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.

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.

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.

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.

The State of Ghana’s Economic Crisis

Ghana’s inflation and exchange rate crisis is deepening and fears are mounting of a newer, more devastating, phase: a full run on the local currency, the Cedi (GHS), which has year-to-date lost more than 50% of its value on the retail end of the market.

The government’s problem diagnosis and corresponding policy responses so far can be summarized as follows:

• For slow growth and inflation, blame external factors – COVID-19 and the Russia-Ukraine conflict in particular – for the entire problem, and admit no flaws in policy.
• For exchange rate depreciation, blame speculators aided by criminal black market operators, and admit no flaws in policy.
• Nonetheless, raise the policy (interest) rate in order to abate inflationary pressures,
• Continue to predict near-term improvement based on an imminent IMF deal and the arrival of certain official foreign loans.
• Catch and jail more tax evaders.

Some of these policies are understandable but taken as a whole they mostly miss the mark.

The True Driver of Inflation

Ghana’s Central Bank has said repeatedly that domestic inflation is currently “generalized” and is not driven primarily by imported inflation. Raising domestic interest rates, as it has done multiple times in recent months to cumulatively reach a 5-year high, to tackle primarily imported inflation would be preposterous.

The key driver of inflation in Ghana is self-evident in fiscal policy. In the first 9 months of this year, the government earned 51.5 billion GHS in income. Despite pledges to cut 30% of discretionary expenditures, it ended up spending nearly 90 billion GHS. This is despite escalating arrears (that is to say refusal to pay many overdue bills). Shut out of international markets, it has resorted to borrowing 41.2 billion GHS to plug the gap (fiscal deficit) and pay interest and principal due on debt.

Because investors have cooled towards government debt, a significant portion of the gap financing has been provided by the Central Bank in various forms. Using the net growth in outstanding stock of government securities on the fixed income market (GFIM) as a gauge of market financing of the government deficit, and taking out the funds plucked from the Petroleum Stabilisation Fund (virtually wiped out now), one can deduce “monetization” in the region of 25 billion GHS. When governments have their central banks create money out of thin air to spend, inflation is always and inevitably the end result.

Blaming the Russia-Ukraine conflict would only add up if Ghana were exceptionally exposed to that region. Fortunately, on many indicators such as trade and investment, Ghana is not even among the top 20 African countries with high levels of exposure. How then is inflation in Ghana the fastest rising in Africa behind only Sudan and Zimbabwe?

Readers will also recall recent decisions by the government to impose certain taxes, particularly the e-Levy, that analysts predicted will be pro-inflationary because of their generalized impact and corrosive effect on confidence.

In short, the government’s inability to rein in the fiscal deficit despite being shut out of the Eurobond market is the driver of Inflation.

Readers who find it difficult to accept this author’s downplaying to secondary status of the very real external contributors to the current difficulties like COVID-19, the US FED rate hikes and the Russia-Ukraine conflict etc. should take cue from the disclosures, reproduced below, made by the government to international investors during its bond issuance in early 2020 before COVID-19 was declared a pandemic.

During the first nine months of 2019, Ghana’s debt stock rose to US$39.2 billion as at 30 September 2019, of which approximately US$19.1 billion comprises domestic debt and approximately US$ 20.1 billion was external. In addition, to the extent the Government faces further challenges in the energy and financial sectors that have not been budgeted for, the Republic may need to raise additional debt to fund such unbudgeted amounts. Debt service (interest and principal repayments) as a percentage of total Government revenue reached 44 per cent. for the year ended 31 December 2018, compared to 47 per cent. in 2017, and the Government expects that debt servicing costs as a percentage of total revenues in 2019 will account for approximately 60 per cent. of total revenues, compared to a budgeted amount of 52.1 per cent.

Extract from the Government of Ghana Global Notes Prospectus (February, 2020)

The government, where it is bound to candour, openly admits that the current economic challenges have been building up well before the current global headwinds.

Speculation vs Hedging

It is very hard to have such high inflation without corresponding exchange rate depreciation because most rational economic actors in the country will seek to find ways to preserve the value of their assets.

Whilst there are multiple factors involved with complex interrelationships, as in the diagram below, the linkage becomes stronger when the effects are so pronounced.

Rational economic actors with low confidence in the economy, dealing with the fast erosion of the value of their assets due to inflation, and struggling to invest because of uncertainty in the policy direction, will seek to hedge through the cheapest and most reliable instrument. In shallow markets with limited supply of various derivatives, especially forwards and futures products, the dollar or other hard currencies are the most sensible options.

Such actions must be carefully distinguished from speculation. Speculation primarily involves the use of risk capital to make gains from future shifts in the exchange rate, known in the jargon as “Inter-temporal carry-overs”. Sometimes those speculating are following the herd or trying to find the right bandwagon. But profit is a major intention. In that sense, speculators can actually be stabilizing if they sense that the local currency will rise in the future and start to dump their inventories of foreign currencies forcing the rate to align with the long-run equilibrium rate. Many theorists even go as far as argue that speculation at variance with fundamentals is always loss-making and thus unsustainable.

The government’s focus on speculators is wrongheaded because the conditions exist for the vast majority of rational economic actors to want to hedge against the currency. To focus one’s energies in such circumstances on the smaller number of actors with the financial heft, risk appetite and risk capital to profit from the situation is distracting.

The Black Market & Market Manipulation

Of course, the government should seek to enforce the law against black market operators and use whatever moral suasion and policy tools are at its disposal to discourage destabilizing speculation. The issue is the degree of emphasis.

The black market – destabilizing speculation nexus in Ghana has been tackled entirely at the retail market end by the authorities. They have organized mass arrests of street-level dealers in recent weeks, for instance.

The problem is that this segment of the forex market is an overflow from the forex bureau market. Forex bureau trades are only 1.2 percent of the total forex transaction volume in Ghana, down from roughly 4% seven years ago. The commercial banks mobilise 72.5% of forex and handle 98%+ of mass market sales. As we have explained extensively elsewhere, the commercial banking sector is now too dominant in the forex trade for small upticks in government forex reserves from such limited inflows as the opaque Afreximbank facility and syndicated cocoa loans to make a significant impact. A two billion dollar injection cannot override sentiment in a near $40 billion system if things are going downhill.

The annual Eurobond injections, on the other hand, were critical because in addition to boosting confidence they were also leveraged for a wide range of liquidity swaps that provided buffers and cushions throughout the year buoying the more vital commercial bank-level trade. With those elements sadly out of the picture, the critical focus should be on taking actions, such as discussed later in this essay, that will sustain commercial banking forex sentiment.

Concern about traders from neighboring countries using Ghana as a hub for obtaining dollars is interesting but if such a trend is significant it must correspond to an increased demand for Naira and CFA in Ghana, which would mean that the fundamental driver of rates would be trade not speculation. Put another way, it would mean that Ghana has started importing such large quantities of goods from across the sub-region that forex operators here are willing to offer large volumes of dollars to secure Naira and CFA.

Given Ghana’s overall higher international trade surpluses, any such sub-regional trade dynamics must be marginal.

The Thrust of the Forex Market

That last point is very significant. On the trade front, Ghana is one of the best performing in the region from the perspective of net dollar/forex importation through the trade channel. Since discovering oil and from the onset of the gold boom, Ghana has been piling up trade surpluses. Yet, its overall current account has been under significant pressure. When that happens it means that the hard currency is being repatriated out of the country for reasons other than basic trade.

In Ghana’s case, the real “culprits” are actually not too difficult to find.

Over the last decade, the country has been aggressively liberalizing its capital markets. The government has tried to attract a lot of capital into the country by promising investors that it will be easy to repatriate their profits and principal back home whenever they want. A fair bargain, especially when times are good.

Amidst groundbreaking developments like launching, in 2017, Africa’s largest domestic bond priced in dollars and targeting mostly foreign investors, Ghana has been busy promoting direct equity investments into all sectors of its economy. Much of the growth touted by the government and visible signs of affluence in the capital come from these liberal flows of forex-denominated capital. Many corporate institutions in Ghana became very focused on raising both debt and equity overseas by riding on the broader narrative, pushed in no small part by the government, of fast growth, super high returns, and liberal capital rules.

And the government took a big chunk of the flows. Let’s even put aside the country’s Africa-topping Eurobond issuances (as a percentage of GDP) in the international capital markets. At one point, the country ranked fifth in the world for how high a proportion of its domestic government debt had been bought by foreigners.

On the whole, whether forex or cedi-based, the fixed income market that started life in 2015 with barely 5 billion GHS in trading volume and is now the fastest growing in Africa (total volume heading towards 300 billion GHS) is totally dominated by investors trying to lend at very high rates to the government.

Government-fueled capital inflows mirror considerable growth in overall Foreign Direct Investment (FDI) in Ghana.

If the government’s own numbers are to be believed, FDI inflows have grown from $20 million in 1991 to $115 million in 2000 to $2.6 billion today. The total FDI stock is a staggering ~75% to ~80% of GDP compared to a continental average of about 25%. Even if we significantly discounts the government’s numbers, the ratio is still intimidating.

It is widely accepted that any country with an FDI-stock-to-GDP ratio above 40% is highly vulnerable to global shifts in sentiment about their economy. The equivalent numbers for Cote D’Ivoire, Nigeria, and Kenya, for instance, are 22%, 25%, and 18% respectively.

Because of the pivotal role played by the government in maintaining this entire apparatus of liberalized capital flows, its continued fiscal adventurism, and the damage it has caused to its credit-worthiness, has sent shockwaves throughout all parts of the economy exposed to global investors.

Foreign investors have dumped 10 billion GHS worth of government bonds and bills this year, but the problem is that they can’t find enough dollars to sell more of the 11% of total stock they still hold. Various other investors have been trying to exit other investors early and quite a number have suspended planned projects. The resultant impact on forex flows in Ghana is self-apparent.

To be absolutely clear, the commercial banking forex window, the dominant part of the forex market, is where all this plays out and not in the forex bureaus and street-level black markets.

So long as various major economic actors are making rational decisions about preserving the value of their investments, they will seek to exit Cedi assets with resulting pressure on the exchange rate. The way forward is for the government to truly and proactively restructure its entire spending in order to drastically reduce the fiscal deficit and stop further monetization. A wholesale end to the decrepit and highly corrupt procurement system that have spawned such woeful cases such as Kelni GVG and underhand SOE commercial dealings such as the GNPC-Genser contract is important to convince analysts about the sustainability of such measures.

Racking up arrears rather than removing obligations, as the government has been currently doing, simply prolongs the problem because sooner than later it would be forced to pay the power plants some of their mounting piles of unpaid invoices (one major producer was recently sent a cheque for $5 million as a sop to keep the lights on despite arrears of roughly $150 million); do right by the medicine and food suppliers of the now totally socialized health and education sectors; and face up to its unkept promises to road contractors else watch them pack up and leave like it happened with the botched National Cathedral project.

 The fiscal drag from the casino capitalism days continues to generate negative currents throughout the economy, heavily undermining confidence. If such is allowed to persist, even as inflation and other direct effects multiply, another phase of exchange rate depreciation might open up that will be even less responsive to policy measures.

