religion in defining the national spirit of Ghana. There are patriots who sacrificed everything for its sake. Artistic giants whose feats emblazon the national essence. From high-life to azonto, and the Allotey formalism to Kofi Annan’s diplomatic legacy, there are many strands of the finest fabric of Ghanaian nationhood that has yet to be woven. They can all have a place at a well-designed National Civic Center.

The National Cathedral episode is, taking all the foregoing into account, a very expensive lesson. Despite years of paying lip service to patriotism, Ghanaian leaders at the least opportunity elevate parochial interests above true national interest and consensus, damaging the country and all its citizens in the process.

If by January 7th 2025, the cathedral remains far from done, the next government may well get the opportunity to cure this national disease by converting the sad symbol of a debased national monument into something truly inclusive, noble, majestic and evocative of what Ghana can be at its best.

Many might recall how in the year 2000 Ghana found itself, for the sixth time in its history, unable to continue servicing its accumulated debts, accepted the tag of a “Highly Indebted Poor Country” (HIPC), and underwent a series of reforms that ended in 2003.

As a result of the HIPC program, Ghana, between 2003 and 2006, became the second largest recipient of debt relief in Africa, which bonanza led to a fall in the proportion of government revenues spent servicing debt from roughly 40% to just above 10%.

Almost everyone also now know that this massive fiscal room gave Ghana fresh latitude to explore new financing options. The country discovered the Eurobond market in 2007; and proceeded to build the Ghana Fixed Income Market (GFIM) in August 2015 to dramatically expand domestic borrowing.

Unfortunately, the rate at which the country accumulated debt soon outstripped the rate of growth in national output and government revenue. Between 2018 and 2021, domestic debt alone grew, on average, more than 26% per year.

Source: Ministry of Finance, Ghana

Foreign borrowing also expanded dramatically from 2018 onwards, resulting in Ghana’s outstanding Eurobond debt more than tripling in just 3 years. Indeed, annual foreign borrowing exceeded $6 billion per year until the taps were shut in late 2021, when the government failed to raise a $1.5 billion facility in October of that year.

That failure triggered a spiraling loss of market confidence as investors looked more closely at Ghana’s books and saw clear signs of pending insolvency. For instance, debt servicing costs had started to consume more than 50% of domestic tax revenue (today, it tops 70%). A selloff of Ghana’s bonds then followed leading to massive losses for investors, belated ratings downgrades, and an estrangement of Ghana from the international capital markets.

In July of 2022, the government reversed earlier decisions not to return to the IMF for a bailout and soon thereafter faced up to the unsustainability of public debt. In October 2022, it began to explore a restructuring of its debt, as a precondition for securing an IMF program, and formed a five-member committee of eminent bankers to solicit viewpoints from across the financial industry. Repeated claims were made about the government’s commitment to a “market-led” (not just “market-friendly”) process that will embrace the perspectives of the country’s key creditors.

Then, almost out of the blue, Finance Ministry mandarins met finance industry stakeholders on December 2nd 2022, and abruptly announced an imminent debt restructuring in which many creditors on the domestic front stood to lose more than 60% of the value of their government of Ghana securities (i.e. debt instruments, mostly bonds). Not only had no report by the 5-member committee been disclosed to any of the creditor groups, none of the proposals presented by the government on December 2nd reflected any of the perspectives and suggestions the industry representatives had shared with the committee.

On 5th December, the government formally launched the debt restructuring program and set a two-week deadline for creditors to sign away billions of Cedis of asset value. Industry players were not even expected to seriously consult with legal and financial advisors. Theirs was merely to acquiesce.

Yet, the financial effect of the government’s initial proposal was far bigger than any tax or other fiscal burden ever imposed on any Ghanaian sector in one fell swoop. Had the proposals been accepted in the form presented, the financial industry and other creditors would have forgone nearly 27 billion GHS in 2023 alone.

In comparison, the government expects to receive, in 2022, 12.1 billion GHS from oil and gas; 1.19 billion GHS from donor grants; 12.75 billion GHS from personal income tax; 16.5 billion GHS from corporate taxes (by the end of September 2022, the government had made less than 10 billion GHS of this target amount); 15.4 billion GHS from VAT (barely 10 billion GHS accrued by end-September); and 8.573 billion GHS from import duties.

The same picture plays out in 2023, as readers can see below; no tax handle generates anywhere close to the amount of resources the government intends to mobilise from domestic investors through the debt restructuring exercise.

The debt program therefore represents, undoubtedly, the largest single transfer of wealth from the Ghanaian private sector to the government in a single fiscal measure, in living memory. It is equivalent to doubling taxes on the entire corporate sector and giving the bill to only banks, insurance companies, pension funds and a few other investor categories to pay.

Whilst various exemptions since the original proposals were mooted have reduced the initial debt relief amount by some 15%, the “debt exchange” program still remains the biggest single domestic fiscal measure in the country’s history.

The least the government could have done before embarking on such a massive wealth transfer exercise was to have engaged closely with those whose wealth is being expropriated in the crafting of the overall program. This was not done. Instead, a fait accompli was presented to creditors.

Not surprising then to see the government postpone its unilateral deadlines twice, initially from 19th December to 30th December, and subsequently from 30th December to 16th January 2023.

In the rest of this short essay, we discuss the 7 main stumbling blocks in the way of a smooth debt restructuring program.

  1. Poor Stakeholder Management

As already hinted above, the poor stakeholder consultations characterizing the Ghanaian government’s approach strikingly differentiate it from the approach adopted in many other countries where similar exercises have taken place in the recent past. In the case of Jamaica, to name but one example, the Advisory Committee representing the interests of the creditors had full access to all financial data underlying the government’s assumptions. It held regular engagements on a wide range of design issues to inform and shape the overall strategy. And it was seen to be articulating the full range of concerns shared by all major creditors.

The Ghanaian government’s idea of consultations is a couple of meetings where monologues are exchanged and vague reassurances of “support” given, this having been how it has conducted all matters of policy since coming to power in 2017. Unfortunately, in a debt restructuring exercise of this magnitude, where such massive amounts of money are involved, its usual style simply won’t cut it.

Creditors are instead demanding to co-create the program through a formal committee process. Creditors are furthermore demanding the engagement of top-notch financial and legal experts to serve this advisory committee, paid for by the government. Failure to accede to these demands would likely lead to more feet-dragging by the major institutions holding a very significant proportion of the debt, and by implication the failure of the exercise.

Considering the government’s incredible good luck in not facing any actual organized opposition to the entire IMF and/or debt restructuring program, it is mindboggling how it has still succeeded in bungling the process so far by failing to engage critical stakeholders in good faith. Given the general sense of resignation across all factions of elite society about the inevitability of some kind of debt restructuring to salvage the economic situation, the government’s inability to build a strong national consensus around the measures needed for the recovery betrays a woeful lack of leadership.

Domestic investors may take some cold comfort from the fact that the government has not limited this practice to the home front. It announced a freeze on servicing external debt without bothering with the niceties of applying for consent from its foreign creditors.

It is true that there was no assurance that a “consent solicitation” of this nature would have been automatically granted. Zambia learnt that hard lesson in 2020. However, research shows that countries that default on their debt before initiating the restructuring process, as Ghana has done on the external front, tend to inflict greater losses on investors. This was the case in Russia in 2000 (50% NPV losses) and Argentina in 2005 (75% NPV losses), for instance.

By contrast, in situations where countries default only after the formal restructuring engagement has commenced, like Pakistan in 1998, Dominican Republic in 2005, and Uruguay in 2003, investors tend to face relatively lower losses (less than 5% NPV losses in the case of the Dominican Republic, for instance). Ghana’s decision to freeze debt servicing before prior consultations has therefore signaled an intent to be aggressive in the upcoming negotiations and to be dismissive of investor anxieties. Such vibes, unfortunately, could delay the reaching of an amicable settlement with foreign investors, thereby slowing the consummation of the provisional IMF deal announced on 13th December in the government’s preferred timeline of 1st quarter 2023.

It bears mentioning that the Ghanaian government’s timeline of weeks for the conclusion of the debt restructuring process, though not completely unrealistic, is highly optimistic.

Lebanon has been working on its restructuring program since early 2020; Zambia since late 2020; and Suriname since mid 2020. Belize needed 15 months to complete a homegrown program with only technical input, and no direct financial support, from the IMF.

Of course, there are also more encouraging episodes like Ecuador’s that took just 4 months to conclude (in the heat of the pandemic) and, also, the case of Argentina which required 5 months. Instructively, analysts have highlighted the sharp contrast between the Argentinian and Ecuadorian approaches; The latter did not allow a focus on haste to damage investor relations and thus obtained more quality concessions without the acrimony that characterised the Argentinian process.

However one looks at it, Ghana’s attempt to ram through the entire process in barely 3 weeks without even a formal creditor coordinating mechanism is somewhat unprecedented. A case can be made that haste is getting in the way of prudence.

2. Effective Burden-Sharing

Data from the IMF, Barclays Capital, and others on comparative debt relief levels recorded in various debt restructuring programs around the world  reveal a worrying feature of Ghana’s debt crisis response plan: the government wants to shift too much of the common pain to investors.

More than a few international analysts are complaining that the amount of government debt burden reduction being sought by Ghana relative to its overall public debt is considerably higher than was witnessed in many previous debt restructuring episodes around the world.

Source: IMF & Barclays Capital

Such a belief tends to quickly degenerate into suspicion that the debtor government is being strategic rather than fair and accommodating. Ghana’s behavior is slowly beginning to resemble that of Greece during its 2011/2012 default episode, which eventually descended into legal squabbles and litigation.

Research by Moody’s shows that investors these days have, since 2015, become used to recovering on average more than 63% of the value of their investments during sovereign debt defaults instead of the 52% average recovery rate seen since 1983. The recovery rate in Ghana’s domestic exercise is lower than 45% for many creditors. The country’s unilateral debt service freeze signals for some analysts prospects of similar steep losses for external creditors too.

