News Guide Africa

Tag: Ghana economy in 2023

  • Postmortem of Ghana’s economy and the DDE

    Adnan Adams Mohammed

     

    Ghanaians are facing a period of economic harshness never experienced after the periods of the military junta in 1980’s.

     

    While inflation is beating about three decades records to record over 54 percent for November 2022 year on year, the Ghana cedi losing value to by over 50 percent to be adjudged as the worst performing currency as at November last year and current ranking second worst performing currency according to Bloomberg data.

     

    Also the country defaulted in debt servicing to both domestic and foreign debtors as the country’s accumulated debt surpassed its Gross Domestic Product recording over over 105 percent debt to GDP ratio. All these compounded with already global slowdown in economic growth and business activities and as well as drop in remittance to the subharran regions.

     

    To anihililate  the current challenges, a finance expert has done a deep postmortem analysis of Ghana’s current economic woes and attributed the ‘big factor’ to reckless borrowing and expenditure.

     

    In a question and answer session with a former executive director with Standard Chartered Bank, Alex K. Mensah Mould, he outlined the causes and solutions to our current economic challenge leading us into a ‘killer’ debt restructuring arrangements under the Domestic Debt Exchange (DDE).

     

    1. Why are we asking for the DDE?

     

    Ans. The financial crisis was largely a result of structural problems that ignored the loss of tax revenue and the slow down in growth in key sectors in a sustainable way

     

    Government was simply not bringing in enough money to cover its growing expenditure including its debt service

     

    This has been exacerbated by high inflation, high physical deficits, low growth in key sectors ,and problems with the exchange rate

     

    1. How did we get here?

     

    Ans. Financial indiscipline and taking wrong bets via ill-thought through policies emanating from populist manifeato promises

     

    Govt also  were not constrained in its financial management and violated many covenants it signed up for; namely:

     

    – Deficit not more than 5% of GDP

    – Public debt to below 60% of GDP

     

    Govt also misrepresented its ability to keep the exchange rate under control by supporting the Cedi via sustainable strong exports and a strong trade surplus

     

    As long as borrowing cost remained relatively cheap and the economy was still growing then issues like current account deficit continued to be ignored

     

    What government did not do was to stress test the economy to see the vulnerabilities and address them by putting some risk management measures in place to address these vulnerabilities

     

    1. Why are we going to the IMF?

     

    Ans. Basically we are going to IMF to assist us getting all our creditors to agree to a debt restructuring once we sign up to a economic performance improvement plan (PIP)

     

    If Ghana brings a credible performance improvement plan IMF will get approval to assist Ghana with a loan to help with the budget

     

    We are not going to the IMF solely for a financial bail out ie IMF funds will not solve our problem

     

    The IMF will insist on financial discipline and should also insist for Govt to address the structural imbalances such as :

    – Low taxation

    – High imports of goods and commoditiesthat can be produced here

    – High unemployment

    – Low growth in key sectors

    – High Govt sector employment

    – Relatively high compensation to

    – low productivity of Govt workers

     

    Govt need to be forced not to hide its challenges.

     

    These structural imbalances can be achieved if the following are addressed:

    – Dampening inflation

    – Lower nominal interest rates

    – Encourage private investment in the real sector

    – Spur economic growth

    – Lower transactions costs

     

    All the above are needed to reduce the deficits and also for debt reduction

     

     

    1. What will happen if we do not get a workable PIP and the resulting bailout for IMF?

     

    Ans. Things could only get worse.

    Capital will begin to dry up – we are currently shut out of Eurobond markets

     

    Ghana could face a liquidity crises and will need even larger bailout financing

     

    Ghana could emerge into a recession amidst hyperinflation

     

    Government tax revenues would weaken

     

    This will find many companies failing especially the SMEs which will result in job losses will exasperate the already precarious unemployment situation in the country

     

  • Banks to lose up to 60% of their revenue due to Debt Exchange – former Stanchart Director

    A former Executive Director of Standard Chartered Bank has warned the economic contraction implications of the debt exchange programme will be dire.

     

    According to the finance analyst, if the Debt Exchange is carried out in its current form, would result in many banks losing as much as 60% of their revenue, since they depend on government treasury bonds.

     

    “To be blunt, most banks will be making losses when you combine this loss of income with the high default rate on loans to SMEs and corporates”, Mr Alexander Kofi-Mensah Mould emphasized

     

    In a Facebook post, he said the main implication of the proposed DebtExchange would be a general slowdown of the economy and “we will either not grow as anticipated, and, perhaps, even not exceed 2% GDP growth this year.”

     

    He said government will have no other option than to cut down its discretionary expenditure and other non-productive policy programmes.