But what about the IMF deal?

 The IMF Deal

This author and his collaborators have written extensively about the ongoing negotiations between Ghana and the Fund.

The crux of the matter is that when in 2021 the World Bank and the IMF said Ghana’s debt was sustainable but at high risk of distress their assessment was based on several caveats:

• Not considering energy sector and cocoa sector liabilities, among others.
• Assuming continued access to borrow from the Eurobond market.
• Assuming steady cost of borrowing.
• Trajectory of debt falling under the thresholds in the standard Debt Sustainability Analysis (DSA) framework.

All those caveats no longer hold. By the yardsticks openly used by the IMF, it is apparent that Ghana’s debt is unsustainable going forward under current fiscal policies.

There are therefore only two serious questions:

• Can public debt be made sustainable without a debt restructuring?
• Will debt restructuring be made a “prior action”, i.e. prerequisite, before the IMF offers Ghana a deal?

Under newer rules in place since 2016, a country with unsustainable debt seeking an IMF program is not automatically required to restructure their debt. But they must find substantial concessional finance if restructuring is to be avoided.

Given Ghana’s large gross financing needs, recent announcements by the country’s Finance Minister of interest on the part of Germany and France to step in with concessional financing are not sufficient. Ghana is far past the stage where bilateral funding can be arranged quickly enough and in quantities capable of making a difference. This means that debt restructuring is inevitable in the course of an IMF program.

True, there are exceptional access policies that sometimes allow the IMF to continue lending to a country with unsustainable debt. But such facilities are far more likely to be used when the country has already started receiving funds from an IMF facility and continued lending is thus judged to be necessary to safeguard the IMF’s already committed resources.

The “Prior Action” Bogey

The only serious questions then are whether the Fund will make such restructuring a “prior action” and if they did whether the government has the political muscle to commence the process without a hitch before later signing an IMF deal, and then using the new flow of resources and enhanced credibility to address the ramifications of the restructuring program. All prior actions are required to be completed five days before the IMF Board is expected to meet to approve a program with a member state.

Analysts worry about prior actions generally because they would mean delaying the commencement of an IMF program. In the case of a debt restructuring Prior Action, this would mean for certain that the government’s arbitrary November budget timeline would be breached. Simply because even the fastest market-friendly debt restructuring processes, once the roadshow has commenced, take about 3 months to close (example: Uruguay’s 2003 exercise). Considering how much the government has banked its hopes on an IMF deal, such a delay would be considered catastrophic by its dealmakers. And yet, the signs are not too rosy.

Still, Ghana has considerable goodwill at the top of the IMF, especially at the political level. Unlike various countries around the world, its record in recent years has been excellent with the Fund. The country is current on all its IMF payment obligations. Every one of its failures to meet targets set in previous programs (2009 – 2012 and 2015 – 2019) were sanctioned by the IMF itself through the latter’s own waiver procedures. Usually, the Fund does not require prior actions of countries that do not have an adverse record. But there is another factor that can make prior actions necessary notwithstanding excellent relations: country ownership of the planned program.

Where it becomes evident that a country borrower is not itself fully braced to take responsibility for the requirements and consequences of its own reform agenda, on the basis of which it is seeking IMF support, the Fund will normally insist on prior actions as a means of demonstrating real ownership. After all, an IMF program is merely meant to give spine to a domestically developed and steered program. Some countries like Belize have in the past even undertaken their own debt restructuring program without embedding it in an IMF program.

Ghana Hires a Sovereign Debt Restructuring Specialist

It is in the above context that news of Ghana hiring Paris-based Global Sovereign Advisory founded by a former Rothschilds banker is somewhat ominous. I will explain.

In 2020, the IMF cancelled a Malawi program due to the authorities providing false data, a strong sign of lack of sincerity about the country following its own commitments. When Malawi’s new government tried to rebuild ties and secure a new IMF program, it was advised to get a serious sovereign debt consultant on board. So, the country hired the same Global Sovereign Advisory (GSA). GSA then advised Malawi to restructure its debt ahead of a program with the Fund but the country balked. Since then, negotiations with the IMF have slowed. One wonders therefore whether the involvement of certain private sovereign debt specialists only becomes necessary when it is clear that debt restructuring is inevitable.

It is important to bear in mind that Malawi’s debt service to revenue ratio (how much of the government’s money spent on paying off debt) was pegged at 24.9% in 2020 when the country’s debt was judged to be unsustainable and a debt restructuring prior action demanded. Its debt to GDP was also around 60%.

Ghana’s current debt service to revenue ratio is topping 60%. Its debt to GDP is between 85% and 110% (against the 55% threshold advised by the IMF) depending on which debts and arrears one chooses to add. Judged by a continental average of about 16% debt service to revenue ratio and 63% debt to GDP metric, one might be tempted to believe that the involvement of GSA is further evidence of the likelihood of debt restructuring being made a prior action.

The counter to that logic, as already hinted, is Ghana’s excellent record with the Fund and the belief that it has a higher debt carrying capacity than countries like Malawi. In those circumstances, the IMF could decide to let the debt restructuring process happen as part of the program rather than as a precondition for one. It will then use the “performance criteria” route to make debt restructuring a condition before the first disbursement of funds under the program.

But if it does not? If it insists on debt restructuring as a Prior Action as it did in the case of Jamaica and is doing in the case of Malawi? What about other difficult prior actions like privatising various debt-prone State-owned enterprises (SOEs), as it once did in Zambia’s case?

Ghana Should Not Set Up the IMF Program to Fail

Ghana’s excellent working relationship with the Bretton Woods institutions has survived many historical ups and downs. Occasionally the country has been judged to be less than candid about its affairs but when caught out, it quickly makes amends and apologises profusely.

It would be a monumental tragedy for the leadership were that track record to be broken as a result of this latest program.

The title of this essay points to the author’s worry, based on what has happened so far, about the government’s capacity to deftly handle the IMF program negotiation and design as part of its efforts to contain the current crisis speedily and with an eye on implementation success.

As clearly argued in an earlier essay, any domestic debt restructuring activity (domestic debt prioritization is essential because it provides 75% of the government’s short to medium-term liquidity relief) shall require tremendous amounts of public goodwill and the full collaboration of the political opposition.

To avoid potential litigation and other confusions (such as may result from any attempts to exempt certain categories of creditors such as households or obstruct certain trades without damaging the Repos markets), new laws are likely to be required to smoothly execute any domestic debt restructuring.

Some readers may not be aware that one of the effects of the securitization models used by the government to ramp up borrowing in recent years has been the nominal transfer of government debt to non-government special purpose vehicles with the debt collateralized (and in some cases overcollateralised) with future tax flows. An investor could conceivably garnish the accounts of the government in the event of any coercive restructuring. One of these special purpose vehicles, ESLA PLC, is even subject to English, rather than Ghanaian, law.

Unpacking all of this complexity to pass the right legislative measures will require consensus in the effectively hung and fiercely polarized Ghanaian parliament.

To garner credibility with the markets, restructuring would also have to be deep enough else Ghana risks seeing a situation similar to Jamaica’s 2010 to 2013 episodes, where an additional restructuring was required to hit 30% (8.5% of GDP) relief after the first one failed to go far enough (achieving relief equivalent to only only 3.5% of GDP). On top of that, the IMF insisted that all bond holders must be covered (i.e. “100% participation”) before it would approve. Jamaica’s second restructuring case was in such trying circumstances only successful due to very skilled management and a bold decision to create a local creditor committee with unfettered access to all data shared with the IMF in the ensuing part two program.

The simple truth is that the short-term effects of any debt treatment that achieves 30% liquidity relief for the government and bring debt service to GDP ratio below 40% in Ghana would also have substantial effects on liquidity in the funds industry and may well rout the domestic fixed income market by curtailing participation for a while. A government shut from the international markets would now struggle to borrow locally too.

Exempting businesses and households from the debt treatment in order to conserve political capital means an even greater burden for banks and Funds. Because quite a number of the banks would require capitalization in such a situation, and yet direct resources from the IMF ($1 billion per year in the most optimistic scenario) would be far from enough to tackle the resultant effects.

The $3 billion that Ghana has requested will take its already high extra-quota access to a level that under IMF policies normally require “heightened scrutiny”.

And yet, it remains a small fraction of the $15 billion needed over the same period to cushion against the effects of adjustment. The restructuring would create far more problems than it would solve if it does not contribute to a broader program to restore investor confidence across the board and unlock much greater additional resources.

Ghana must be guided by the famous saga of the botched debt restructuring program in Russia in 1998 that triggered a currency run after investors judged that the overall program will not result in debt sustainability. Actors that shape sentiment in such contexts, especially in the political opposition, need close cultivation and briefing at every point.

Even an Approved IMF Program Does Not Guarantee Success

After all, a detailed analysis of many IMF programs between 2011 and 2017 found that only 32% achieve success. Unsurprisingly, programs that involve some debt structuring or relief tended to be more successful though only 33% of such programs proceed to completion. Countries like Pakistan have today become bywords for serial IMF recidivism because each program becomes protracted.

Still, whatever its historic sins, scapegoating the IMF should no longer be used as an automatic get-out-of-jail card for fiscally bumbling African states.

The government of Ghana must take full responsibility for the path it is taking the country on. Which is why some analysts worry seriously about whether the current decision makers at the helm have what it takes to build the degree of public goodwill necessary for the hard choices facing the country. There is a secretiveness, a clannishness, an aloofness and a pervasive lack of accountability that alienates rather than mobilises. In good times these may well be the ingredients of success in the private capital markets. But in a context such as the one Ghana currently finds itself in, it is highly counterproductive. To date, the government has not even published the so-called “enhanced fiscal recovery program” based on which it is purporting to negotiate with the IMF. Very much the opposite of what the authorities did in countries seen to have had a relatively successful debt restructuring exercise like Uruguay and Jamaica.

Besides all the technical complexities described in this essay, the lack of political preparation for the serious development ahead of Ghana in containing the current economic crisis is, to the greatest extent, what keeps this author awake at night.

Readers of this site would be aware of a joint investigation by IMANI Center for Policy & Education (IMANI) and the Africa Center for Energy Policy (ACEP) into a sweetheart deal between GNPC, Ghana’s national oil company, and Genser, a US-based Ghanaian-owned company that recently announced that it has raised $425 million to expand its gas-to-power facilities in Ghana.

For those readers not abreast with the key facts, here is a quick recap.

Context of the Gas-to-Power Market in Ghana

Ghana has three main gas fields, all offshore, from which natural gas is pumped through an undersea pipeline to the shore. From the offshore receiving facilities, gas is distributed, in principle, according to the country’s Gas Masterplan.

The gas is produced by private oil and gas companies of the likes of Tullow, Eni, Vitol and Kosmos and aggregated by GNPC, in its capacity as Ghana’s main upstream state interest operator, for sale to other entities. Ghana Gas is the primary wholesale buyer of the gas and the main processor. Currently, it is also the largest distribution infrastructure operator, though that role has been designated for state-owned BOST. BOST is unable to effectively invest in the pipeline complex required for it to play this distribution utility role due to financial constraints.