There is no doubt that investors have to take a major hit. They are better positioned to absorb financial losses than ordinary Ghanaian citizens are to suffer cuts in social services. But the government is even better placed to bear the mere political costs of cutting patronage spending and wasteful perks.

3. Credibility of the Fiscal Adjustment Strategy

Sovereign creditors get jittery from any sign that the sovereign debtor (Ghana in this case) is not willing to absorb its fair share of the harsh adjustments needed to balance the books and restore fiscal stability and macroeconomic health. Ghana’s seeming overreliance on debt relief and tax raises, and the authorities’ reticence in cutting expenditure by trimming wanton waste identified by many fiscal activists, appear to be steadily giving credence to such a suspicion.

Researchers, such as Veronique de Rugy and Jack Salmon, have shown however that fiscal adjustment programs that balance tax raises more robustly with meaningful expenditure cuts succeed 55% of the time versus only 38% for those that rely predominantly on tax raises.

Creditors worry about the credibility of the overall fiscal adjustment plan because they hate to be bitten twice. Supposing they give in to Ghana’s demands and accept the massive losses being proposed on the basis that half a loaf is better than none. If Ghana’s fiscal strategy turns out to be poor, they may end up losing the other half of the loaf should Ghana default again or start to show signs of future insolvency and the value of the already devalued debt they hold depress further.

The historical evidence does suggest that once a country has defaulted once, the prospects of a future default does go up, and, according to Tamon Asonuma, a subset of countries, about 24 or so of them being frontier economies, tend to default serially. On average, such countries have defaulted more than 4 times each at intervals of just a little over 3 years.

Thus, without considerable assurance about the fiscal consolidation strategy being pursued by the government, restructuring negotiations could drag out for months, as has been the case elsewhere.

4. Absence of Credit Enhancements in Exchange Instruments

Modern creditors have become used to receiving perks when sovereign debtors want debt relief through the exchange of new instruments for old. The new instruments can be enhanced in various ways to make up for the upfront losses. For example, when Seychelles defaulted in 2010 the new debt instruments it tendered to investors had a fresh guarantee backed by the African Development Bank (similar to how the US Treasury backed the “Brady Bonds” used in resolving the 1980s Latin America debt crisis). Even hard-handed Greece offered exchange notes that had English law protection to replace the old bonds that had less-valued domestic law protection. Russia, in a similar vein, added Eurobond features to its replacement bonds in 2000 in order to placate bond investors.

Ghana, by contrast, is pushing to insert single-limb collective action clauses into the new bonds that would make future defaults easier (because, unlike the case at present, a vote by a majority of creditors will impact all creditors). It is removing English law protection from the ESLA and Templeton bonds. And it is applying a total interest standstill that should all but eliminate tradeability of the new bonds in 2023 (an approach that demolishes the prospect of the new bonds providing the liquidity to satisfy redemption that some fund managers claim to be anticipating).

In short, the new lower-value bonds the government of Ghana is offering investors to replace their existing government bonds not only lack attractive enhancements, they are manifestly of lower quality in other respects too.

Everyone agrees with the general principle of debt restructuring leading to real liquidity relief and thus providing the government with fiscal room to reset the economy on a better trajectory of sustainable growth. The issue is one of fairness. Investors were actively courted to inject funds that made the government look good. If things have taken a turn for the worse, they can’t be milked twice to make the government’s life easy.

5. Lack of Legislative Guardrails

Much has been made of an advisory opinion by Ghana’s Attorney General suggesting that laws cannot be made to retrospectively attack the rights of creditors, and that any such laws would be unconstitutional.

But this advice was quite pointless as that much has always been obvious. In the Greek debt default episode (2011 – 2012), which has become a benchmark of some sort, similar issues were exhaustively addressed. Eventually the statutes that were specially made for the occasion provided a kind of framework for government bankruptcy proceedings in relation to the voting mechanisms required to allow orderly resolution. They were not necessarily expropriation tools.

An example closer to home would be the 2016 law used to resolve Ghanaian banks, several of whom were founded before the law the passed. It would have been preposterous for anyone to argue that the law was being applied “retrospectively” to dispossess bank owners.

The simple fact of the current situation is that the government of Ghana needs to undergo some kind of bankruptcy process. The country is in completely uncharted waters. Rights and obligations are being improvised on the go. It helps to have laws passed on a bipartisan basis to clarify some of the grey areas and to elevate the weightiness of these momentous developments. To leave everything to the administrative fiat of the Finance Ministry is to seriously underestimate the scope of the crisis and its sociopolitical implications going forward.

6. Upside Sharing & Downside Mitigation

Because all debt restructuring programs are undertaken based on forward-looking assumptions, considerable uncertainty is usually a constraint on the calculations of the parties. For example, the government-debtor in making the case of its inability to service debts going forward does so based on macroeconomic projections several years into the future. But some of the anticipated trends could pan out differently. Growth may be higher, interest rates may rise, and inflation may stay stubbornly high.

The true value of the new bonds given to investors in place of their original holdings could thus fluctuate wildly based on how the macroeconomic winds blow. A government that anticipates hardship some years down the line could instead experience a commodity boom that dramatically transforms its finances. Or an influx of massive Chinese investment could change the original trajectory of public borrowing requirements. Or something else.

Moreover, some aspects of any economic improvement may well come from the fiscal room created by the debt restructuring and would in that sense have been partly paid for by investors.

Investors would hate to make massive sacrifices for the long-term only for the situation to abruptly improve and all the gains accrue to the government counterparty. Whilst this is not an easy concern to accommodate, the rise of contingency instruments has revamped the legal technologies available in crafting strategic options for both the government and its creditors to equitably share any windfalls or upside. Argentina in both 2005 and 2010, Ukraine in 2015, and Greece in 2012, all utilised so-called “GDP warrants” to offer investors assurance of higher earnings should the economy grow faster than the baseline. Grenada in 2015 tied its warrant offers to growth in government revenue, which is harder to game.

In a similar vein, some investors have sought protection from a worsening downturn that could exacerbate inflationary and interest rate conditions, whilst some government-debtors have sought to add additional cover for natural catastrophes and other severe reversals of fortune.

Ghana’s current proposals offer none of these creative possibilities. Perhaps it is time to think up one or two gaming-proof mechanisms.

7. Narrative Consistency

A sovereign debt default is a wealth destruction event of megaton proportions. In the panic, paranoia breeds. In such an environment, nothing muddies the waters like inconsistent messaging from the defaulting sovereign.

A. It started with the president and various of his assigns promising investors that there will be “no haircuts”. And then proceeding to unveil a debt exchange program with stiff haircuts. Current domestic bonds maturing, on average, within 3 years will be replaced with a new set maturing on average in more than 10 years. Coupon rates have been cut from an average of more than 20% down to an average of less than 10%. The only way to preserve the value of a bond after such heavy reprofiling (and thus avoid the equivalence of a principal haircut) would have been to increase coupon rates in latter years. Despite near-consensus among investors that there have been haircuts, government spin-doctors continue to persist in the false “no haircuts” narrative.

B. The government has made significant political capital from the decision to exclude treasury bills by presenting it as a gesture of compassion towards the many ordinary citizens who save through these instruments. The real reason of course is that with the bond market having collapsed, and the Eurobond market shut to Ghana, the only public financing lifeline available to the government is the treasury bill market. Some investors were thus surprised to see a caveat in the original exchange agreement hinting at the possible future inclusion of treasury bills in the exchange program.

Extract from the Debt Exchange Prospectus

C. Similar discrepancies between rhetoric and action can also be seen in the decision to abandon the earlier pledge to co-create the debt restructuring program with local creditors and the total reliance on foreign advisors and consultants when the actual process got underway.

It would be vitally important going forward that such twists and turns in the official narrative stop for the good of the program.

Conclusion: More Carrots than Sticks

On 24th December, the Ghanaian authorities announced a new deadline for the debt restructuring program of 16th January 2023. The announcement is the first acknowledgement that the government is beginning to take the concerns of creditors seriously.

In the new proposal, the authorities have increased the number of new instruments intended to replace the 69 extant bonds they are seeking to retire from 4 to 12. They also seem to have walked back on an earlier strategy to exempt non-institutional bondholders en masse. Coming on the back of a decision to exempt pension funds from the exercise, the revocation of the exemption for non-institutional bondholders has been interpreted variously as a shortfall-plugging mechanism and/or as an attempt to seal a loophole that would have allowed institutional holders to enjoy an exemption by transferring holdings to individuals and masking ultimate corporate beneficial shareholders through offshore trusts.

The new proposal, whilst showing capacity for flexibility, still falls short of the co-creation demands being made by creditors. It is not clear why the government prefers to engage with creditors without a coordinating mechanism such as a formal advisory committee representing the bulk of outstanding debt. Perhaps it fears that such a process might undermine its negotiation position by removing the “divide and conquer” option. The danger with the attempt to preserve the fragmentation of the creditor community is the likelihood of inertia being traded for lack of organised resistance.

At any rate, there are hints of external holders of domestic debt making preparations to litigate. A group holding derivatives that expose them to defaults on the underlying government of Ghana securities has already filed for an advisory opinion on whether Ghana is already in default.

With nearly 50% of domestic debt likely to fall under one or the other exemption even before formal, coordinated, negotiations, the government is watching in slow motion as bits and pieces of the estimated 22.5 billion GHS in possible liquidity relief for 2023 from the debt exercise start to vapourise.

It is natural in these circumstances for the Finance Ministry to harden its resolve and try and hold the line without further concessions. But such an approach would do little to deter holdouts. The leaked attorney general report has revealed major chinks in the government’s legal armor: there is very limited prospect that holdouts will get a worse deal from the Ghanaian courts. And given the one-year moratorium on interest payments affecting all creditors, the time delay penalty – stemming from litigation – is less onerous for holdouts if government chooses to outrightly default on their bonds.

The Finance Ministry has threatened to render old domestic bonds essentially useless by making it difficult for them to be treated as banking assets. But such threats seem foolhardy when the government’s number one risk management concern in this entire exercise is maintaining financial sector stability, for which cause it is even willing to relax prudential regulations.