     

    “We also expect a reduction in the construction of new roads as well as a slowdown in road maintenance, and a lot of non-essential government workers’ salaries being delayed or not paid at all etc ie more expenditure accruals,” he stated.

     

    Read full statement

     

    Gov’t seems not to have thought through this _debt exchange programme_ thoroughly; the economic contraction implications are dire!

     

    There will be a general slowdown of the economy and we will either not grow as anticipated, or, perhaps, even not exceed 2% GDP growth this year.

     

    This will be due to less demand, which means that there will be less production, fewer imports, and fewer services being given to the populace.

     

    Now, what does this mean for government revenue?!?

     

    Since the demand of goods and services will go down, it means people will be paying less taxes. Additionally, due to reduced demand – a result of less discretionary expenses – there be fewer imports and as such there will be less duty and other excise taxes collected at the ports.

     

    So, government revenue will plummet and they may fall short of making the projected revenue in the approved budget.

     

    The DebtExchange, if carried out in its current form, will result in many banks not getting any income from Government Treasury Bonds they hold for almost 1.5 years! In some cases, this forms up to 60% of their revenue and is a huge contributor to their profits! To be blunt most banks will be making losses when you combine this loss of income to the high default rate on loans to SMEs and corporates.

     

    With lower than expected revenue, Government will have no other option than to cut down its expenditure.

     

    The first to go will be *discretionary expenditure* and other non-productive policy programmes.

    .

    We also expect a reduction in the construction of new roads as well as a slowdown in road maintenance, and a lot of non-essential govt workers’ salaries being delayed or not paid at all, i.e more expenditure accruals.

     

    Furthermore, with the statutory payments, like pension contributions, the situation will be worse than it currently is, i.e. gov’t backlog of unpaid pension contributions of gov’t workers.

     

    Gov’t needs to re-visit this _debt exchange program_, and create policies that will bring back confidence in the economy, as well as attract investment to spur on the economy; resulting in more spending and increased savings.

  • Another banking sector cleanup in the offing – Experts alarm

    Another banking sector cleanup in the offing – Experts alarm

    Adnan Adams Mohammed

    Financial industry experts have alarmed of imminent cleanup exercise as the country is witnessed a debt restructuring program.

    This comes as the local economy is yet to recover from the first ever financial sector cleanup exercise initiated in 2019.

    The experts explained that, Debt Exchange Program the debt-ridden country is to undertake will usher Ghanaians into unprecedented hardship likened to the era of 1979-83 hardship in Ghana. A former Executive Director at Standard Chartered has indicated that, the debt restructuring will result in sequence of events that will end with many borrowers defaulting their loans or funds borrowed. This will affect many financial institutions.

    “Many will be borrowing funds which they won’t be paying back (so let us say they will be given grants, but lenders don’t know this yet)”, Alex Mould intuited in an interview last week.

    “He itemised the expected economic situations due to the debt restructuring program as that: in this year, there will be less spending power, little or no savings; companies will borrow less and less production due to less demand (only essentials like food staples); Many businesses will fold and eventually lay off workers; Most contracts will not be honored; and Many rentals will be unoccupied. This will lead to low Gross Domestic Product (GDP) growth.”  

    To this, the Dean of University of Cape Coast School of Business, Prof. John Gatsi warned that the country will experience another round of banking sector cleanup if care is not taken.

    According to the economist, the “Debt exchange program is default announcement and a call for support to resolve debt servicing burden by government.” but was quick to add that “This does not in anyway take away the solemn and legal commitment to pay principal at maturity and also pay periodic coupon to the bond holders.”

    Implicitly, this legal obligation or covenant is such that the debtor (government of Ghana) is still a debtor whether there is cash flow / revenue challenges or not.

    In the financial terms, the fact that government has declared default does not mean government has triggered a different status for itself. Government is still a debtor.

    Prof Gatsi emphasizing on this aspect expunged that, “The Ministry of Finance is not a court to determine that individual bond holders will not get favorable judgment in any legal action especially when the process was described as voluntary.”

    “In a democracy, individuals bond holders are at liberty to go to court. The court has the choice to determine whether or not people should be scared about government and her debt instruments going forward. Government indeed needs the support of bond holders in the debt exchange program but the critical question is whether government should determine what it wants and not a negotiated deal.”

    Consequently, the Economics Professor cum Lawyer juxtaposed that, the debt restructuring will lead to liquidity challenge in the financial sector of the economy.

    “The challenge now is that government debt restructuring in a high interest rate regime, may trigger a certain percentage of default by private sector debtors such as households, micro, small and medium size enterprises . So we await a boom in the non- performing loan portfolio of banks soon with reclassification of assets with huge assets expected for impairment. This will create liquidity and capital challenges. We are in for another round of bank sector cleanup if care is not taken”, he added.