At every level of the value chain, there are regulators that are supposed to make sure that a level playing field exists; and that strict compliance with law and policy, observance of standards and the political and economic interests of the country and its citizens are the hallmarks of the country’s budding gas industry.

Clearly, either all these regulators are asleep or they are complicit in the brazen ongoing heist of public resources evident in the GNPC – Genser sweetheart deal.

So, who is Genser?

Genser is one of 15 main thermal power producers in Ghana. A “thermal power” producer uses fossil fuels like gas and crude oil to generate electricity for sale to customers. Unlike most power producers who sell the power through the GRIDCO-managed national grid, Genser locates its power plants close to its customers and transmits directly as an “embedded generation operator”. It is one of two main companies doing this in Ghana, the other being Trojan.

So why are we saying it has entered into a “sweetheart deal” with GNPC? Well, the charge is vindicated by the mindboggling pricing it succeeded in securing from the national oil company.

In 2020, it signed a deal to buy natural gas from GNPC at a cost of $2.79 per MMBTU. “MMBTU” is just a fancy unit used to measure gas flow in the gas industry.

This was after it had committed in 2018 to buy gas at $6.5 from Ghana Gas if it succeeds in being classified as an “strategic industrial consumer” and if not then at $7.29. When Ghana Gas tried in February 2019 to get the Energy Commission, a key regulator, to designate Genser as a strategic consumer and thus to justify the lower price, Energy Commission refused.

A year after the Energy Commission rejection of any discount arrangement for Genser, GNPC stepped into the fray with the $2.79 (per MMBTU) price deal, obviously at a steep discount from the regulated price then of $6.50. But that was not sweet enough. So, in July 2021, GNPC upped the ante and offered Genser a deal whereby it will further reduce the gas price to $1.72 if Genser built more pipelines that GNPC might in the future use to transport gas (thereby bypassing the Ghana Gas network).

ACEP and IMANI were scandalised by these revelations because even large energy producers and wholesale buyers of gas in Ghana do not get such deals, despite fuel being the biggest contributor to the cost of power businesses and households face in Ghana.

The biggest power producer in Ghana, VRA, for instance, attributes 60% of its total costs to fuel when breaking down the electricity prices it is allowed by the PURC (the main pricing regulator) to charge. Its cost of gas is the regulated price of $6.08 (changed to $5.99 by the regulator in 2022).

Under what circumstances then can a smaller power producer with far less impact on the economy, without any of the social constraints faced by VRA to service poor and rich alike, get gas at a price that is roughly 1/4th what the principal public utility is charged?

Even the main wholesaler of gas in Ghana, Ghana Gas, which on-sells/retails to the power industry, gets its gas at $5.4. Due to rampant under-recoveries in the power sector (implicit subsidies imposed by the government, which it nevertheless refuses to pay), it struggles to get paid by the utilities and therefore rack up debts to the upstream suppliers.

GNPC’s own calculations suggest that securing gas costs it $7.9 per MMBTU. It has therefore tried to persuade the pricing regulator, PURC, to increase gas prices above the $5.99 the latter has set for the downstream power sector.

How can a commodity that has been averaging $8 per unit in recent times, and which the seller claims costs it $7.9 to produce, be sold at $2.79 or, even worse, prospectively at $1.72?

GNPC’s Bogus Explanations

Following the ACEP-IMANI exposures, GNPC and the Energy Ministry went on the offensive this week. At an ongoing parliamentary enquiry, GNPC did it best to obfuscate the issues, and suggested all manner of reasons why Genser deserves to pay between 60% and 75% lower than virtually every other gas buyer in the energy industry.

First, it cited the fact that Genser is on the “industrial development tariff”, which at $4.20 per unit is lower than the regulated price (“weighted average cost of gas” – WACOG) set by the regulator.

Next, it insisted that Genser is one of a few companies that pays its bills on time and does not rack up arrears and thus deserves some back-patting.

Finally, and most importantly, it rolled out the Rolls-Royce of all justifications: Genser uses its own pipelines to transport the gas it buys and so deserves a rebate on that account alone. Even more vitally, Genser has given GNPC the right to use gas pipelines it is still building in the future to transport gas for free and thus deserves further discounts in what amounts to a barter trade.

None of these arguments hold water; some are plain lies.

The Sham “Industrial Development Tariff (IDT)”

As already pointed out, the Energy Commission rejected similar arguments about the role of Genser in 2019.

There is nothing exceptionally “industrial” about what Genser is doing. It is not facilitating manufacturing or doing manufacturing on its own, unlike other IDT beneficiaries. The agreements it has with GNPC and Ghana Gas do not impose any requirement for it to use the gas for industrial applications or purposes.

It virtually all the power it generates with the discounted-price gas to mining companies, which are in the “primary extraction” sector.

It is merely undercutting other power producers, who could easily meet the demand of the mines, by buying gas for cheap. Recall that for gas power producers, raw gas is roughly 60% of their total costs. There is absolutely no strategic, policy or developmental reason for Ghana to discount gas prices for a commercial power producer to undercut its rivals in selling power to rich gold mines.

Companies that are focused strictly on delivering power to Ghana’s industrial parks, export processing zones, and manufacturing corridors do not get these sweetheart deals.

The Hollow Pipeline Argument

It is not correct, as being canvassed by GNPC, government and Genser PR agents that only Genser has invested in private pipelines for receipt and onward transmission of gas. Companies like Aksa, Trojan and Early Power have all gone through the necessary regulatory screening to construct pipelines to convey gas to their plants.

Ghana Gas has the largest pipeline complex in the country. Roughly $1.6 billion of equity and public/ publicly-guaranteed debt have gone into this huge infrastructure base. All the offshore pipelines that bring the gas from the sea to land (the most expensive form of gas transmission) belong to Ghana Gas. Yet Ghana Gas is paying an average wholesale price of about $5.4 per unit for the gas it retails.

At any rate, as argued at length in the previous essay, the value of gas pipeline transmission is well established. Ghana Gas provides clear local benchmarks for how to value the contribution of pipeline infrastructure to cost buildup.

The PURC has set a regulated threshold price of $1.288 per MMBTU. And there are many global benchmarks (some of which were shared in the previous essay). If GNPC wishes to give Genser a rebate for transporting the gas it buys over the small proportion of distance covered by its own pipelines versus the much greater extent of public pipelines used in bringing the gas from under the sea, it can do so rationally and transparently. Such an approach will not generate a rebate of more than $0.5 per unit.

As for the planned use of Genser’s pipelines for free by GNPC, the proposition has been cited as a justification since early 2020. GNPC has not transporting any volume of gas through said pipelines. Some of the use cases for that arrangement, like the bauxite refinery at Nyinahin, are highly futuristic. It is plainly ridiculous to be granting massive discounts on the basis of hazy, unrealised, future barter arrangements.

More bizarrely, the agreement signed between GNPC and Genser does not bear out the “free” thesis. Genser intends to charge a “gas compression fee”:

Does Genser pay on time?

The short answer is “no”.

As of the end of December 2021, it owed roughly 50% of its due obligations to GNGC, in the amount of $4.6 million.

In the first half of 2022, as of June 30th, Genser owed GNPC more than $3.24 million. Whilst reconciliation is still outstanding for Q3 2022, that debt keeps rising and may hit $5 million.

Genser has a track record of owing suppliers. It recently had to pay damages to Vitol in a London court for failure to pay for LPG/NGL (mostly propane) deliveries made to it during the lean years of 2018 and 2019 when it had not yet secured its sweetheart deal with GNPC and was paying in excess of $7 per unit of gas to private suppliers.

Worst of all, it gets Worse

Imagine the horror of IMANI and ACEP analysts when they discovered that all the time GNPC and Genser PR agents were seeking to justify Genser’s $4.2/MMBTU IDT (“industrial development tariff”) and the various rebates as sensible commercial terms, the company was neither paying $4.2/MMBTU nor, as some of its spokespersons have said, $3.5.

Genser has not even been paying the contract price of $2.79 all the time.

According to reconciled GNGC accounting data, Genser has in fact been paying, wait for it, $1.14! Essentially, a giveaway price.

Comparing how much Genser pays with the rest of the industry, including those manufacturers that actually qualifies for the IDT rate as a result of their playing critical roles in resurrecting strategic dying industries like ceramics, throws into alarming relief the true scale of the mess.

Here is part of a pricing chart for January/February 2022:

And for June/July 2022:

Clearly, Genser is the golden-haired boy-wonder of the power consuming world. It is billed nearly 6 times LESS than the main public power utility and nearly 4 times LESS than companies that are actually using gas to drive Ghana’s industrialisation.

The Big Picture

Whilst we have talked about the risk of Ghana losing $1.5 billion if GNPC continues to sell gas to genser at the contract price (based on the contract gas volume of more than 328 million MMBTU), it is important to now clarify that Ghana has already lost considerable amounts of money.

Selling gas at $1.14, $1.72 or even $2.79 to Genser instead of the $7.9 it costs GNPC to acquire the gas or the $6.08 set by the regulator for the relevant period means losses of between $4.97 and $6.76 for every unit of gas sold. In 2021, Genser bought more than 7 million MMBTU of gas from GNPC implying a loss of between $34 million and $45 million already incurred, even after making provision for a fair transmission rebate for the use of Genser’s own pipeline. By the end of this year, $100 million in losses would have already accrued.

At a time when Ghana is seeking a $3 billion IMF bailout due to a debt crisis worsened by mounting energy sector liabilities of more than $2 billion a year in recent estimations, it is both unconscionable and mindboggling that GNPC can afford to lose nearly $100 million on a single contract in just two years or be willing to lose as much as $1.5 billion over the contract’s lifetime.

To underline the fishiness and level of impunity, consider that Genser started enjoying these discounts EVEN BEFORE GNGC signed the new agreement with the fresh discounts based on the futuristic pipeline barter trade. Here is a January 2021 trade ledger entry (the agreement was signed in July 2021).

Clearly, the Parliament of Ghana which now claims to be investigating this matter has its full credibility on the line as Ghanaians await its findings.

[This short briefing note summarises IMANI’s preliminary findings from an analysis of potential sovereign debt restructuring in Ghana.]

The government of Ghana is confronted with a series of Hobson’s choices regarding its current debt stock.

1. Should it restructure the debt or persist in the hope that the signaling effect and maximum inflows of a potential 3-year $3 billion IMF deal will make it possible to push the debt can farther than the road?
2. Should it restructure only the domestic debt (debt owed to Ghanaians who have bought government securities such as treasury bills) or only the external debt (debt owed to foreigners who have bought Ghana’s Eurobonds and given out various loans for various projects? Or both?
3. Should it try to bring all creditors together in a single decision-making forum (such as a “creditor committee”) or attempt to engage them in informal consultative conferences and surveys?
4. Should it attempt to address the debt issues purely through contractual negotiations or should it complement negotiations with legislative support (make laws to ease its way)?

These questions present some of the most formidable analytical challenges the Ghanaian government has ever faced. IMANI’s analysts wonder if the government recognises this fact, if it has the leadership to mobilise the nation behind the choices it makes and whether it has the temperament to manage inevitable dissent, especially from the official political opposition and the country’s highly vocal civil society movement.