There are further logistical complications stemming from the decision to allow exemptees like pension funds to enjoy the full value of old bonds, which presumably means the ability to trade them. Trying to implement elaborate rules on the GFIM trading platforms, including the CSD settlement system, to discriminate against certain old bonds could lead to serious confusion, and would at any rate take time as international contractors and IP owners are involved in managing the platform. And should holdouts exceed 40%, the logistical issues will merely compound.

In a previous essay we pointed out how certain holders of government debt, like insurance companies, operate in a sensitive market such that any attempt by the government to selectively default on their holdings would trigger various other contagion effects. Similar to the banks, it is not in the government’s interest to take actions that could destabilise insurance companies due to the sensitive intermediation roles they play within the financial system.

All told, therefore, the authorities have very few sticks to coerce the kind of rapid capitulation they have been hoping for since the onset of the debt restructuring program. What they have going for them is the widespread convergence across the entire society on the view that debt restructuring is inevitable. The government should not squander this real benefit. Rather, it should look carefully at its stock of less expensive carrots and leverage them to the hilt. Most of its cards center around the engineering of consensus by giving creditor groups the sense of truly being part of the solution rather than the problem. A time-bound co-creation process, supported by the industry’s preferred expert modelers, may be far less costly and program-derailing than the government fears. In fact, if designed effectively, it may even save time and considerably nudge the participation rate towards the highly optimistic 80% target the Finance Ministry has now set itself.

The government would do well to move decisively in addressing at least some of the issues raised in this essay well before the 16th January 2023 deadline. If by then teething issues still remain, it would be wise not to announce another new unilateral deadline. Whatever announcements it makes from here on out should be done with the full acquiescence of the leadership of the key creditor groups in a show of collective purpose.

Such optics are hugely critical in dispensing with the image of high-handed fiat the government’s tactics have to date painted. And, even more critically, they are needed to salvage what credibility remains in the government’s ability to steer a successful debt restructuring program and progress from there to successfully launch the new IMF deal.

Barring a last-minute change to plans, Ghana will formally announce its intent to default on its debt early next week.

This was revealed in high-level meetings between the country’s authorities and top finance and economic sector actors on Friday, the 2nd of December 2022, as the country’s senior men’s football team battled the Uruguayans for World Cup glory.

Regular readers of this site will recall our earlier mention of the authorities’ intent to have a “shallow restructuring” of the country’s debt and our assessment of any such approach being unlikely to make a serious dent in the macrofiscal situation. After hiring four international consulting firms, and crunching the numbers more soberly, the government seems to have come around to the reality that a somewhat deeper restructuring is required.

Driven by a strong compulsion to fast-track its impending IMF program, the government appears also to be backtracking on earlier commitments to design a “market-led” debt treatment strategy. Financial sector actors report that the tone of the authorities during Friday’s initial engagement was not one of delegating the strategy formulation for the proposed “debt exchange” to the Ghana Association of Banks, securities and dealers, and other such industry groupings. The government is determined to drive the process.

The Finance Minister expressed fears of Ghana being shut out of the international capital markets for the next three years. Consequently, the strategy is to aggressively revive relationships with bilateral donors (like the UK, US, Germany, France, China etc.) and multilateral institutions (like the World Bank, African Development Bank, etc.) in order to attract more cheap money in the form of grants and other concessional types of financing. Doing this, he reckons, would require a “stamp of approval” from the IMF.

It is thus the government’s strategy to quicken the tempo of meeting any prior actions the IMF formally imposes once the government submits its Letter of Intent for a Fund program hopefully this month. The seeming haste in powering through the debt restructuring stems from this factor.

The Finance Minister’s Technical Advisors disclosed at a high level results of an internal debt sustainability analysis which confirms long-held views on this site that Ghana’s debt is not sustainable under realistic fiscal conditions over the medium term. In fact, subject to stress testing, even a consistent series of low or zero fiscal deficits may not be able to bring the debt onto a sustainable path in the next 10 years. On both solvency and liquidity grounds, debt treatment (some kind of default) is now unavoidable and inevitable in any scheme to make Ghana’s debt bearable without permanently damaging the economy.

Given that Ghana’s debt carrying capacity is of medium calibre, debt sustainability requires that debt-to-GDP ratio be brought down from the current level of more than 100% to 55%. The debt service ratio (how much of government income is spent on paying interest and repaying principal) must likewise be brought down from over 60% to a more prudential 18% level.

In the view of the Technical Advisors, tackling the fiscal deficit alone will bring down debt-to-GDP to a still high 85% to 90% range, when the prudential target is 55%. It will moreover require an “extreme adjustment” involving successive primary surpluses in a country that has only seen such surpluses 3 times in non-consecutive years in the course of the last 30 odd years. The growth implications of such an extreme fiscal adjustment would be dire in a developing country where government spending is highly stimulative. In short, a complete non-starter.

Faced with these strong constraints, the government is compelled to take difficult decisions on the debt stock. To stay true to a political preference for avoiding “principal haircuts” (i.e. failing to repay part of the debt) in the domestic context, the decision has been taken, as far as the local debt is concerned, to instead have steep coupon discounts. In simple terms, if the government can’t repudiate a part of the domestic debt, then it will heavily reduce the interest it pays on it and how long it takes to pay through various techniques.

The Finance Ministry concedes that using coupon discounts alone will not bring the actual domestic debt stock down, and thus will not enhance solvency. Coupon cuts and tenure extensions are merely “partial support”, but they will nonetheless bring much-needed short-term liquidity relief (reduce the year-to-year stress on the government from having to pay very high interest rates in a time of financial distress). It follows then that some of the “support” for lowering the total debt stock simply has to be found from principal haircuts on the foreign debt (in simple terms, Ghana will not pay back all the external debt it owes). More on that later.

On the domestic front, the government’s plan is to recall all the bonds and other debt securities it has issued, with the exception of treasury bills, and return to investors new bonds with new terms (the technical term is creating “exit bonds”). Because the existing bonds are too “fragmented” (many and diverse), the government will consolidate. After the restructuring, there will be only 4 types of local bonds with different maturity and interest terms.

The maturity profiles (when repayment will be due) of the four bonds will be 2027, 2029, 2032 and 2037, with an average weighted life of 10 years.

The local debt stock will be split among the four exit bonds as follows:

2027 – 17%

2029 – 17%

2032 – 25%

2037 – 41%

That is to say, regardless when the original bonds an investor held were due to mature, they will now be exchanged for new bonds that will mature according to the above timelines.

As part of the trade-off for not cutting the face value of local debt, the government will freeze principal repayments of the local debt but not necessarily that of the external debt. All local bonds due for repayment will simply be rolled over in line with the new maturity terms.

The 2027 bonds will see principal repayments made in two equal instalments in 2026 and 2027. The 2029 bonds will be repaid in two tranches in 2028 and 2029. The 2032 bonds, on the other hand, because of their size, will have a three year repayment schedule starting in 2029. The 2037 bonds will see repayment over a five year period. In all cases, interest payments will fall linearly in proportion to the principal amortisation rate.

The transformation aimed for is one of a constant linear payout rate on local bonds from 2026 onwards, in effect phase-shifting the burden on government away from the present to the post-2026 horizon. The government is of the view that such a model creates predictability to the benefit of the financial sector.

Regarding interest payments, the authorities intend to pay no (zero) interest across all bonds in 2023. In 2024, it intends to pay 5% interest. And in 2025, the interest rate will increase to 10% and stay constant across all bonds till the last bundle matures in 2037. Readers may put this in perspective by comparing the current average weighted interest rate of more than 21% per annum.

To reiterate, these measures are expected to only bring the key solvency indicator, debt-to-GDP, down to 85% from the current 100% plus level (the latest IMANI estimate is 108% without Sinohydro obligations and contingency liabilities emanating from the energy, cocoa and roads sectors).

And now to the most controversial part. The government intends for these measures to apply equally to the entire domestic debt stock, except for treasury bills. No discrimination is envisaged for the debt secured through special vehicles like ESLA and Daakye or those issued locally but in USD, or even the so-called “Templeton bonds”. The only nuance involved is that the spreading of these “special” government debt obligations across the four exit bonds will follow a certain order and pattern.

No mention was made of government debt that are not in the form of marketable securities. Supplier/contractor debts, bank loans and various overdrafts were not touched on at all in the deliberations.

To pacify the clearly traumatised audience, the Finance Ministry gurus dangled the benefits of a quick IMF program and accelerated return to stable macrofiscals. They projected a likely drop in inflation (and potentially interest rates) to single digits resulting in positive real returns on the new exit bonds.

The government pledged to double down on liability management, including a fastidious commitment to improved sinking fund management to ensure that come 2026, the government will be in a position to resume servicing debt at an elevated level. Some industry observers are worried of a repeat restructuring as was the case in Jamaica in 2013.

Some vague assurances were given by the government about special measures being introduced to ensure limited or zero negative spillovers into the financial sector as a result of the debt restructuring program. Somewhat more tangibly, the government discussed the prospect of a new liquidity fund that will help financial sector players in dealing with a sudden upsurge in redemption requests (customers trying to pull out their money from the financial system).

The possibility of loosening some prudential ratios related to liquidity, leverage, risk-weighting of assets and capital adequacy was mulled without any concrete commitments. Regulatory forbearance was however affirmed, especially in relation to minimum capital, asset class limits and the standardisation of the accounting treatment of revalued bonds. Pension Funds were consoled with news of upcoming support measures to mitigate against mounting redemption risks.

No information was provided about the moral hazard implications of all this regulatory laxity in the trusteeship process, among others.

As hinted above, the President’s premature commitment to “no principal haircuts” was not tenable when given. The authorities are now trying to manage the fallout by shifting the burden of adjustment to external debt and deepening coupon discounts. Our understanding is that the government will offer external debt holders the following terms: a 30% principal haircut, a 30% coupon haircut and a three-year moratorium (or standstill) on interest payments.