    “The debt exchange must be negotiated fairly for bond holders to accept the difficulties government is facing to share part of the burden with government. If this is not done then the entire process becomes hostile . The exercise should be fair to the financial system in general to foster a negotiated debt exchange program and this will keep bond holders still trusting government. Everything must be done to maintain investor confidence to achieve trustworthy and credit worthiness of government instruments along the long term path.”

    Meanwhile, the Finance Minister, Ken Ofori-Atta has noted in the ‘Invitation to Exchange’ to individual bondholders that, the principals of eligible individual bondholders will not be touched in the debt exchange programme but the interests will get a haircut.

    This invitation is to exchange certain domestic notes and bonds of the Republic of Ghana, E.S.L.A. Plc, and Daakye Trust Plc (collectively, the “Eligible Bonds”) for new bonds of the Republic of Ghana.

    The exchange, the minister noted, will rather involve an exchange for new government of Ghana bonds with a coupon that steps up to rates ranging from 9.15% to 10.65% (depending on the specific series of new bonds) as soon as 2025 and longer average maturity.

    The minister said the domestic debt exchange is part of a more comprehensive programme to restore debt and financial sustainability.

    In the Amended and Restated Exchange Memorandum to individual bondholders, he noted: “The successful completion of this domestic debt exchange is a critical component of both the debt reduction programme and the International Monetary Fund programme discussions; it will contribute to unlocking the support of the international community and will allow Ghana to reach debt targets agreed with the IMF”.

    “We need the full participation of all bondholders in this transaction. Anything less will not make us eligible for assistance. There can be no exception”, he added.

    Apart from that, he said contingency plans have been prepared with applicable regulators to assist certain sectors of the economy (including the financial sector) after its participation in the exchange, to minimise negative spill-overs and safeguard the domestic economy including the establishment of a financial stability fund to provide a backstop for liquidity.

    The minister indicated that, the alternative to the debt exchange would be a far worse economic crisis, with protracted closure from international markets including imported goods and services and further domestic economic instability both for the real economy and the financial sector.

    “It would also mean depleted fiscal resources to support the neediest.”

    “We are acutely aware of the upfront cost of this transaction, and other aspects of our adjustment programme, to participating holders. To that end we are carving out from this exchange treasury bills (up to one-year maturity) typically held by retail investors”, he explained.

    “Further, there is also a positive trade-off for debtholders as a group: this transaction, though resulting in reduced coupon payments from 2023, will make a positive contribution to a safer and brighter future for all Ghanaians”, he argued.

  • Editorial: Turning  around the economy in 2023

    Editorial: Turning  around the economy in 2023

    2022 goes down in the global economic history books as the year Ghana faced the worst of economic turmoil since the 1983 economic crisis the faced during the military juntas era.

    The local currency, Cedi, was ranked the worst performing currency globally. Inflation reached all time highest for a period of two decades. The country’s debt surpassed our Gross Domestic Product among other key macroeconomic indicators.

    However, the Finance Minister, Ken Ofori-Atta, says the government will put in place stronger foundations in 2023 to change the country’s economy for the better.

    He is quoted to have said; “The ensuing years will focus on building an entrepreneurial and export-driven economy as we grow the economy to protect and create jobs, tackle inflation, and strengthen our currency. The importation of food should soon be a thing of the past.

    “2023 must be our “comeback” year. A year in which we put in place stronger foundation that would allow us to change our country for the better and in a way that is enduring, inclusive and transformational.

    “We all have a role to play. And I urge us all to work together with the Government and support the various interventions being implemented to kick–start our recovery in a determined, bold and courageous way,” MrOfori-Atta said.

    The finance minister bet his hopes on the recently announced debt exchange programme and the staff-level agreement with the International Monetary Fund on a $3 billion bailout have contributed to the rebound of the economy.

    “The launch of the debt exchange programme, coupled with the signing of the Staff Level Agreement with the International Monetary Fund, have aided our stability efforts and have in particular contributed significantly to the rebound of our currency.

    “While accommodating the inputs of stakeholders, we must do all we can to sustain the gains of these initiatives keeping in sight the urgency of obtaining IMF Board approval in Q1 2023. The cost of this not succeeding will be too huge for our economy.”

    The assurance is in the good direction, if only the government machinery will walk their talk.

    We at www.newsguideafrica.com therefore urges the government to be bold enough to solicit for better counsel from all those that matters in the economic management cycle, implement bold but better economic policies that will cut unnecessary expenditures where increasing domestic revenues.

    With these, we can also be hopefully of a turnaround for the economy this year.