Context: IMF Engagement

The speculations about a potential debt restructuring by the government of Ghana arose in the context of the commencement of formal negotiations this week between the government and the IMF on a possible bailout package through the so-called “extended credit facility” (ECF). (Side note: the government’s attempts to solicit views and inputs into this whole effort have been perfunctory at best in line with a general disinterest in building national consensus on critical issues).

The IMF’s policy when designing a bailout for a country that has serious debt challenges can be summed as follows:

In determining whether a country has unsustainable debt, the IMF evaluates, first, the country’s capacity to carry debt and then the trajectory of revenues and repayments to see if in the medium-term the country will face debt distress or is already in distress.

Here is how the IMF assesses whether either condition has been met during the so-called Sovereign Risk & Debt Sustainability Analysis:

As indicated above, the starting point for deciding if a country can continue servicing its debts without defaulting in the medium term or triggering economic collapse is to look at the country’s capacity to carry debt. In the IMF world, this is done through the Country Policy & Institutional Assessment (CPIA) which is led by the World Bank. If the results are stellar, the country is classed as having high capacity. If it is good but not stellar, the country is said to have “medium” capacity. “Low” is the obvious bottom rating.

Ghana is currently rated as having “medium capacity”. What that means is that the thresholds and benchmarks used to assess when a country’s debt is too much are looser for Ghana than for countries rated low. Ghana used to be ranked second across Africa. This is how it fared in 2012:

It declined to 7 in 2019 and slid to 8 in 2020.

It is instructive to note in this regard that it is not only Civil Society Organisations (CSOs) who have complained about a fall in the quality of Ghana’s institutions and its policymaking process. It is quite something to see Uganda now beat Ghana on policy and institutional quality. That notwithstanding, Ghana is considerably above the regional average, hence its medium rating.

Also, Ghana is not classified among resource-rich countries in a counter-intuitive assessment which suggests a more diversified economy.

The mechanics of how the CPIA feed into the final debt sustainability numbers can be seen in this IMF chart here:

Once, debt carrying capacity based on institutional and policy strength has been accounted for, it is time to look at the actual flows of money for debt servicing: in and out. And to try and estimate the liquidity and solvency factors impacting the debt sustainability trajectory.

An analyst doing this first checks the debt ratio using this IMF equation:

Next, one tries to assess the time effect of repayment obligations using another IMF equation:

When such analysis was last performed for Ghana, the IMF said the situation was quite dire BUT Ghana’s debt was still sustainable given some caveats.

The judgement on sustainability was based on comparing certain important ratios of Ghana’s debt to certain macroeconomic measures of its economy and assessing divergence:

What’s the IMF’s Record in Judging Ghana’s Debt Sustainability?

In 2015, when Ghana entered into its previous IMF program, the IMF judged the country’s debt to be sustainable based on projections of how the debt will accumulate and Ghana’s capacity to service. As it turned out, the IMF was far too optimistic.

In June 2021, it was less sanguine about the situation, but by ignoring, at the prompting of the government, the impact of energy sector liabilities, Cocobod’s deteriorating financial circumstances (which ultimately devolves to the government) and various arrears and contingencies, it produced a baseline scenario of how the country’s debt will evolve and changes to that scenario in the event of certain shocks, such as inability to borrow from the capital markets (i.e. “loss of market access”)It w. That baseline scenario, as already mentioned, presented Ghana’s debt as sustainable but on a very borderline basis.

It was clear even then that the market, on the other hand, had already started, way back in 2019, to negatively revise its opinion on the riskiness of Ghana’s debt. Investors were asking for more discounts when buying Ghana’s debt (so “spreads” on the debt were rising).

What is the situation today?

First, let us look at the thresholds for the ratios preferred by the IMF in determining if a country can continue servicing their debts without causing damage to the economy. Here:

Ghana’s actual and projected numbers from 2019 to 2022 are as below:

In 2022, the IMF expected the total external debt to the total GDP to be 40.9%. The maximum threshold as readers can see above is 40%. Ghana’s total external debt today is $31 billion (adding recent borrowings). Due to depreciation of the Cedi, the GDP, despite a massive administrative adjustment by the government, has fallen to $58 billion, as per the latest budgetary numbers from the government for 2022:

Consequently, instead of 40.9%, the ratio is now 53%.

Bank of Ghana exports data for 2021 and data so far for 2022 can be cross-analysed to generate a figure for 2022 of $14.5 billion taking into account relatively higher oil numbers, due to rising prices (significantly lower than the government’s midyear projection though) and lower numbers for gold and cocoa due to production challenges.

Instead of the projected 128%, the number rises to an alarming 221%.

Debt service to Revenue is currently estimated at 60%. This is because revenue projection for 2022 is currently GHS 80 billion whilst interest payment alone (i.e. without accounting for amortisation) is at 41.36 billion.

The 60% figure is well in excess of the projected 32% and massively in breach of the 18% threshold in the IMF’s debt sustainability framework (DSA). Debt service to export is about 32%, which is more than double the projected 14.8% or the 15% DSA threshold.

Ghana’s debt is thus technically unsustainable based on the IMF’s standard yardsticks. However, the IMF has the discretion to look at country specific factors, such as the fact that external debt servicing is less than 10% of export revenue, and various capacity for adjustment related factors when making the ultimate decision as to whether a credible plan is underway to restore sustainability.

When the IMF chooses to overlook its usual constraints regarding lending to countries with unsustainable or near unsustainable lending, it turns to its “exceptional access” policies, such as the “lending into arrears” rules, which permits it to lend to even countries that may already be in default on some of their debt.

Countering against such a lenient view of this situation is the fact that the IMF was explicit in its last assessment that sustainability is hinged on continuing market access, which currently Ghana has lost.

On top of all this, Ghana is number 5 on the list of countries that have nearly maxed out their total quota for IMF support, even under the new COVID-triggered loosening of quota limits. In fact, should the IMF approve the $3 billion request, Ghana will shoot to the top of the table bar none (i.e. even outflanking Ethiopia).

Which brings us squarely to the issue of whether, in the absence of market access ahead of a Fund program, “fiscal consolidation” (cutting government expenditure whilst lifting revenue) alone would be enough to achieve sustainability without debt structuring. Here is what the IMF said in the 2021 Ghana Debt Sustainability Analysis report.

Assuming the IMF concludes that without debt treatment, Ghana’s debt is not sustainable? In those circumstances despite eligibility for “exceptional access”, some “debt treatment” (i.e. restructuring) may still be required.

In such circumstances the issue we started with then assumes outsized proportion: should Ghana accept debt restructuring as a condition for an IMF program?

The 3-part Choice: Domestic, External or Both

Analysts who specialise in debt restructuring looking purely at the indicators would suggest that Ghana ought to restructure both domestic and external debt.

This is because Ghana meets three of the four conditions IMF analysts usually set for that determination:

As can be seen from the chart above, only the bank credit to private sector condition is not met by Ghana.

There is of course a considerable burden in conducting a simultaneous domestic and external debt restructuring process. And, of course, there is only so much capacity in the Finance Ministry and the Presidency.

In the case of an external restructuring, Ghana has to contend with very different creditor categories with vastly different power dynamics and reputational consequences:

Benu Schneider simplifies what is possible as far as external debt is concerned as follows:

In short:

• Debt to the IMF, World Bank, AfDB and other multilaterals cannot be restructured in Ghana’s current situation. They typically require official multilateral initiatives like HIPC.
• Debt owed to countries like the US, the UK, Germany, China and other “bilateral partners” require a dedicated program which will require the convening of the donors to determine the terms of engagement. This will take many months. Luckily, Ghana does not owe a lot of money to China so it is unlikely that such a convening would take the two years that it took Zambia but it definitely not be done in a couple of months.
• It is very unlikely that Ghana will try to default on its various Letters of Credit (LCs), bank-guaranteed supplier credit and conventional bank loans as that would impact severely on a wide range of infrastructure projects and resurrect dumsor (the country’s perennial power crises), posing an existential threat to the stability of the government. At any rate, cutting a London Club deal will take not less than one year as well.
• The country’s Eurobond portfolio is thus where a lot of the emphasis shall be placed in any external debt restructuring. Ghana had about $13.1 billion of Eurobonds outstanding at face value at the end of 2021. By the end of this quarter, it should reduce to about $12.4 billion.

Besides constituting nearly half of the stock of Ghana’s external debt, eurobond issuances are also Ghana’s costliest external debt, increasing the temptation for restructuring. According to analysts, nearly $7.5 billion of the principal must be cleared by 2032 ($1.5 billion of which is due in just 3 years). Of the 16 or so outstanding bonds, 14 have collective action clauses that makes it easier to convene “creditor committees” to negotiate an en masse agreement.

Yet, the Eurobond debt service burden is still only about 12% of total revenues and thus, per our earlier estimates in this note, just 20% of the overall public debt service burden. In fact, Ghana’s total external debt service burden is about 25% of the entire annual debt service burden. In these circumstances, some analysts contend that viewed only from the point of view of the liquidity factor (instead of both liquidity and solvency considerations), the domestic debt, because it constitutes 75% of the annual debt payment burden, ought to be tackled with greater urgency.

Restructuring Domestic Debt Alone

When considering the restructuring of domestic debt, a government usually only has three broad strategies as follows:

• Shaving off some of the principal amount (“face value reduction” or “haircut”).
• Changing the tenor or maturity of the debt, which is to say deferring payments.
• Lowering the initial interest rate of the debt instruments.

These types of restructuring activities in relation to domestic debt happen more often than many people suppose. According to the Florence-based European University Institute’s Aitor Erce, domestic debt restructurings nowadays exceed external restructurings in number.

African countries have now overtaken Latin American countries in their preference for domestic debt restructurings.

The only two instances of domestic debt restructuring in Ghana, in 1979 and 1982, primarily featured demonetization rather than principal haircuts or interest rate reduction.

Will it be easier to restructure the domestic debt instead of the external one?

According to Aitor, domestic debt restructuring tend to be quicker. 42% of domestic debt restructurings happen in less than 6 months; only 13% of external ones do.

However, for various reasons, affected investors tend to lose more money during domestic restructurings:

Though “simpler” than external variants, domestic debt restructuring can still get complex if sophisticated investors are involved in the negotiations. Take the Greek debt crisis in the aftermath of the 2008-2009 international financial meltdown for instance. 86% of all Greek debt was issued under Greek law, making the process a predominantly domestic restructuring one.

The Greek government exchanged existing debt for new ones with markedly lower returns but it also added various enhancements to try and dampen investor resistance.

Because Greece was a member of the European Union, it could also fall on the European Financial Stability Facility to design the debt exchange mechanism resulting in a secondary offer to investors: the EFSF Note:

Unfortunately, regional mechanisms for debt crisis responses are virtually non-existent in Africa, so each country bears its own woes.