The famous “Debt Laffer Curve” denoting the debt overhang as a result of suboptimisation of liquidity-stock relief
Chart: Oshua (2018)

This essay is much too brief to delve into the differential impacts of the different debt exchange models politically available to Ghana and their resulting effects on different classes of investors. The academic, technical, policy and professional literature on that subject is very vast. On the whole, however, it is safe to say that Ghana’s current “opening gambit” proposals tilt enough to the “higher loss” end of the spectrum for a large enough group of investors to trigger some banding-up resistance soon after the announcement.

The literature is awash with studies on how different debt exchange models impact investors. Chart: Jochen Andritzky and
Julian Schumacher (2019)

So where does all this lead to as far as the short-term dynamics of Ghana’s economic crisis are concerned? We have not heard enough to update our previous analysis, though we suspect that the occasion to do some of that will arise in coming days. For now we will reiterate our standing assessments:

  • Consistent with the government’s posture, “stakeholder consultations” will remain perfunctory. No serious attempt has been made to mobilise major factions of the society behind these plans. Not even the ruling party is fully briefed about the entire strategy set of the authorities.
  • The Opposition Party in Parliament is not sufficiently primed to play a major role in these developments. The frontbench has not shown any clear signals of pushing any detailed alternative policies. There are some concerns that the leadership is fickle and unsteady. Impending internal primaries have also weakened Opposition Party leaders and distracted some Members of Parliament.
  • That notwithstanding, the government’s strong inclination to entirely ignore Parliament has serious risks.
  • Civil Society actors, including the unions, have yet to develop anything remotely like a united front, Still, the complete disinterest in “meaningful engagement” with these groups on the part of the authorities will create negative conditions in the information environment. The lack of an “elite position” on the planned measures will result in a highly discordant public conversation with massive amounts of misinformation being generated without significant counter. The principal religious bodies and others, seen as more sympathetic to this government, for instance, are in no position to credibly calm waters.
  • We reiterate our earlier position that, next to poor stakeholder mobilisation, the biggest risk to the proposals is litigation, including the possibility of class actions inspired by political opposition actors and unions. Some of the local debt instruments are subject to English law, heightening the prospect of some holdouts being facilitated by the use of the London courts to frustrate the government’s timeline. Some other local debt instruments are overcollateralised by tax revenue and may become the subject of domestic litigation.
  • We have suggested in the past that a Greece-style law may have been helpful in moderating litigation risks but the government’s preferred timeline for action and disinterest in meaningfully engaging the Opposition has apparently ruled this out for now.

It is important to bear in mind that these are merely the government’s initial proposals. Haste has been the foremost consideration in coming up with them. The rubber however meets the road in the rough and tumble of the democratic process. Some of the risk factors indicated above can only be resolved by strategic backpedaling by the government with perfect timing.

The true quality of the Ghanaian government would be seen in how it sequences and orchestrates its concessions, whilst holding its red lines, as it navigates the process post-announcement.

Whilst the underlying technical appraisals guiding its actions are reasonably thorough, I am afraid I do not have too much confidence in the government’s mastery of the political economy of crisis management.

There are a number of public sector institutions whose operations and service delivery can generate revenue to offset the costs involved. In Ghana, the jargon used is: “internally generated funds” (IGF).

For many years analysts have lamented the very poor IGF record of some of these institutions and much lip service has been paid by the Head Honchos of the Public and Civil Service about fixing what is becoming an annoying source of waste.

Ghana’s “development partners” have funded various programs in the last several years to plug leakages, but seemingly to no avail.

The problem has been hidden because over the years Finance Ministry budget analysts have simply resorted to setting absurdly low IGF targets for public sector institutions so that they can report overperformance.

For example, a review of IGF performance for the 2016 to 2019 period would suggest to the untrained eye that public sector institutions in Ghana are highly efficient in meeting their IGF targets.

Credit: Owusu-Akomeah, Owusu-Afriyie and Asare (2022)

Yet, in 2022, Ghana projects just 9.78 billion GHS in total IGF out of a total projected revenue amount of 98 billion GHS. This is literally just 10%. Given that as at the end of September 2022, IGF receipts totalled just 6.4 billion GHS, the likely annualised outturn is actually about 8.5 billion GHS (closer to 8.5% of projected revenue).

Nigeria, on the other hand, recorded IGF totalling 1.9 trillion Naira ($4.28 billion at the official exchange rate or $2.5 billion at the parallel market rate) in 2021. I accept that there are probable methodological and categorisation factors that can complicate a direct comparison between the two countries. The State and Local government entities in Nigeria, for instance, are generally more empowered in their federal system than is the case in Ghana. But even so, adding local government revenue in Ghana makes little difference in assuaging the concerns raised.

In 2019, local government entities in Ghana reported 388 million GHS ($75 million) in IGF. Nigeria’s Lagos State alone reported 398 billion Naira ($1.1 billion at parallel market rates) in IGF collections for that year.

Source: Auditor General of Ghana (2021)

In 2020, the latest year for which audited reports are available, local government IGF in Ghana amounted to 391 million GHS ($70 million, thus showing negative real growth), with the Accra Metropolitan area earning just $2.1 million ($26 million for Greater Accra Region). The Auditor-General points to worrying inefficiencies as the main culprit for the underwhelming performance.

So, political-constitutional differences notwithstanding, the IGF performance in Ghana, compared to regional peers such as Nigeria, at various levels raises eyebrows. Because whatever IGF is not being collected at local level due to the weakness of the district and municipal assemblies must, logically, be collected by the central government and so should show in the aggregates anyway.

In that light, the mere fact that Nigeria is able to report that 23.5% of all government revenue can be attributed to economic earnings made from delivering services to citizens, whereas Ghana can only attribute less than 10% of total revenue to a similar source (whatever the differences in categorical composition) is seriously mindboggling and deserving of explanation.

Here are a few specific examples that add credence to my suspicion that something seriously problematic is going on.

As at the end of September 2022, Wenchi Farm Institute, which the Agric Minister promised in 2020 was on the verge of being converted into an advanced agricultural college, was in such dilapidated shape that its IGF was a grand total of ZERO.

GRATIS, set up to develop machinery and industrial equipment for sale to micro, small, and medium enterprises (MSMEs) to transform Ghana’s industrial capacity, has made less than 200,000 GHS out of a ridiculously low target of 435,000 GHS.

The country’s foremost state-funded hospitality training school (HOTCATT), set up to advance Ghana’s tourism capabilities and transform the country into a regional hub, has made just 30,000 GHS ($2000).

The country’s most iconic state-run entertainment venue, the National Theatre, has recorded only $54,000 in revenue.

The massive touting of success in the country’s railway sector is exposed by the disclosed revenue of just $135,000. Comparatively, Nigeria’s equally constrained and struggling railway sector generated 6 billion Naira in passenger revenue alone in 2021 (i.e. more than $100 million).

Ghana’s foremost management sciences think tank and public sector capacity building institution, the MDPI, manages a woeful $82,000 against a $2.2 million target by end of Q3 2021.

The country’s mortuary facilities operator says it has collected no fees so far in 2022.

Efua Sutherland Park, heartbreakingly left to rot, heroically collects $5000 in service fees.

But the most shocking of all is the Ghana Enterprise Agency which so far this year had scraped just a little over 260,000 GHS ($18,000).

Some readers will recall that during the pandemic the government of Ghana set up a scheme to disburse soft loans to eligible MSMEs under a scheme called CAPBuSS (CAP Business Support Scheme).  The government’s own accounts suggest that more than 900,000 MSME owners applied for assistance under the scheme.

Subsequently, about 300,000 of them were deemed successful in their applications and thus qualified for various amounts of loans disbursed to them through mobile money networks and/or other financial channels.

The period of fund disbursement to the beneficiaries was indicated as “May 2020 to July 2021”, though it would appear from the government’s accounts that most disbursements were done by March 2021.

CAPBuSS beneficiaries were given a grace period of one year and a two-year repayment schedule on a standard amortization basis.

Of the initial GHS 1.2 billion approved for the COVID-19 Alleviation Program (CAP), about GHS 900 million was reported to have been spent on (CAPBuSS).

More than 18 months have since passed since the grace period elapsed for the first cohort of recipients. All recipients must now have exhausted their grace period months ago.

Given the two-year repayment period, an elementary linear amortization model (i.e. discounting the fact that the bulk of the money was spent in the early part of the disbursement period) would suggest that even at a painfully low 10% recovery rate, Ghana Enterprises Agency should be seeing an average amount of at least 2 million GHS a month (~$140,000).

To instead report $18,000 over the course of the year is frankly shocking. It begs the question, what kind of basic credit due diligence system was put in place when disbursing the funds?

It is important to bear in mind that even if some of the funds were disbursed through partner financial institutions, the institutional accountability still falls on Ghana Enterprise Agency, and any recoveries would need to reflect in its books.

Surveying these results, one cannot help but wonder what exactly are the performance bonds of the boards and management of these institutions.

How can the government justify additional taxation when various avenues to generate revenue in Ghana continue to underperform at this rate? Regular readers of this site may recall my spirited arguments in the past against the uncritical notion that Ghanaians are tax cheats.

If in the past Ghanaians have been lax in monitoring revenue performance of all these state bodies, well, today, times have changed.

Now that the government is ramping up consumption taxes, attempting to default on its debt obligations to some citizens, and calling for general belt-tightening across society, hard questions must obviously be asked. If non-tax revenue, like IGF, can help cover some of the gaping fiscal deficits without increasing the tax burden, why has so little effort been made to boost it?

Ghanaian public institutions must be told in no uncertain terms to plug their leaks, quit slacking around, and “show us the money”.

Of all the motley crew of ideas the government of Ghana has churned out in recent days and weeks to deal with the country’s deteriorating public finances, none has caught fire like the decision to start buying oil with gold rather than dollars.

Everyone from crypto anarchists to goldbugs is doing cartwheels trying to chip in their two cents about how the move contributes to the long-awaited demise of the petrodollar system.

