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.

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.

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%.

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.

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.

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.

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.

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).

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.

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.

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.

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.