Greece also came up with a creative third offering that linked the likelihood of affected investors getting paid to the country’s economic performance as measured by EUROSTAT, the pan-European statistics body. The so-called “GDP warrants” introduced additional game-theoretic elements into the whole debt restructuring affair:

Should Ghana decide to go the debt restructuring route, would such creative measures be viewed as credible by investors? Would investors trust statistics from the local authorities for use in designing such contingent triggers, including statistical parameters such as “GDP growth”?

Factors to consider in any Domestic Debt Restructuring Exercise

In addition to the “speed advantage” of domestic debt restructuring (especially given the government’s apparent need for haste) and domestic debt’s 75% contribution to debt service costs, the fact, as illustrated by the Greek case, that local law is more amenable to government desires also favours a domestic debt restructuring exercise at present.

Should the government be inclined to include domestic debt in any planned debt restructuring exercise, it would be minded to consider the following points very carefully.

First, a decision has to be made if only listed debt (essentially bonds and treasury bills) shall be considered or other government liabilities like loans and contractor arrears will also be touched. Because listed debt is easier to track and is more standardised, most analysts assume that it is the only part of the debt that will be restructured.

If so, then attention has to be paid to the different categories of creditors. Below, the “client type” term refers to the current classification of domestic listed debt creditors.

Of somewhat less importance is the definition of “government debt” itself. Different parts of the government can incur debt, sometimes with varying character:

In Ghanaian context of debt, the “central government” is the most dominant player. However, there are important exposures stemming from state owned enterprises (SOEs) and guarantees.

From the Ghana Fixed Income Market (GFIM) data posted above, it can be seen that exposure to central government debt is concentrated among two main broad classes of creditors: commercial banks and financial sector actors (like insurance and pension operators).

•Stripping out about GHS 9 billion of Bank of Ghana and Cocobod securities, the commercial banks hold about GHS 65 billion (~$6.5 billion) of the ~GHS 190 billion ($19 billion) domestic debt (– ~34%). But total exposure to public & quasi-fiscal debt may be significantly more as Banks are sometimes ultimate backstoppers for other debts owed to the private sector (such as “contractors”) by the government .

•Institutional Investors and Businesses hold ~26%

•Individuals & Households hold ~13%

•Foreign Investors hold ~12.3%

•Pension Funds hold ~7%

•Insurance, Rural Banks & Others hold ~7.7%

It is important to remember that the government of Ghana has also borrowed through special purpose vehicles like the Daakye Trust and ESLA PLC, which are, by law, commercial entities in their own right. ESLA and Daakye can be sued on their own account and some sovereign rights may not apply to them.

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.

Businesses that operate “floats” of various kinds, such as those in the fintech, telecoms, gambling/lotteries and related areas have traditionally used government securities to hedge against inflation and will likely resort to the courts to injunct the process except for the large companies whose political economy exposure in Ghana reduces their incentive to oppose government plans.

All in all, it is estimated that more than 1.4 million people are directly exposed to government securities judging by the number of depositary accounts in the country. This is a numerically significant political force.

The Special Case of the Banks

Because the commercial banks hold one-third of Ghana government’s debt, and in view of the ongoing financial sector cleanup, their situation deserves special mention.

Some banks are of course more exposed than others. Whilst most private banks were cutting their holdings of government debt securities, GCB (a bank with significant government shareholding), for instance, has been doubling down, adding roughly 500 million between 2021 and 2022.

Agricultural Development Bank (ADB), also a state majority owned bank, on the other hand, has cut its holdings by almost 25%.

Some private banks like Zenith have followed GCB’s lead by increasing their holdings.

Across the industry as a whole, however, the fact remains that income from government securities has been rising even as income from the “normal” operational activities of lending and trading drops. Some analysis suggest that income from government securities has outstripped interest income and now hovers around the 50% mark. Interest income on the other hand seems to be trending towards the 30% industry-wide average mark.

With government securities constituting nearly 30% of assets, and exceeding 45% of income (due to the high concentration of “investment” funds in government securities among Ghanaian banks), any process that cuts face value (“haircuts”) will hit the risk-weighting of banks’ capital. Similarly, any process that touches coupons/interest rate will hit the bottom-line (profit after tax) of banks massively.

Banks with a capital adequacy ratio below 17% may well become technically insolvent if a haircut of 25% or more takes place.

Instructively, technical solvency indicators for Ghanaian banks has been dropping due to risk adjustment of the value of assets despite many financial institutions being cavalier about marking their government securities to market after massive price drops on the secondary market. To the extent that some banks will require government financial assistance to weather any storms triggered by domestic debt restructuring, the total savings my be significantly less than assumed on face value. In fact, in some restructurings the overall stock of public debt actually grows even if debt service pressures are alleviated.

On the positive side, Ghanaian banks have the second or third highest (depending on risk adjustment) return on assets in the world and thus a good number of them may be able to withstand a significant hit to profitability.

Because some banks and financial institutions are already experiencing significant liquidity, capital and solvency challeges, IMANI strongly advises that prior to any restructuring activities in the local market, a fresh asset quality review be conducted.

Non-Bank Actors

Other financial sector actors will likewise be heavily impacted.

Because regulatory guidance strongly favours investment in government debt securities, many investment funds in Ghana have stocked up heavily on treasury bills and government bonds.

About 25% of insurance industry assets is in government securities. The corresponding number is about 30% for pension funds.

Foreign Investors in Domestic Debt Market

Whilst foreign investor participation in Ghana’s debt markets has dropped from nearly 40% just a few years ago to just a little over 12% today, that number is still significant in absolute terms.

Nearly $2 billion equivalent of foreign investor money is still invested in treasury bills, government bonds and notes.

Some of those debt instruments, amounting to about $800 million, are actually denominated in dollars.

These investors represent the highest level of litigation risk for any attempted domestic debt restructuring. Their interest in suing to prevent any harm to their portfolios is very elevated and government’s political economy leverage is lowest where they are concerned.

Risks to Debt Restructuring

To summarise, the greatest danger to a successful domestic debt restructuring on the technical front is litigation.

Worldwide, that risk has substantially risen for all types of restructuring, domestic or external.

At the domestic level, however, the fact that government debt securities like bonds and bills are governed by local law makes the Greek approach feasible. Greece introduced laws in parliament with retrospective effect thereby overcoming the absence or insufficiency of “collective action clauses” that would have permitted the government from changing the terms of the debt it had borrowed.

We see the government’s inability to build political consensus as the biggest challenge ahead constraining any attempt to resort to using Parliament to speed up the process of renegotiating the terms of its domestic debt. We do not believe that the government’s promise of an “industry-led” process is credible since apart from the banks (who hold only one-third of the debt) such a model would not be viable for the rest of the fragmented private sector.

IMANI’s assessment is that new legislation would be required to smoothly undertake any domestic debt restructuring but the political costs are very high.

The official political opposition will make much of any attempt to penalise Ghanaian investors to the perceived advantage of international investors if the government tries to circumvent litigation risk by ignoring external debt holders and non-resident holders of domestic debt.

The Opposition will however be torn between the political gains from the fallout of a botched restructuring and the prospect of obstructing any restructuring at all and thereby sharing the blame for undermining the IMF program (should debt treatment become a condition for a program).

Should the Opposition take a principled policy stance that both the domestic and external debt be restructured, they will find grounding in research that shows that restructuring both external and domestic debt leads to the deepest economic recovery for affected countries after a steep initial hit.

The government will find cold comfort in the same analysis that suggests that recovery terms for doing only domestic debt restructuring are better than for doing only external debt restructuring.

Can Restructuring be Done Right?

The IMF provides a substantial framework for doing domestic debt restructuring with flair:

IMANI’s position is that any restructuring affair in Ghana will face considerable scepticism because of a lack of trust in the ongoing fiscal consolidation program as a whole.

Only 34% of targets in the country’s last strategic public financial management (PFM) process (up to 2018) were met despite the formal inclusion of all key domestic and international public actors.

Performance in budget execution for both debt and expenditure dropped rather than rose significantly over the period.

88% of central government transactions in financial statements of the country’s financial controller in a large sample reviewed by public auditors were found to have bypassed the central accounting system, the GIFMIS.

Fiscal slippages continue unabated.

When the Eurobond door was shut in the face of the government, it did not implement proper austerity. It simply increased domestic borrowing by 480% to finance mostly recurrent expenditure. Cost of borrowing, a key factor in the IMF’s 2021 debt sustainability prognosis for Ghana, is rising alarmingly.

Cost management in government business is abysmal. IMANI is currently investigating the continued accumulation of energy sector liabilities, which some analysts claim may hit $12 billion in years to come, effectively increasing the public debt by more than 20%.

IMANI’s analysts were frightened to discover that the national oil company, GNPC, which a few months earlier had tried to pressure the pricing regulator, the PURC, to increase the price of gas it sells to the utilities based on a claimed average cost to it of $7.9 per MMBTU (a unit of measure), had quietly done a deal to sell gas for just $1.72 to a company called Genser. The potential losses to the country are on the order of $1.5 billion over the life of the contract.

In short, there is a widespread scepticism about the government’s commitment to fiscal consolidation. Seeing that the IMF in previous programs has been complicit in the government’s rosy forward-looking forecasts and failures to hit fiscal reform targets, the overall credibility of any adjustment program, including any debt restructuring, is very much on the line here.

Should a domestic debt structuring lead to a broken fixed income market, no IMF financial injection will make a difference. The government borrows more than GHS 12 billion ($1.2 billion) a month from the local fixed income market, a good chunk of which goes into rolling over existing debt.

No IMF program can inject even $100 million a month directly. Nor will any situation that triggers a local financial sector crisis be viewed favourably by international investors. Which means there is a very real risk of damaging both local sources of financing for the national budget and external perception of recovery, and with the latter any chance of restoring the country’s access to the Eurobond market.

The Hobson starkness of the choices facing the government is as follows: restructuring external debt will prolong the shutout from the Eurobond market forcing the overreliance on the domestic debt markets that has seen borrowing costs surge through the roof. Such a scenario will compound inflation and exchange rate depreciation and deepen the fiscal hole. Restructuring the domestic debt may shut the government out from the local market if investors simply fail to subscribe to any new government issuances. Not restructuring either or resorting to cosmetic measures could undermine any IMF-backed adjustment effort.

In the above context, it is important to remember that weak restructuring effort will likely just delay another debt crisis. Globally, it takes on average two restructurings to stabilise a debt crisis in the medium term. Some countries become “serial defaulters” in the process. As the IMF’s Tamon Asonuma shows, almost 41 countries have earned that ignominious title.

The government faces daunting choices. Leadership would be crucial in building confidence and preventing debt recidivism. Like all burdens, this one too will become lighter if it is shared collectively by those it affects, the people of Ghana. No time is better than now for the government to show its mettle in dispelling mounting scepticism and cynicism about its commitment and capability to get the debt crisis response right.

Failure will have consequences too dire to contemplate.

In a previous essay, we announced a joint investigation by IMANI Africa and the Africa Center for Energy Policy (ACEP), two Accra-based policy think tanks, into a case of possible fiscal recklessness on the part of Ghana’s national oil company, the GNPC.