The government of Ghana has professed two goals:

  1. Reduce the pressure on the local currency – the Ghanaian Cedi (GHS) – caused by large fuel importers’ perennial search for US dollars to bring in fuel from overseas. In the government’s new model, the country will buy locally produced gold in local currency and exchange the gold for fuel produced in the Gulf or elsewhere.
  2. By removing the dollar input into local pricing, it aims to offset the effects of the alarming depreciation of the Cedi on retail fuel prices, and thus moderate price rises at the pump. That is to say, if the dollar exchange rate is no longer a factor in how wholesale prices are set, then they won’t factor into retail prices either, and the breakneck depreciation of the Cedi won’t be passed through into final prices paid by consumers.

Are these hopes valid? Is the program even feasible at all?

As for technical feasibility, there is no doubt that it is feasible. After all, Ghana is hardly the first country to mull this idea.

As far back as the 70s, major oil exporters in the Gulf initially responded to the Nixon shock (the jettisoning of the “gold standard” by the US that led to gold prices rising from $35 to $455 by close of the decade) by broaching the idea of being paid with gold directly. That is, if the US was no longer going to back the dollar with gold (i.e. redeem the dollar with gold on demand), then, the oil exporters argued, they might as well just take gold as payment for their wares.

In the event, the Gulf-based oil exporters abandoned this stance and opted to instigate oil “price shocks” instead. Within three years the price of oil went from $3 to $12 a barrel.

An even earlier case study of the gold-oil barter phenomenon would be the use of Philadelphia-minted gold coins by American oil explorers to pay royalties in Saudi Arabia in the 1940s.

More recently, between 2011 and 2012, India and Iran explored the use of gold as a payment for Iran’s sanctioned oil. Iran in fact tried to scale the program internationally but failed to find enough takers. Turkish brokers and government intermediaries however dug in until, in 2016, Reza Zarrab, a Turkish banker with vast regional networks, was arrested in New York by the American authorities for money laundering and sanctions-busting.

From then on, gold-oil barter schemes became too closely associated with the shadowy underbellies of global finance and commodity trading. Reza’s fate would give more fodder to the cottage industry of conspiracies about the West, especially America, being hellbent on preventing gold-based commodity trades. The internet today is awash with all manner of theories about how Libya’s Gaddafi was “taken out” for trying to switch from the petrodollar system to a gold-backed dinar based trading system.

The murkiness notwithstanding, the technical viability of trading oil in gold is not really in doubt. In fact, there are reports of Emirati, Kuwaiti and Omani refineries and oil traders already reaching out to the Ghanaian government to explore the prospect.

The real issue is whether, even should a deal be successfully struck with Gulf or Asian traders, any resulting transactions will lead to the attainment of the two goals described above. Here, I am somewhat doubtful.

Some crude modelling should make my case. In 2023, Ghana will consume about 2 million metric tonnes of imported refined gasoline (called “petrol” or “premium motor spirit/PMS” in Ghana).

“Imported” because due to insider fighting and perennial horse-trading, the country has struggled to fix its only sub-scale petroleum complex, the Tema Oil Refinery, despite having collected hundreds of millions of dollars in taxes from the population to do precisely that.

Using an unweighted average of “ex refinery” (essentially, “wholesale”) prices quoted by the 23 main fuel importers in Ghana of $4.62 per gallon or, even safer, the $4.06per gallon FOB pricing quoted by the downstream fuel regulator in the June 2022 import window, one can estimate a petroleum import bill of anywhere between $2.9 billion and $3.3 billion per year. (The latest Platts wholesale pricing for gasoline is now in the $3.74 per gallon range).

The government’s plan, at least the bits of it that has been disclosed, calls for the use of 20% of Ghana’s annual gold production by large scale miners to offset a part of this dollar bill.

According to industry data, gold production in the large-scale sector is in the range of about 2.8 million ounces per year.

The government prefers to use the World Bank’s Commodities Market Outlook database for its price forecasting. The average gold price in the 2023 horizon of this analysis is about $1700.

Therefore, the government’s plan is to buy roughly 560,000 ounces of gold in Cedis at the average USD spot price over a three month period (full pricing details have yet to be agreed with the gold industry). Meaning the Cedi equivalent of roughly $952 million worth of gold will be provided to the local industry by the Ghanaian Central Bank, and the gold will be turned over for refined gasoline (the most economically sensitive fuel) equivalent to about 30% of Ghana’s current total annual needs. In this analysis we will ignore that further refining may be necessary to meet bullion standards demanded by the ultimate recipients of the gold.

It is not too clear how the actual trading dynamics will work out. The government has effective control over one of the major downstream retailers (the country has about 235 active retailers) called “Goil”. Goil controls about 24% of market volume. One strategy then would be for the government to borrow the roughly 14 billion Ghana Cedis (GHS) needed for the series of transactions described above from the Bank of Ghana. With those funds in hand, it will buy the 560,000 ounces of gold from the large-scale miners, pay the Emiratis or whichever Gulf refiners/traders they have signed up, land the consignments in Ghana’s ports, and then on sell to Goil. The final move on the board would then be to pressure Goil to pass all the savings on to consumers, in the hope that competition would force the other retailers to also reduce prices.

It should be clear by now that the plan above, regardless of precise configuration, is fraught with challenges.

First, the large-scale miners today have major overseas payment obligations that lead them to repatriate roughly 20% of their forex earnings to Ghana. The rest is apparently needed for legitimate forex-denominated business expenses. Forcing them, outside these “retention agreements”, to sell 20% of their output in local currency could mean a corresponding and equivalent gap in their forex needs. If so, then, as many analysts have already suggested, they will seek to convert the Cedis received to US dollars. The first goal of relieving US dollar pressures in the forex markets would thus have been defeated.

Second, assuming no or minimal US dollar pressure abatement, the majority of fuel importers will still have to find USD to import 70%, or very likely more, of the required national fuel need. Given that the majority of importers are barely scraping by (a significant number of licensed importers are unable to trade at all, and more than 75% of fuel is brought in by the 10 largest traders), it is not clear that the rest of the industry will respond to competitive pressure to lower prices even if Goil significantly drop their own prices due to a favourable wholesale price secured through the barter trading.

Third, and more critically, there is no guarantee that the fuel the government procures through this barter arrangement will actually be cheaper than what it can buy on the international market.

For the fuel bought with gold to be cheaper, two assumptions must hold: a) the local Cedi to gold exchange rate must be lower than the Cedi to dollar exchange rate and b) the Gold to oil price ratio (or “exchange rate”) must be lower than the dollar to oil price ratio. Both factors will depend on skilled negotiation, but in a voluntary contracting situation, such as this one, one wonders whether such a double arbitrage will be possible to achieve.

Surely, all gold producers in the world that are net importers of oil would love to exploit these arbitrages. China is both the world’s largest gold producer and oil importer. Yet, despite repeated promises to scale up its gold-backed Yuan-priced oil futures and settlement products, it never seems to find the heart.

Here is a crude summary of why exploiting the three-way arbitrage among local currency, gold, and oil may be harder than it appears at first glance.

Oil and gold prices do not move in tandem. Gold and dollars are however increasingly more correlated than used to be the case. So much so that gold is increasingly a poor hedge against the dollar.

The intriguing joint effect of both facts is the result that Ghana’s plan may in fact be quite risky.

As financial trendspotter, Tim McMahon, has noted, the gold to oil exchange rate is fairly volatile.

More importantly, there are more persistent trends in the record of oil being expensive relative to gold instead of the other way round. It is thus very possible that Ghana may have to find more gold for the same amount of contracted oil during significant stretches of the relationship with the Gulf traders.

Here is some simple illustrative math. Suppose at contract sign-off, 10,000 Cedis buys $1000 dollars which in turn buy one ounce of gold. Suppose this amount of gold can buy 10 barrels of oil. Because the gold to oil price ratio is quite stochastic, it could easily so happen that one ounce of gold suddenly only buys 5 barrels of oil on the international spot market. Knowing this, the Gulf traders will insist on linkages to Platts and Argus (international petroleum price intelligence databases often used as a source of price benchmarks) over short windows in order not to be left carrying the can for too long in such a scenario. (Note that we are not even considering the transaction and carry costs involved in the physical handling of gold versus electronic transfer of dollars.)

Thus, without any significant movement in the dollar – Cedi rate, a subsequent pricing window might require that Ghana must now find 20,000 Cedis to buy $2000 worth of gold if it wishes to maintain the 10 barrels of oil trading volume. In those circumstances, Goil, the assumed retail-end offtaker, would find itself completely on the wrong-end of the market since its prices would have to double in order to maintain both the peg and its own margins.

It is true that there are legal technologies that can be used in contracting to manage some of these risks (such as options and cross-options), but the Gulf traders/refiners are not daft. They will not consent to an arrangement that consistently disadvantages them. Any extensive use of options (agreements which grant rights but not obligations to buy certain volumes at certain prices at certain times) would likely be symmetrical or come at a cost. “Strategic flexibility” could be offered by options which allows the government to resort to the supply agreement intermittently. In such a context however it would make more sense if the scheme was designed and marketed more as a backstop arrangement rather than as the country’s primary source of volumes.

Furthermore, to the extent that the government is introducing another volatility in the pricing chain (the gold-to-oil exchange rate), standard rules of finance will imply higher risk. It is also a cardinal rule of finance that economic actors demand higher margins for higher risk. (For simplicity sake we are even ignoring various integrity and institutional risks inherent in abandoning open market transactions for under the table, backroom, negotiations).

All of which raises speculation about the prospect of the government trying to stiff the large scale miners by forcing them to peg the dollar spot price of gold to a Cedi exchange rate set by the Bank of Ghana. Whilst this will not deal with the gold – oil volatility problem itself, it will seek to moderate the other source of risk: the Cedi – gold exchange rate. Because, if not, then any depreciation of the Cedi against the dollar will immediately reflect in how much the government buys gold for (i.e. in order to maintain the US dollar spot price peg).

Shortchanging the miners using the exchange rate will increase their own operational risk and make them highly sensitive to shifts in volumes bought locally at the government’s preferred dollar-cedi rate for spot gold transactions. This may well affect their investment decisions linked to production scaling. They may seek to time outputs and exports to distort the government’s own fuel import schedules.