In our initial analysis, we explained how potential losses of up to $100 million per year could build up for Ghana if the GNPC’s current arrangement with Genser Energy Holdings, a US-based Ghanaian-owned energy company, persists under current conditions. Frequent readers of this site must be aware of our longstanding disquiet about how GNPC’s lack of technical prudence frequently courts financial disaster for Ghana. This inquiry follows faithfully in that tradition.

We intend to explore in a bit more depth the circumstances giving rise to the latest GNPC financial debacle. This essay will thus touch on both the antecedents of the original 16-year contract signed between GNPC and Genser in 2020 and more recent developments to paint a holistic picture of the fiscal risks to the country.

The whole mysterious saga can be traced to an agreement on 20th April 2018 between Ghana Gas, the state-owned gas distribution company (which for a short period, before the advent of the current administration in 2017, was a subsidiary of the GNPC), and Genser in which Genser committed to pay a reasonable price for gas to power embedded/off-grid power plants it leases to various large mines and consumers in the cement and ceramics industries.

Subject to various regulatory decisions and notices, Genser had committed to pay between $6.50 and $7.29 for each unit (mmBTU) of gas received from Ghana Gas as per the so-called WACOG, a regulated price set by the government of Ghana through an industry regulator (PURC).

Around the same period, it was frantically engaging various liquefied petroleum gas (LPG traders) to supply imported fuel for its plants. The logistics of trucking imported propane and LPG from the port being cumbersome and the costs being benchmarked to world prices, Genser’s ideal situation was a more stable domestic source of gas that it could transmit more conveniently, reliably and cheaply via pipelines. Besides, it faced cashflow constraints that made it difficult dealing with the strict European traders it was then buying from.

Having secured a fair deal with Ghana Gas, Genser began to feel that the price paid by the rest of the power industry wouldn’t work for its modular and embedded generation business model. Consequently, it attempted to influence an industry regulator, the Energy Commission, to grant it a waiver of the regulated price so it could cut a deal for a lower price but the Energy Commission wouldn’t budge.

Specifically, the Energy Commission did not regard Genser as “strategic” for which reason it would deserve a special discount and therefore ruled out any arrangement in which Genser would pay a lower price than the state-set amount (WACOG) it had already agreed to in its contract with Ghana Gas.

But what Ghana Gas had no appetite for, GNPC, as usual, couldn’t wait to gobble. As already discussed in the previous essay, GNPC agreed to price gas for Genser at just $2.79/mmBTU (i.e. at a whopping ~60% discount).

To provide political cover for this scheme, the Chief Executive of GNPC wrote to the Ministry of Energy on 10th August 2020 informing the Deputy Minister about this decision and asking for “ratification”.

Somehow, the documented history we have narrated above disappears from the record and a contrived basis is invented to suggest that somehow the proposed $2.79/mmBTU price is a better deal than what the GNGC had signed with Genser.

It is also suggested that because Genser has agreed to provide free passage to GNPC gas to other, third party, customers through its pipelines, some kind of barter arrangement is involved.

Consistent with the GNPC’s less than candid approach, the Chief Executive fails to disclose that the use of the Genser pipelines are not actually free because a “gas compression service charge” applies.

More to the point, even if the GNPC wanted to give a rebate to Genser for use of the latter’s pipeline, there are established costs for pipeline transmission in Ghana that would provide a sense of how much it could have knocked off the WACOG or market price of gas for Genser. GNPC provided no such analysis.

The following year, it decided instead to double up. Its Chief Executive wrote again to the Ministry to justify a revision to the contract for an even greater reduction of its gas sale price for Genser.

Note once again that the massive near- 40% discount is justified on the basis of pipelines to be built in the future for projects yet to be actually realised. Suffice it to say that no such pipeline to Kumasi was built by December 2021.

At this point, through the ingenuity of GNPC, the maximum price negotiated by Genser with Ghana Gas had been discounted by a whopping 77%. Genser stood to pay $1.72 if it built a pipeline to reach customers in the interior whether or not GNPC found the money to build the new power enclave in that part of the country and for which it claimed it needed all this future pipeline capacity (suffice it to say that GNPC has not been able to build the enclave).

Recall also that this was the period when economies worldwide were recovering from COVID-19 and prices in the most actively traded European hub (TTF) had surged past $10/mmBTU.

Genser, frantically raising funds to service debts and stave off harrassing Senior (Debt) Agents, needed the rosiest deals it could find and GNPC was always at hand to oblige. So, $1.72 it was.

The GNPC would also tell various people in policy circles that the source of the gas it was selling to Genser was exclusively Jubilee and TEN. Jubilee and TEN gas are very cheap because Ghana, until later this year, only pays for their processing and distribution costs, but not the gathering and feedstock.

Yet the agreement it had originally signed and the newly amended one would both contain clear “service delivery point” provisions establishing the source of the gas, at least partly, to be from the Sanzule (ORF) facility which is connected to the Sankofa Hub where, according to the same GNPC, gas costs $8.72/mmBTU.

At the same time that it was busily dispensing discounts like candy, GNPC was also busily harassing the PURC (a price regulator in the energy industry) for increments in tariffs due, among other factors, to the growing costs of aggregating gas. With TEN facilities contributing just 2% of the gas GNPC collects and Jubilee offering 28%, Sankofa was now responsible for a full half of all gas throughput. Yet, Sankofa gas was also the costliest for GNPC, at a mighty $8.72/mmBTU. Whilst Jubilee may cost GNPC $2.3 to obtain, a concession from the oil producers whereby Ghana got the gas feedstock itself for free, the concessionary pricing regime was on course to end in about a year and half from the time the 16-year agreement was agreed.

So, at worst, GNPC was willing to take gas at $8.72 from Sankofa and sell to Genser at $1.72. At best, we can use the industry practice, as GNPC itself does, and look at its average cost of sourcing gas, which it says is $7.9 in 2022 and set to rise to $9.37 in 2026, when the contract with Genser would still have ten more years to go.

When the Ministry of Energy was notified of the decision by GNPC as enshrined in the initial contract (2020) to grant those massive discounts to Genser, it was neither alarmed nor deterred by any of this.

The Minister waited for about seven months, during which period the contract was of course in force, and then sent the following gems of ministerial guidance.

Any surprise then that just four months later, GNPC will revise the contract and hand over another delicious 40% discount for yet more phantom pipeline promises?

Clearly emboldened by ministerial laxity, GNPC was now literally giving the gas away. The price of the commodity itself would be pegged at just $0.57 should Genser succeed in closing its fundraiser and build a pipeline for GNPC’s future use in distribution schemes that were then unfunded and very much on the drawing board.

The Ministry’s actions were, and it is easy to guess, in contravention of all settled policy. Just around the same time that GNPC was negotiating with Genser, the country’s highest decision making body in economic matters, chaired by no mean personage than the Vice President, had taken a decision about gas pricing. A decision the then Energy Minister in March 2020 had communicated to the GNPC.

The essence of the decision was simply that gas aggregators (like GNPC) should endeavour to recover their full costs. Full cost recovery and financial exposure mitigation are obvious commonsensical principles dating from Ghana’s first Natural Gas Pricing Policy from 2012. It had been further reinforced in the apparently discarded Gas Master Plan and continues to inform price regulation by the PURC today.

More recent reviewers of Ghana’s national gas policy have reinforced the simple point that in the absence of thoroughly compelling reasons there should be no deviation from the WACOG, as a reflection of average cost recovery across the power sector, in terms such as the following:

It is worth reminding readers that the WACOG, though set below the cost that GNPC says it pays to get the gas it sells, is definitely not $2.79. Or, God forbid, $1.72.

So, even if GNPC does not want to charge its own estimate of a fair price at $7.9/mmBTU, is there any reason why the $5.9/mmBTU WACOG minus any pro-rata transmission charges owing to the presence of Genser’s own pipelines in the mix shouldn’t apply? What exceptional reasons really?

On the point of Genser being somewhat unique in having its own pipelines, it’s worth recalling GNPC’s own numbers of the cost contribution of pipeline transmission to the price buildup.

In essence, one cannot justify a rebate for pipeline transmission higher than half of $0.919 if one wishes to account for Genser picking up the gas midway from their offshore source at the agreed “delivery points”.

Globally, until distances exceed 1,500km (total network length in Ghana is less than this), it is very hard to justify pipeline transmission tariffs exceeding one dollar per mmBTU for natural gas transportation.

In similar light, GNPC’s use of Genser’s pipeline construction and its potential use of same in separate contexts as the basis for discounts is highly suspect given the typically low contribution transportation makes to natural gas project capitalisation.

So, once again, what other exceptional reasons then? Let’s even suppose that the Energy Commission was wrong, and Genser, even though so far it basically just sells power to primary extractors like mines with a sprinkling of cement and ceramics players and is thus far from a massive value addition enabler, deserves to be regarded as a “strategic actor” as the GNPC insists it is. One would still have to look, before going anywhere near subsidies, at whether domestic prices of gas are in fact too high for competitively priced power to be produced.

Luckily, there are well settled methodologies for doing this, such as the use of netback price & value analysis. Done properly, netback analysis can approximate industry willingness to pay and provide robust estimates of gas pricing needed to accommodate breakeven points in the capital investment analysis of various industries. When Ghana last concluded such an exercise, it found that $9 to $12 per mmBTU was a reasonable price range for those industries for which gas-to-power generation makes economic sense.

To cut to the chase, is Ghana’s $5.9 WACOG rate exorbitant? So much so that it must be tempered by subsidies? Is it a “strategic industries killer”? Global comparative analysis does not suggest so. Indonesia, a fast-growing gas market that could offer benchmarks for Ghana in various ways has a $6 WACOG-like price threshold. There too, key industries cluster around the $9 to $12 per mmBTU sweetspot pricing range.

At the time Ghana Gas offered the $6.5 – $7.29 per MMBTU range, the global picture for gas pricing was pretty aligned with the regulatory view in Ghana.

The other question is whether based on the prevailing sentiment during the contract negotiation, a belief that relatively cheaper Jubilee gas could be used for strategic purposes to promote the emergence of a diversified energy conglomerate of Ghanaian origin could have justified that humongous 77% discount. Even that concession, wild as it is, removed from the reality of gas either coming primarily from the expensive Sankofa Hub or at best being commingled and thus costed at the GNPC’s own weighted level, still does not condone the pricing agreed upon in both 2020 and 2021.

The policy position among the country’s experts was clearly that Jubilee gas ought not to be included in pricing indices. And that even if it was, gas prices would not fall below the $4.5/mmBTU range. Taking cue from the logic in the now, apparently abandoned, Gas Masterplan, prudence ought to remain the policy anchor.

It is amply clear from the foregoing that GNPC’s decision to discount the price of its gas to Genser from the $7.9/mmBTU it says it costs on average to produce the commodity, and to deviate from even the regulatory price benchmark of $5.9 (2022) – $6.08 (2020) per mmBTU is suspect. Its further decision to offer the gas to Genser at a prospective amount of $1.72 for 16 years can therefore not be justified at any level on the evidence currently available.

Until GNPC presents compelling arguments to vindicate itself, we must consider the contract as constituting a massive financial loss as follows.