Just like the case where the depreciation of gold against oil leads to inflation in the ultimate Cedi amount paid for the oil, a market rate for local gold purchases based on the open market USD rate (which in turn is linked to the dollar spot price of gold), on the other hand, would always result in general depreciation being passed through the local price of gold, which in turn will affect the volumes of gold the government can buy and the resulting barter-volume of oil or gasoline. In simple terms, an unstable chain of pegs.

There is also a further complication regarding the differential pricing of gasoline in the Gulf versus in North-West Europe which may diverge more steeply from underlying crude oil price trends due to faster rising gasoline price rises in the Gulf compared to the more highly traded North-West markets where Ghana currently obtains its import-parity benchmarks.

But one needs not go that far to make the central point of this short essay.

And the central point is simply that a successful arrangement to barter gold for oil will not necessarily lead to less Cedi depreciation against the US dollar nor to lower prices at the pump for consumers. Everything depends on the devil in the detail.

The leadup to Ghana’s budget presentation was filled with political drama and outsized investor expectations.

On Thursday, the 24th of November, the much anticipated event finally came off, in the shadow of a World Cup fixture between Ghana and Portugal.

The budget, as finally presented, has many twists and turns but on the essentials it is a bit of a Frankenstein mash-up.

On the one hand, it contains the clearest yet admission by the government that the fiscal situation is dire, in ways that are not predominantly attributable to external factors like the Ukraine conflict and the COVID-19 pandemic, and therefore that significant waste-cutting is warranted.

It is a standard practice of Ghanaian budget speech-drafting during economic downturns to frame the domestic crisis against the global picture. Below are extracts from the 1999 and 2000 budgets, when the Asian Financial Crisis was looming large.

The 2023 budget had its fair share of global scapegoating but not to an extent where all emphasis on domestic triggers of the crisis was totally neglected as has been the case in most policy statements of recent times.

Yet, on the other hand, the bulk of the numbers do not add up anywhere close to the much speculated austerity package. In fact, this is one of the most expansionary budgets in the history of Ghana, at a time most investors and analysts expected contractionary policy.

The government’s approach harks back to the failed fiscal consolidation approach in 1999.

Total Ghana government expenditure in 1998 was 4.38 trillion Cedis or $1.64 billion against nominal GDP of 16.59 trillion Cedis (or $6.3 billion at the then prevailing exchange rate) yielding an expenditure-to-GDP ratio of ~25%. Faced with domestic and external headwinds, the economic managers of the time decided instead to increase spending to 28% of GDP as evidenced in the extracts below from the 2000 budget statement.

As everyone now knows the 1999-2000 fiscal consolidation effort, not surprisingly, failed completely and the succeeding government was forced to declare HIPC for concessional terms in the restructuring of Ghana’s debt.

A far better lesson for today’s economic managers should come from the crisis budget design of 1995, the Kumepreko year. Against the 1994 outturn, government reversed back to back deficits and generated a fiscal surplus by spending 1.15 trillion Cedis/$800 million (from revenues of 1.26 trillion Cedis/$870 million) to result in an expenditure-to-GDP ratio of 16% (i.e. using a GDP figure of $5 billion at the prevailing exchange rate).

Against this historical background, one marvels at the government’s decision to project expenditure to GDP at more than 28% in 2023 (from ~25% in 2021) in the hopes of almost doubling revenue (from a likely outturn of 85 billion GHS in 2022 to an expected 143 billion GHS in 2023).

To seek to grow government revenue by more than 68% in one year at a time of collapsing demand, imploding confidence and low economic growth is clearly wishful thinking.

Source: Bank of Ghana

That way of thinking is reminiscent of the government’s insistence on raising billions from its highly unpopular e-Levy despite widespread analyst sentiment against such projections. In the event, e-Levy could not even clock 6% of the original target by end of September 2022.

Extract from the government of Ghana 2023 budget statement

There is no evidence of government learning any lessons from this episode. Massive increases are projected in 2023 for VAT (an expected 65% increase in 2023 over the 2022 outturn), e-Levy (a near 500% increase on the likely 2022 outturn) and COVID-19 Health Levy (an expected doubling of the yield seen in 2022).

It is impossible to fathom why the government expects the COVID-19 levy (initially sold to the country as a temporary revenue measure) to grow at more than twice the rate of NHIL when the base for computing both taxes are the same. In fact, all these levies, under normal circumstances, should grow proportionately as VAT increases.

Such a lack of credible revenue estimation in a critical budget such as this, one which investors and analysts all over the world have been awaiting to use as a gauge of fiscal direction, is most worrying.

Equally bizarre is the decision to project an increase in expenditure from an estimated 137 billion GHS (cash basis) in 2022 to an estimated 227 billion GHS (a 66% increase).

It is evident from this budget design that the government is not keen on contractionary policy at this time. Despite repeated demands from civil society and policy think tanks for it to commission a root and stem independent spending review to assist in jettisoning obligations of dubious value contracted by various government assigns and state-owned enterprises to benefit business cronies, the budget is instead replete with symbolic moves like banning the use of SUVs by Ministers for municipal commuting.

Civil Society Organisations (CSOs) and policy think tanks such as IMANI and ACEP have for many years and months now documented massive leakages in the energy sector and elsewhere amounting to billions of dollars. Yet, unconscionable public sector contracts like the Kelni GVG deal continue to subsist.

Even more alarmingly, the budget itself contains spending proposals that persist in the tradition of prioritising non-essential spending even in a time of serious crisis. Why should a government confronted with such dire fiscal numbers authorise the medium-term spending of ~330 million GHS on a “national cathedral” or for continued consultancy spending on a so-called Petroleum Hub that has failed to attract any significant investor interest?

The price for sustaining the continued spending on non-essentials is the dangerous resort to pro-cyclical measures such as the increase in the broadest-based consumption tax (VAT) by a whopping 2.5% percentage points. One shouldn’t be an uncritical devotee of Arthur Laffer to protest strongly against broad-based tax rises in a time of fast falling confidence in the economy and steadily collapsing demand.

This, in a country where the loss of investor confidence has reversed earlier debt management gains from the lengthening of maturity profiles back to the dark days of overreliance on short-term debt.

At the end of 2021, short-term securities constituted just 14.6% of total domestic debt. Today, the figure has climbed steadily to nearly 50%.

Extract from the 2023 government of Ghana budget

The shift to expensive short-term borrowing is reinforced by a growing reliance on the Central Bank for deficit financing.

The Central Bank’s accommodative stance towards fiscal expansion is now complete. In addition to sweetheart repo deals in the commercial banking sector to prop up artificial demand for government of Ghana domestic debt issuances, the Bank of Ghana has also allowed overdraft financing of the central government to violate every public financial management norm in existence.

One only need look at the plummeting “net foreign assets” levels (a crude but important proxy for forex in the economy) against the surging “claims on government” and corresponding expansion of broad money to start discerning the feedback loops amplifying inflation and Ghana Cedi depreciation.

Both trends – aggressive central bank financing of the deficit and a shift to expensive short-term debt securities – result from a complete inability to deliver on the promised fiscal contraction. 2022 expenditure has already hit 159 billion GHS on commitment basis despite claims of cutting “discretionary spending” by 30%. The nominal increase on 2021 spending levels of 113 billion GHS is 39%, or 29% in real terms. In simple terms, despite bold promises of a significant reduction in spending (including repeated assertions of a “30% cut in discretionary spending”), fiscal expansion has been galloping at an uncontrollable pace. Meanwhile, the inflationary and exchange rate depreciation spiral is set to continue, deepening the downturn cycle.

The government’s decision to continue budgeting hundreds of millions of GHS for non-essential spending like the cathedral and to support non-strategic defense spending, like the inexplicable decision to keep supporting the construction of some forward-operating bases, such as the one to protect the Bui Dam (well beyond the country’s well-acknowledged need for a shield against spillovers from the deteriorating Sahelian security environment), among others, is ample evidence of a lack of commitment to true crisis budgeting.

Whilst we continue to analyse the 2023 budget for deeper insights into the government’s fiscal prospects in 2023 and the quality of the planned IMF ECF program, our initial assessment is not encouraging. Once again, the lack of meaningful prior consultation, even within the ruling party, has resulted in an underwhelming document unlikely to restore serious confidence in the economy.

On Sunday this week, the President of Ghana mounted the soapbox to calm nerves in his frazzled and bewildered country.

For months, soaring inflation (at near 40%) and a currency in free fall (50%+ depreciation against the US dollar this year) have been triggering controlled panic across the country. Yet, the President had studiously refused to comment substantively on the crisis in public.

To crown the confusion, he decided five weeks ago to embark on a tour of his political strongholds to “call on traditional authorities, commission a number of projects, and cut the sod for the commencement of new projects”. This bizarre decision to feign normality despite the escalating volumes of complaints and cries of anguish was widely used as further evidence of a presidency that has grown so aloof, so cocooned in a bubble of sycophancy, that reality simply can no longer penetrate. Surely, had the president any advisors left, whose counsel he respected, they would have cautioned him about how out of step the idea of a triumphant tour at this time was?

How the Bubble Burst

As anyone could have predicted, the tour was dogged by spectacles of booing crowds and unnecessary controversies sparked by some of the “traditional authorities” he visited. But the worst was yet to come. Incensed by the President’s claims that calls for him to sack some of his Ministers, whose performance he described as “excellent”, were induced by sheer ill-will, ruling party members of parliament (MPs) revolted. His own camp had finally had enough.

A group composed of more than 80 of the 138 ruling party MPs in the evenly split Parliament threatened to torpedo all government business unless the President sacked his Minister of Finance and the Minister’s right-hand man forthwith. Apparently, the MPs had been demanding this for weeks on the quiet but had been rebuffed at every turn. Finally, the thick cocoon encasing the president seemed to crack. His minders, scampering to regain some foothold, promised a big speech on the economic crisis.

So, on Sunday, he came on TV and did his thing as best as he could. Many Ghanaians were underwhelmed, though appropriate uses of humour at various points in the speech appear to have chimed with the Ghanaian style of not taking anything too seriously.

When I got my copy of the speech, ahead of an appearance on one of Accra’s main news networks, I leafed through with great anticipation, expecting a revelation. There was none of note. But three issues triggered me a bit and inspired the thoughts that I shared on TV the day after. I will reproduce them here for readers of this website.