Fair Price of Commodity – $7.9

• Rebate for Buyer Transportation – $0.5

• Strategic Option Rebate for Third Party Delivery via Genser Pipeline – $1

Prudent Net Sales Price – $6.4

Choosing to sell the gas at $1.72/mmBTU to Genser therefore generates a loss of $4.68/mmBTU.

The contract envisages delivery of ~329 million mmBTU over its 16 year lifetime.

The total potential financial loss to Ghana is thus $1.539 BILLION.

Of course this number is an approximation of approximations. But all the trends point to elevated prices for natural gas in the medium-term justifying the projection into the future of these round numbers. It is a very sensible call to estimate losses around this general figure should the contract as currently crafted persist without very sound, genuine, strategic reasons.

The point must be stressed that no one is accusing Genser of wrongdoing. At worst, it is guilty of “excessively effective” lobbying and shrewd negotiation. But it is a private business seeking to maximise the welfare of its corporate backers who are taking risks worth ~$500 million so one can understand. Our focus is thus principally on the role of GNPC, which has a bounden ficuciary duty to prevent Ghana from losing such fantastical sums whether out of sheer incompetence or recklessness.

This essay is part of an active, ongoing, investigation by ACEP and IMANI. Readers with information are strongly encouraged to reach out.

On 27th July 2022, the newswires flashed an announcement by Genser Energy Holdings, a Ghanaian-founded energy company headquartered in the United States (Washington DC) and backed by the powerful Oppenheimer family of South Africa and several other funds and banks.

The announcement concerned the successful closing of two loan facilities totaling $425 million to support Genser’s refinancing of its 2019 and other debts; expansion of its petroleum pipelines (the only privately owned facilities of their kind in Ghana) and port facilities (for its propane and other natural gas liquids – NGLs – trade); and the funding of a greenfield gas processing facility to compete with the current state-owned monopoly at Atuabo.

From its origins in 2007 as a small off-grid energy supplier, Genser is now set for the big leagues. Its first deal in 2007 with Golden Star Resources to supply a 36MW power plant for the miner’s Bogoso site could hardly have predicted the emergence of a sophisticated diversified energy holdings conglomerate as Genser seems now determined to become.

Until “dumsor” struck, and at the height of that excruciating power crisis, Genser found its mojo. It entered into a 5-year power plant leasing and maintenance deal with Unilever to power the latter’s Tema factory. Paving the way for even bigger prospects: three significant deals with major gold producers, Kinross and Goldfields.

It is Genser’s powerplants serving Goldfields in Tarkwa and Damang that, however, have fuelled the massive infrastructure financing deals announced with such flourish in 2019 and July of this year. The country’s gold mines consume more power than the whole of Ghana’s northern sector (equivalent to ~15% of the power distributed by ECG). By positioning itself as the offgrid power supplier of choice to the big gold mines, Genser is paving the path to industry dominance.

Even juicier opportunities lie ahead: the Ghanaian government seems likely to outsource gas transportation for the new power enclave in the Kumasi area it intends to develop around the Ameri plant to Genser. In the course of researching this post, we saw how instrumental letters or support issued by the government attesting to these future deals were in helping the company close its latest funding round.

Whilst there is no denying the growth in Genser’s operations in its 15 years of existence, it is starting to look under further scrutiny that its expansive ambitions of the last few years have sadly been bankrolled at Ghana’s expense.

Careful work by analysts at the Africa Center for Energy Policy (ACEP) and IMANI has revealed that Genser’s operating profits may be heavily dependent on a sweetheart, unpublicised, deal it has signed with the Ghana National Petroleum Corporation (GNPC) whereby it pays a fixed rate of just $2.79 per mmBTU (a unit of energy measurement) for the natural gas it receives from the National Oil Company. There is some evidence to suggest that the GNPC sweetheart deal came after attempts to woo Ghana Gas, the national gas company, by Genser had been less than successful.

Genser’s negotiated gas rate with GNPC is completely mindboggling in a country where the energy regulators assume an average cost of gas of $6.08 per mmBTU when setting tariffs for electricity pricing. In fact, actual gas pricing on the market for various power plant operators (or the government, depending on circumstances) is often higher than this. In 2019, for instance, it averaged $6.91 per mmBTU, and total costs of gas to the industry as a whole amounted to more than $455 million.

In 2020 and 2021, Ghana bought gas at $6.14 per mmBTU and $7.24 mmBTU on average from private producers in its offshore basin and from Nigeria, respectively, to fuel thermal plants. In fact, from the agreement between GNPC and Genser, it is clear that GNPC gets the gas from the J.A. Kufuor Floating, Production, Storage & Offloading (FPSO) facility in the Sankofa Hub, beaches the gas at the Sanzule facility and then handover at a designated delivery point for Genser to transmit through its own pipelines to Damang and Tarkwa to fuel power plants for the gold mines in that enclave.

From the chart below, it can be inferred that this is gas sold to Ghana at $6.14 per mmBTU (down from an earlier rate of $9.59 per mmBTU) and then on-sold to Genser at $2.79 per mmBTU. What is worse, tariff analysis data has suggests an optimal gas selling price of $9.42 per mmBTU if GNPC’s gas trading operation is to be sustainable. A prospect further threatened by the national oil company’s professed strategy of importing liquefied natural gas (LNG) into Ghana from overseas at a cost some analysts contend will hit $11+ per mmBTU at delivery point.

In simple terms, for every unit of gas sold to Genser, a potential loss of $3.35 per mmBTU is recordable. For 2022, the potential loss to Ghana and inferred windfall for Genser is more than $52 million (assuming fully delivered volumes). By 2025, going by natural gas pricing forecasts, the total loss could easily hit $100 million a year.

Genser’s recent good fortune is even starker when viewed in light of its challenging operational history.

From early 2018 to mid 2019, Genser and commodities trader Vitol had an arrangement in which the former was to supply the latter with between 4.7 million and 6.25 million gallons of propane (one of the two main gases found in liquefied petroleum gas – LPG) delivered to a floating facility docked at Takoradi (or roundtripped in a ship-to-ship transfer maneuvre between Lome, Togo, and Takoradi). The price of the propane in 2018 was roughly $0.9 per gallon on average after accounting for the premium charged on OPIS Mont Belvieu pricing (so, for example, Genser owed Vitol $4.24 million for a delivery of ~4.7 million gallons of propane made in February 2019).

Using standard heat conversion factors, one can benchmark this propane pricing to the pricing of the natural gas being sold by GNPC to Genser (natural gas, by the way, is composed mainly of the lighter methane with a bit of ethane). That conversion yields $10.26 per mmBTU. One may, arguably, choose to account for higher propane combustion efficiency so as to reduce the amount to roughly $4.5. The other costs of handling and transportation (including the trucking, floating storage and bunkering costs) have not been fully captured. It is safe to say that just before Genser signed the groundbreaking, never publicised, deal with GNPC, allowing it to switch from LPG to LNG/natural gas, it was paying the likes of Vitol significantly more than $5 per mmBTU equivalent for the feedstock gas it needed to power its plants.

Had it continued to rely on these contracts, then at today’s propane and butane prices, premiums and handling inclusive, its fuel costs from imports would exceed $7 per mmBTU equivalent (applying the same conversion factors). Its serious cashflow problems would have continued to precipitate repeated payment delays, liquidation damages from customers like Goldfields, and eventually the same type of defaults that had to be remedied in an English court of law in July of this year with settlements and costs exceeding $20 million for breach of supply contracts.

But, as we have seen above, Genser managed to convince GNPC to enter a sweetheart deal of ~$2.79 per MMBTU, thereby completely transforming its fortunes. By virtue of its sweetheart agreement with GNPC, it is poised to consume more of Ghana’s precious gas than 9 of the 13 main thermal power plants operating in the country, only slightly behind TICO in 2022, and set to overtake TAPCO in mid-2023. The volume of gas supply committed by GNPC to Genser in the mindboggling contract for the 2025 timeframe will be nearly half the total consumption of VRA powerplants in 2020.

Whilst entrepreneurship of the calibre of Genser is always to be celebrated, the success of private business cannot be at the expense of public good. Every company that pays $2.79 for a critical input that its competitors get for $6.08 will do wonders in the market. More to the point, fiduciaries of public interest like GNPC cannot throw out every hint of commercial prudence to advance the private wellbeing of their corporate favourites.

Purely from a public policy point of view, GNPC ought to have looked carefully at the export price parity numbers to determine a starting point for its deal with Genser. It was amply clear at the time of sealing the deal that natural gas prices were going through a cyclical downturn and that historical trends called for the use of Henry Hub spot benchmarks (applying discounts and premiums as appropriate).

A flexible and market-sensitive pricing regime with appropriate caps, floors, discounts and premiums would have ensured that now that natural gas pricing on the international markets is inching towards $9 per mmBTU, a Ghanaian state-owned company wouldn’t be selling the commodity at $2.79. That spot gas prices were low at the time of concluding the deal is absolutely no basis for not having introduced some kind of market-aligning mechanism into the pricing formula.

No doubt, GNPC will counter with the argument that amendment to the pricing annexure is within their purview and may even have been considered. But the evidence is glaring that Genser’s obscene margins on these trades started to emerge just a few months after the contract was signed and that it has made a total bonanza on the gig. Because of the ridiculous pricing concessions, it can afford to undercut any competitor in its segment of the market, show fantastic future earning potential, and thus attract large investments to further seal its dominance in the private pipeline, gas port logistics, and modular off-grid market niches.

Whilst Genser has a few cement companies in its customer list, it is overwhelmingly a power producer for the primary extractive sector, which many economists argue strenuously undercontributes to government revenues in Ghana. It seems thus very unlikely that even a formal government policy to use highly subsidised gas for strategic purposes would have countenanced the $2.79 per mmBTU sweetheart deal.

The good fortune of the shrewd operators at Genser, interpreted in the light of that unconscionable contract, seems less the outcome of entrepreneurial brilliance and more the byproduct of exceptional incompetence and serious national betrayal on the part of the ever bumbling GNPC.

ACEP and IMANI have only just commenced their investigation into this seeming debacle. Stay tuned.

In January 1994, the French government caved in to pressure and slashed the value of the CFA currency, used by its former colonies in Africa, by half. Overnight, prices skyrocketed, purchasing power dropped, and widespread violence erupted in many cities. In response, the IMF was invited in, France slashed debts owed by the CFA countries and desperate price controls were imposed by many of the governments of the affected countries.

The event sparked a deep dive into the many aspects of exchange rate setting and movements in developing countries. Economists in the hallowed halls of development finance, at the World Bank, the IMF, in academia, took stock of the massive specialist literature on what drives exchange rates, updated a few concepts and reignited many old debates.

All the flurry of reflection however turns around a simple question: how to tell if an exchange rate is overvalued or undervalued?

In the Ghanaian context that seemingly simple question has some profound implications for assessing the government’s attempts to stop the free fall of the national currency, the Cedi. The Cedi has depreciated by a whopping 40% since the beginning of the year. Is this depreciation merely a rational adjustment to balance the country’s true position in the global economic system? That is to say, does the Cedi’s depreciation reflect a true picture of economic fundamentals and therefore is its depreciation merely a movement to an accurate level?