“Ownership” is still a Problem

One way to sum up the management of the ongoing economic crisis in Ghana so far is that at every major crossroads in a maze of increasing chaos, the government has made the wrong call and chosen the worse turn.

First was a decision in mid-2021 after having raised $3 billion in March of that year, under tight global market conditions, to return to the markets a few months later for an additional $2 billion. The decision spooked investors who began to sense fiscal adventurism. A growing buzz of negative vibes started to ripple through the markets. In October, Ghana abandoned the plan as spreads on the country’s Eurobonds started to rise, suggesting increasing unease in the market. I started to observe a spike in Ghana-critical analyst reports around this time. Mind you, no negative ratings actions had occurred by this time.

With the spotlight suddenly turning on Ghana’s fiscal situation, the government chose to take a budget packed with some pretty contentious policies to the polarised hung Parliament. Even when the Opposition relaxed their objections to most of the items in the budget except the most controversial of them all, the ill-fated e-Levy, the government refused to make the necessary concessions. It clung on to the e-Levy throughout, despite consistent analyst feedback suggesting the tax was far from the silver bullet it was being made out to be, and almost universal opposition from civil society and citizen groups.

After burning precious goodwill and political capital, and generating even more market anxiety, the government managed eventually to pass the e-Levy. But at the price of a major ratings downgrade by Moody’s in February 2022, to CAA1, firmly in junk territory. Despite Moody’s action being wholly consistent with the timbre of market sentiment at that time, the government chose, rather bizarrely, to mount an attack on the individual ratings analysts who had issued the opinion.

By this times, calls had begun to mount for Ghana to head for the IMF. With the country shut out of the international capital markets, investors continuing to dump the country’s bonds, severe fiscal pressures, and growing signs of a balance of payments crisis, the government’s posture of dismissing the IMF out of hand was startling in its incoherence. Some government ministers even went as far as to denigrate the IMF option as fit only for incompetent economic managers. Finally confronted with the stark reality of zero options, the government beat a retreat and scampered to the IMF.

The point of the above chronology is to emphasise a strong tendency of the government of Ghana to make the wrong bets and calls when faced with a strategic dilemma. Choices appear to be frequently motivated by grandstanding than by hard and cold calculation.

At the root of this romantic approach to statecraft is the government’s inordinate sense of self, buoyed as it is by a culture of powerful political leaders rarely hearing the hard truth from those closest to them and inclined therefore to believe that all critical viewpoints emanate from implacable foes best ignored. Facts are heavily filtered to construct well curated narratives for believers only, the rest be damned.

In the resulting version of reality, as constructed for the current ruling elite in Ghana, the country was sailing tranquilly on the waters of paradise until the pandemic struck in early 2020 and was on the verge of total and glorious recovery from even the pandemic until the tragic Ukraine episode erupted. In this narrative, Ghana is simply the pious innocent massacred by savage global currents from under which its blameless government continues to toil diligently to extricate its fate.

Mauling Facts to Suit a Narrative

Not surprisingly, the President of Ghana spent quite some time in his Sunday speech regurgitating the government’s mantra of the Ukraine crisis having created a world of total catastrophe in which Ghana’s plight is far more tolerable than that of its neighbours. For instance, in his account, whilst inflation, since 2019, in Togo has risen by 16 times and in Senegal by 11 times, Ghana has managed to get by with only a five-fold increase.

This is of course untrue. Inflation numbers are some of the most widely reported worldwide and the IMF, in its official global macroeconomic surveillance function, studiously monitors trends. Below I have provided the latest IMF data.

Togo

From a 2019 average rate of 0.7% to a 2022 average rate of 5.6%

Senegal

From a 2019 average rate of 1.8% to a 2022 average rate of 7.5%

Beyond the factual negligence, which of course does not speak well of a major presidential speech screened by the government’s leading lights, there is a serious lack of analytical rigour. Inflation in Togo (5.6%) and Senegal (7.5%) bouncing up and down within the single-digit zone, and just 2.6% and 4.5% above the target of Francophone West Africa’s Central Bank (BCEAO), can certainly not be compared to Ghana’s situation. Not when inflation in Ghana is at more than 37% (and rising on an annualised basis), and thus hovering nearly 30% above the Central Bank’s target. And certainly not when “cost of living impact” is the primary reason for the comparisons in the first place.

At any rate, why select CFA-area countries where inflation is usually so low to begin with that percent-on-percent changes in inflation are likely to exaggerate the real effect on incomes, expenses and price changes?

Why not any of the many countries in Africa where the baseline inflation rate tends to be closer to Ghana so that percent-on-percent changes could translate to similar price effects and thus impact on expenditure and income?

For example:

Nigeria, where inflation has moved from 11.9% in 2019 to 17.4% today, using the President’s speechwriters’ preferred methodology?

Kenya, where inflation has moved from 5.4% to 7.7%?

Uganda, where inflation has moved from 2.85% to 10%?

Zambia, where inflation has moved from 9.15% to 9.9% (and in fact has dropped from 22% in 2021)?

Isn’t the fact that Ghana, with its inflation figure of 37% (annual average of 32%) and climbing, is today only behind Zimbabwe and Sudan in terms of absolute inflation numbers a more salient, and dare I say important, fact to chew on?

Global vs Local

But this is not just about quibbling over some wonkish numbers. It goes to the heart of credibility in different ways. In one respect, it reinforces concerns about the lack of ownership of the crisis.

The government’s continued spinning around the fact that its missteps and miscalculations have contributed significantly to the crisis makes it difficult to trust it to reverse course on those tendencies exacerbating the crisis. It puts to doubt the quality of any fiscal adjustment program, including the planned IMF one. In another respect, such relenting spinning backs perceptions that the government will always favour convenient scapegoating and rhetorical gymnastics over building trust.

For example, researchers at home and abroad have long established a strong correlation between money supply and inflation in Ghana. The finding is robust under standard cointegration and unit root controls, simply meaning that it is not spurious but rather reliable.

Chart Source: Osei & Ogunkola (2022)

The Bank of Ghana’s increasingly accommodative stance towards unprecedented fiscal looseness on the government’s part is easily seen by the massive expansion of its balance sheet from 10% of GDP to nearly 20% of GDP over the last decade. By binge-buying government securities, especially in recent months, and advancing large loans to the government, it condones considerable fiscal recklessness. It is important to bear in mind that unlike households, firms, and even banks (fractional reserve banking notwithstanding) the Bank of Ghana undertakes virtually no productive activities and thus an expansion of its balance sheet is tantamount to creating money out of thin air.

The celebrated growth of the domestic debt securities market (Ghana Fixed Income Market – GFIM), reputedly the fastest growing in Africa, merely rides on the back of a government debt binge facilitated by the central bank.

It bears remarking that for a decade, the domestic proportion of domestic debt stayed in the 25% range until exploding in 4 years to almost 40% of the total. Whilst foreign debt expansion was also massive in absolute terms, it is evident that large portions of the dollars borrowed externally propped up a massive growth in Cedi borrowing without the effects being felt in the exchange rate and inflation. Now that those anchors have been removed, the real extent of fiscal looseness in the last 5 years is plain for all to see.

Chart Source: Jubilee Debt Campaign (2016)

No one disputes the contributory role of the global energy crisis and supply chain reconfigurations linked to the tragic Ukraine – Russia conflict in the inflationary spiral in Ghana. However, these effects have been relatively uniform around the world. So, where it is clear that Ghana’s situation is significantly worse than peer countries, it is only basic logic for serious leaders to look critically at the idiosyncratic domestic factors at play acting over and above any imported challenges.

In fact, every major inflationary spiral Ghana has seen in the last 30 years had significant global inputs as easily discerned in the growth below.

Global Inflation Trends. Chart Source: MacroTrends (2021)

The famous 1994 spike was the backdrop to the 1995 kumepreko demonstrations in Ghana. The 2008/2009 spike (triggered by the deepest global financial crisis in the last 30 years) coincided with the domestic power crisis and other downturns that led to the country’s return to the IMF. And, of course, the resurgence of external pressures in 2012-2013 had a role in the country’s 2014 request for another IMF program.

But in every one of those episodes, domestic actors and commentators were right to also point to the important contributory role of national policy. Except, apparently, if government spokespersons are to be believed, in the present.

The IMF Salvation Hymn

As regular readers of this site must now be well aware, Ghana’s debt is likely to be declared as unsustainable by the IMF.

Per IMF policies, a country with unsustainable debt must propose a credible strategy to bring the debt back onto a sustainable trajectory. Because Ghana, already the largest IMF borrower in the IMF Africa region (which excludes North Africa) is requesting a whopping $3 billion of IMF money which will take its utilisation of IMF resources from the current 200% to 500% of its quota, its request should normally attract what the IMF calls, “heightened scrutiny”.

On the plus side, Ghana has maintained excellent relations with the IMF for a long time. The balance of these pros and cons is that whilst the IMF will do what it can to speed up the process, it is entirely up to Ghana to provide a credible plan to bring its debt back onto a sustainable trajectory.

As a matter of IMF policy, a plan for dealing with debt unsustainability must also be fiscally sustainable.

In the light of the above, the President provided the highlights of the plan submitted to the IMF in his Sunday speech. Two themes are the most important.

Extracts from the President’s Sunday speech

Both statements left analysts perplexed.

The Minister of Information, on a whirlwind tour of media houses, attempted to suggest that these plans have already been informally accepted by the IMF (“low-level agreements” as he called them).

The basis of analysts’ perplexity is that whilst a medium-term debt trajectory computation is always part of any Debt Sustainability Analysis (DSA) conducted in expectation of an IMF program, where it is clear that debt restructuring is the only fiscally sustainable path to restoring balance, the restructuring event itself must bring immediate relief in the short-term else a subsequent one will inevitably follow.

It would be completely ridiculous if the government’s plan is to undertake a restructuring process that spans 6 years. The point of a debt restructuring is an upfront adjustment that resets the trajectory towards medium-term sustainability (meaning that the downward slide in total debt stock and how much is spent servicing it does not reverse after a short term but persists until a stable lower equilibrium is reached and maintained in the medium term).