This is a very complicated matter to address. It requires empirical estimation of something called the “long-run equilibrium real (effective) exchange rate” that attempts to compare how the prices of similar and dissimilar goods behave in Ghana versus its trading partners to ascertain if the exchange rate is merely trying to maintain balance. One may even have to make provision for so called “behavioral factors” to balance the current (or “spot”) demand and prices with near-future or “forward” demand and prices etc.

Pernicious Supply – Demand Imbalance

A far simpler question may be to ask whether the usual demand for dollars in the economy is being met by the usual supply. Or, whether, as the government now insists, “speculative bubbles” are inflating demand and thereby triggering artificial scarcity. If one reduces the problem to one created largely by speculation, the policy response may favour a lot of “signaling” rather than actions to address real and structural issues.

A government fighting speculators is essentially engaged in a game of bluff. It huffs and puffs that it has enough forex (usually dollars) to meet all legitimate dollar needs in the medium-term so the exchange rate is bound to return to its natural rate at some point, leaving speculators carrying massive losses. If speculators blink first, it wins. In a country with such a fine tradition of political propaganda, such huffing and puffing flows quite naturally. Government spinning goes into overdrive in a style very similar to the one recently witnessed of the Minister of Information threatening speculators to immediately release their hoards back into the market or face annihilation.

If you look carefully though, you will see the old menacing question of how to determine the accurate exchange rate disguised in the implied claim that there is a natural rate that speculators are disrupting. Should it be the case that speculators are merely profiting from a gap between what should be the true, more devalued, Cedi rate and a current, artificially propped up, rate, then it is easy to see how the government’s actions merely increases the eventual profit of bound-to-win speculators.

Africa has seen many instances of such misguided government machoism. One famous instance in Malawi also occurred in 1994, the same year as the titanic CFA devaluation. The country was in that year forced to abandon its commitment to auction adequate volumes of forex to meet legitimate demand. Malawi buckled because the pledge proved unsustainable as it became clear that structural demand rather than speculation was driving the imbalance.

An intuitive survey of recent data and trends in Ghana inclines one to the view that the equilibrium exchange rate in Ghana is influenced more by inflation and changes in rational expectations by investors and other actors in the economy than by interest rates and real incomes. Even a cursory survey of the asset management market will bring up many serious complaints by industry players of a serious outflow of funds from Cedi-denominated assets and uncover widespread perceptions that the central bank’s rate-signaling actions are having zero effect so far. Misguided “government control” interventions in the forex market without due attention to such a reality could strain the balance sheet of the central bank and spillover into the broader financial sector.

Gauging the True Forex Market Balance from Trading Data

To discern a structural demand-supply imbalance of the dollar stock in Ghana, one does not necessarily have to build complex empirical models to ascertain the equilibrium rate. It is possible to glean enough insights to arrive at fairly sound conclusions about the current forex crisis in Ghana by looking at recent trends in actual forex flows in the country supplemented with a brief analysis of the central bank’s forex operations.

The first critical point to note is the sheer expansion of the country’s forex trade in less than a decade. Between 2012 and 2020, commercial banks were able to expand their dollar stocks, earned domestically, from $7 billion to $24.82 billion. Absa Bank alone, in 2020, was responsible for $5.68 billion of this amount, many times higher than the forex repatriated by the entire mining sector. Ecobank accounted for $2.648 billion, and Stanbic $2.508 billion. Note that all these three banks earned more forex from a range of sources such as customers involved in exports and remittances than the country earned from the pre-export financing package for Cocobod that the Ministry of Finance is currently touting as the miracle cure for the depreciation.

In fact, the total amount of forex mobilised in the private sector by the commercial banks – i.e. $24.82 billion – in 2020 was double the $12.18 billion that went through the official Bank of Ghana corridor that year, or the $12.65 billion earned in 2019.

More fascinatingly, the 2020 amount of forex mobilised by the commercial banks was also nearly double the $12.7 billion the same banks earned in 2019, underlying the potential for massive volatile swings in this segment of the forex market that is highly sensitive to investor sentiment. Reinforcing the volatility point is the corresponding 2018 figure of $25.95 billion for commercial bank forex earnings. In summary, aggregate commercial bank forex trades have swung from ~$26 billion to $12 billion and back to $25 billion in a single 3-year cycle.

The Central Bank’s Reserves Muscle

Judging from these numbers, both in respect of scale and volatility, one wonders if the Bank of Ghana has the financial muscle to manage a floating regime when it goes awry as a result of shifting private investor sentiments, especially in the context of a liberalised capital account.

Below we provide snapshots of the forex reserve composition of the Bank of Ghana across the 3-year cycle and a lagging picture from 2015. (PS: Note the rigidity implied by the amount of reserves held as fixed deposits.)

The 2015 comparative is very interesting for two reasons. Firstly, the total forex flows through the official Bank of Ghana corridor amounted to more than $10 billion. Secondly, the reserve composition of $6 billion is highly consistent with the scaled level of forex receipts and payments through the official Bank of Ghana corridor.

Contrast this relatively stable picture with the dynamics in the commercial dealer banks’ corridor, where total flows amounted to $4.27 billion, a far cry from the ~$25 billion range being observed at the peaks of recent cycles. The massive mismatch between Bank of Ghana cyclical forex swings and the cycles observed at the commercial bank level renders any attempt to use the central bank’s meagre reserves to stabilise supply-demand imbalances created by shifts in sentiment among private sector market participants no longer viable in Ghana.

Bridging and Swapping Galore

A further factor worthy of note is the role played by bridge and swap facilities in smoothing liquidity bumps in periods when the country has access to the Eurobond window. These secretive arrangements involve significant flows of forex that have a real effect on local supply. In 2015, these short-end mechanisms yielded over $2 billion spread helpfully across the year.

By 2020, these sources were generating nearly $5 billion in forex value. The Bank for International Settlements, for instance, supplied $3.2 billion in bridge facilities in 2017, $1.5 billion in 2015, $1.6 billion in 2018 and $800 million in 2019. In 2020, the amount picked up again to $1.3 billion. The unscrutinised nature of such bridge and swap facilities (often bundled with the omnibus “international capital market program” and negotiated quietly, away from the prying eyes of parliament) mean that their volatilities are not all that well understood by the broader market.

It is intriguing that in the most recent year that Ghana witnessed a sustained depreciation episode, in 2019 that is, a number of negative shocks can be seen to be operating in tandem in the data. First, we witnessed a halving of forex flows through the commercial banking window. Next, a significant decline in bridge and swap deals. Before a raft of countervailing measures, such as a large Eurobond issuance, took hold, Bloomberg reported the Cedi as the worst performing among 146 tracked currencies worldwide that year.

A stronger tide of similar negative shocks are currently rippling through the commercial banking forex corridors but this time around the country is unable to depend on the Eurobond market for relief. Of course, a vicious cycle then ensues as the liquidity pills of swap and bridging facilities have also, in keeping with their strong correlation with large debt issuances such as those available in the Eurobond market, run short.

In these circumstances, where monetary policy has become accommodating of considerable fiscal recklessness leading to runaway inflation, and private market participants are thus exiting Cedi assets into the refuge of the dollar, the extent of imbalances, given the size of the commercial bank segment of the forex market as described above, and the dwindling capital receipts in the Bank of Ghana corridor, can no longer be addressed by small inflows that merely serve a signaling effect. Unless expectations improve on account of an improved inflation and investor confidence picture.

Afreximbank & Cocobod Facilities

Which discussion brings us to the issue of the Afreximbank and Cocobod facilities that the government has, with customary spinning skill, hoisted as its victory banner over speculators.

Afreximbank is one of the government’s recent partners in its swap and bridge programs. In 2018, Afreximbank offered Ghana a $300 million facility. In 2019, because of the headwinds in the economy, it followed other counterparties in lowering its provision to $150 million. In 2020, it didn’t bite at all. It is curious therefore that in seeking for a facility to signal capacity to intervene in the market, the government had to resort to a project-financing facility from Afreximbank of the sort that it took to Parliament.

Regular readers of this blog will recall that we have in previous commentary questioned the suitability of milestone-tied financing for the kind of signaling interventions the Bank of Ghana is engaged in. As it turned out, the highly provisional term sheet presented to the relevant committee of Parliament was merely cover for what looks like a separate and undisclosed contractual arrangement not available for scrutiny. The government now insists that it has received the project financing in full. Uncharacteristically, Afreximbank itself has remained silent about the facility and its disbursement. The Ghanaian case is more similar to a series of transactions in Zimbabwe that are now the subject of a lawsuit. And less like other project deals that Afreximbank tends to widely publicise. Afreximbank has been known to drive a tough bargain where it is clear that its resources may be put at risk, as evident in recent strained dealings in Swaziland.

To the extent that the Afreximbank – Ghana deal is shrouded in considerable murkiness and opacity, there is little more that can be said except, as repeatedly explained, its total insufficiency in making a dent in the serious forex shortfall situation in Ghana today unless and until confidence is restored to the bulkier commercial bank end of the market.

Regarding the Cocobod pre-export financing facility, the issues are more straightforward. The historical disbursement rate has been in the $600 million for the first tranche, and not the $910 million the government insists will arrive in October.

Given major shocks to output in the Ghanaian cocoa sector, and Cocobod’s heavily deteriorated finances, it is not clear why the government believes that the banks would consent to such frontloading. But, here again, as with the Afreximbank facility, there may well be undisclosed factors that make determinative analysis impossible. It is also important to mention that in recent years there appears to be parallel flows of forex linked to cocoa separately from the pre-export financing facility itself amounting to roughly 30% of the total receipts. The fact remains however that out of a total $1.3 billion facility secured in 2020, only $860 million was eventually disbursed. In the course of 2021, disbursements again fell short despite a much celebrated $1.5 billion raise.

The meat of the matter

In the final analysis, all things considered, neither the opaque and assumed $750 million Afreximbank injection nor the $600 million to $910 million likely to flow from the Cocobod facility in October can defend against the tides should trading in the private markets continue to be driven by negative sentiments about inflation, loose monetisation of the still outsized fiscal deficits, and the willingness of the government to credibly rein in expenditure. Together, they amount to $2 billion if disbursed fully. Ghana’s forex market has in recent years easily absorbed $40 billion. The Cocobod-Afreximbank injection is thus a mere 5% of total throughput. In extreme dislocation scenarios, $12 billion swings have been observed. A $2 billion blip on the radar, with noisy speculation also bubbling in the background, will thus barely make a beep.

So long as the government’s announced fiscal consolidation plans do not show any clear evidence of a selective default on wasteful obligations, of a sincere and serious spending review, nor of adjustments to spending beyond the perfunctory cuts to discretionary funding that per this author’s analysis do not even amount to 2% of discretionary spending, the government’s signaling will fail. The Cedi will continue to suffer acute bouts of depreciation, with periodic relief proving short-lived, until government’s actions start to match the rhetoric. Recall that the government’s public pledge is to cut 30% of discretionary spending. It should start by at least redeeming it.

Unfortunately for Ghana, investors and other private market participants are by their nature less swayed by spin than by action.