The Information Minister’s explication of the 6-year plan appears to suggest a different strategy in which the debt is tackled slowly year after year. Unfortunately, a debt restructuring is indeed an event as well as a process. There must be point in time when the default (change in the original terms of the debt) happens and if that initial default is sizable enough, then the ripple effects reset debt to a stable path not easily reversible to unsustainability in the short-term.

Since the Information Minister mentioned the Jamaica case, it is worth looking briefly at it.

Jamaica attempted restructuring in 2010, with the results displayed in the charts below.

Source: IMF

It is evident that in each parameter (total debt as well as share of national income used in servicing the debt) there is a sudden cliff which represents the debt restructuring event after which post-default management sets in to stabilise the outcome to some desired medium-term equilibrium. The debt-service number (how much the country pays in interest and principal repayments per year) is particularly noteworthy. The reader will note an attempt to bring down the 35% debt service to GDP number to something below 20% in the immediate aftermath and curtail further growth in the medium-term.

Equally revealing is the maturity profile of the country’s debts before the debt restructuring event (pre-JDX) and immediately afterwards (post-JDX).

Source: IMF

The reader will also notice that some reversals of gains were evident in both the debt trajectory and the maturity profile of debt. Not surprisingly, Jamaica had to do a second restructuring because the relief offered in the first instance was simply insufficient. Crucial to understanding this point is the knowledge that Jamaica chose to avoid principal haircuts, as Ghana plans to do. It opted to extend the maturity of debt securities and reduce coupon payments where possible but simply did not go deep enough.

As the IMF, which had provided resources to assist Jamaica navigate these difficult times, noted, Jamaica’s shallow restructuring strategy was not fiscally sustainable.

On February 12th, 2013, the Caribbean country launched a second restructuring program with heftier coupon haircuts and maturity extensions as below.

Useful to note here that the entire process took 9 days to cover 97% of creditors. And the effect was felt in the immediate aftermath. The government’s borrowing needs declined by almost 30 percentage points.

Source: IMF

In view of the above, if the government’s chief spokesperson says the government wants to use the Jamaican playbook then the following inferences are reasonable.

  • The government plans to launch an initial program that it is fully aware will not provide the needed relief but which it hopes will be sufficient to secure an IMF deal and hopefully give it enough breathing room until the next elections.
  • The government must know that the 6-year timeline for debt restructuring is meaningless. At some definite point in the near future, it will have to propose a specific day on which the program will be launched and the entire process will take months not years.
  • As far as creditors are concerned, the pain will hit immediately.
  • It is the fiscal adjustment part of the process, aimed at preventing debt from rising back again to unsustainable levels that could take six years, not the debt restructuring event.
  • The decision to set the 55% target at the end of 2028 reflects only the fact that there will be no principal haircut but the debt stock will remain and apparently reduced steadily through GDP growth, possible fiscal surpluses, principal retirements and perhaps even debt buybacks.
  • Investors will still feel the pain of not being able to redeem their principal when due because of the maturity extension/tenure elongation, which will have liquidity implications across the economy.

There are some important facts to bear in mind. In the Jamaica case, the IMF’s preferred solution after the botched initial attempt was a 25% haircut on principal plus other impairments across the board. It took months and persistent negotiations for the IMF to agree to accept the government’s self-initiated approach of deeper coupon cuts and maturity extensions. In Ghana, the government has not even been bold to suggest what exactly it has in mind much less galvanise society behind it.

Jamaica recognised the legal constraints under which it was operating and thus built massive social consensus across the society, something the Ghanaian government has refused to do. Ghana’s planned “market-led” approach, entirely dependent on voluntary participation, is fraught with risk of litigation. The only way to mitigate that risk is legislative backing for the debt restructuring program, which will require opposition backing. To date, the government has refused to meaningfully engage on this.

Treasury Bills

The President also mentioned a decision to exempt treasury bills, which per my estimation may currently hover around 28 billion Ghana Cedis or 14% of total debt. Given that treasury bills tend to pay no coupons and are short-term, this may well be a natural consequence of the strategy to undertake a shallow restructuring in the initial stage for political convenience reasons.

How Feasible is the Government’s Debt Treatment Plans?

The picture emerging of the government’s strategy for dealing with Ghana’s unsustainable debt leaves much to be desired.

The plan as can be deciphered is fraught with political risks as described above. But the fiscal issues are more daunting.

Under current circumstances, the government is faced with the onerous task of not just reducing the crushing burden of current debt but to halt the escalating growth of that debt as well. In this case, the government is promising to actually cut the debt by about 6.5% of GDP every year. This is supposed to be done in a context where the government has lost an average of $4 billion per year in overseas financing to which over the last 3 years it has come to feel highly entitled. Regardless what form restructuring takes, the effect would be to lower the government’s capacity to borrow from domestic markets anyway. Only consistent fiscal surpluses over the next 5 years can achieve these crazily ambitious goals. And yet below is the record of the government’s fiscal balance situation historically: consistent deficits.

Chart Source: Osei & Ogunkola (2022)

The government’s own medium-term analysis in 2021 shows no sign of a reduction in debt numbers as seen below.

Readers will note that the 55% threshold is thus not a new aspiration. The analysts in the Ministry of Finance simply know, as indicated in the table above, that under current fiscal conditions, a reduction in numbers is highly fanciful.

The Long and Short of it

The only question remaining then is whether the current fiscal conditions can be significantly altered by the proposed shallow restructuring.

Below is a standard set of debt sustainability assumptions used around the world.

Gratitude to Carlos Cuerpo, Cristina Checherita-Westphal & Francois Painchaud

It underlies a very simple model for plotting debt trajectory under the constraints of fiscal sustainability. The stock-flow adjustment term captures corrections for various discrepancies complicating the link between fiscal deficits and debt accumulation. The output gap term reflects limitations of GDP to lift up to full national potential.

Taking into account the reduced growth that typically follows debt restructuring episodes and elevated cost of borrowing in the short run, a simple arithmetic computation shows that a shallow debt restructuring involving even a coupon cut of 30% off current rates on domestic debts (assuming the government follows through with plans to omit external debt in defiance of the Political Opposition) would mean a drop in average weighted cost of servicing debt to about 15%.

Failure to do a principal haircut, rigidities in the budget, higher cost of borrowing, and a shift of the debt profile to short-term maturities (already underway) all point to cost of borrowing returning to 20% in just two years. If the only fiscal savings amount to the 7.5% percentage points drop in the average weighted cost of servicing the eligible debt (i.e. domestic debt stock minus treasury bills, ESLA, which is issued under English law, etc), then debt accumulation will drop by only so much from the current 25% annual average rate (in real terms) observed in recent years.

Judging from the contribution of the domestic cost of borrowing to the deficit, the estimated savings of about 10.5 billion Ghana Cedis in the first year and less thereafter following a shallow restructuring will initially lead to a drop of about 1.5% percentage points off the secular trend of the fiscal deficit. Even if we pad the figure to 2% percentage points, such a retreat will not generate enough fiscal surpluses in the ensuing years to be used in buying back debt or even halting any further increases in debt so that GDP growth and output lift can in time lead to a falling public debt-to-GDP ratio trajectory.

We have not even touched on the fact that though the government is said to be planning to omit external debt from treatment, it still intends to drop external debt servicing from over 35% of domestic revenue (growing everyday due to exchange rate depreciation) to just 18%. Unless the plan is to issue no more Eurobonds, with considerable effect on government’s forex reserves capacity, and just continue to pay off the stock, it is hard to fathom how this can be achieved. Or, maybe, external debt will be included after all, just not at principal level, in which case the reservations above regarding “shallowness” apply.

In short, the planned shallow debt restructuring exercise would be wholly ineffectual without a major accompanying fiscal consolidation program. Unfortunately, the President did not mention any serious fiscal adjustment plans apart from the so-called “30% reduction in discretionary spending” trope, which so far has merely led to a massive piling up of arrears but left fiscal deficits stuck at an elevated level.

All the aforesaid leads to the conclusion that the plan the government has hinted at is not credible on fiscal sustainability, which raises serious questions about the “country ownership” of the proposed IMF program and the risk of IMF resources being used to pay usurious interest rates on new debt.

Because IMF’s policies are very clear about the need to mitigate such risks, it is inconceivable that the government indeed has an “advanced agreement in principle” with the IMF structured along the terms discussed above that can be incorporated into the 15th November (or soon thereafter) budget in a form acceptable to the Political Opposition (especially one that plans to impeach the Finance Minister, constitutional ambiguities notwithstanding, on 10th November).

As is now public knowledge, the Information Minister insists that the Debt Sustainability Analysis (DSA). From his comment it would appear that the government believes that whatever it discussed informally with the IMF during the annual meetings constitutes an agreement in principle. But the IMF has policies. A DSA is always embedded in an overall macroeconomic review. Each such review goes through at least three rounds of administrative scrutiny before conclusion. There is no way on Earth that process can be completed by the mid-November budget timeline.

Seeing as without the DSA sign-off, a formal letter of intent and memorandum cannot be submitted by the government, which in turn would also go through multiple rounds of administrative review, we believe that the government’s end of year timeline for a staff agreement is super aggressive and smacks of desperation. But even if it pulls it off to the surprise of all of us, the government, as argued in our previous comment, will still have to conclude any prior actions five days before board approval. The IMF board meanwhile meets at quarterly intervals. All of this is subject to no objections being raised during any formal review. So the quality of the government’s proposed strategy is critical to even getting a final deal in Q1 2023.

Until the government gets serious and starts building massive social consensus around a transparent and truly credible combined debt and fiscal sustainability plan, the IMF deal that it has currently hinged everything on will itself start to lose credibility generating further market anxiety, negative investor sentiment and what the Bank of Ghana now prefers to call, “disorderly market conditions”. All these, sadly, with severe implications for living standards in Ghana.

Hopefully, the President won’t wait until he is backed into a corner again before taking decisive steps to respond.