GHANA government borrows mainly to finance the national budget for economic development, honour statutory obligations and service legacy debts. Broadly, Ghana incurs sovereign debt by issuing bonds, bills, other securities or by going for loans from bilateral sources and multilateral organizations such as IMF, World bank and AfDB. National debt is either owed to foreigners or to Ghanaians (i.e. debts by nationality of creditors) and tend to be in either foreign currencies or in Ghana cedis (i.e. public debt by currency of debt) as well as whether creditors are individuals or businesses that are either private or state-owned.
Nations running deficit financed budgets need public debt to transform their economies
Public debt in whatever form is to be repaid on its terms whenever it falls due and failure to do so results in sovereign default. Sovereign default is failure or refusal of a government to repay its debts when due. It broadly occurs when government fails to make timely interest (i.e. coupon payments) or principal repayments on debt, whether that debt is a loan, or a security or a bond or bills. Sovereign default is either a missed payment or multiple missed payments on debt.
Are bonds safe haven or merely myths of security?
Bonds are contracted on stated terms, thereby making it a fact that no two bonds are identical in form. However, one thing that remains clear is that regardless of the nature of bonds, bond issuers are bound to pay bondholders in line with agreed terms anytime they mature without which hell may break loose! Historically, many nations had defaulted on their sovereign debts and classic examples of such nations were: Spain defaults in 1557, 1560, 1575 and 1596; Russia’s defaults in 1918, 1998 and 2022 due to imposition of economic sanctions for its invasion of Ukraine; Chile’s default in 1832; Several Latin American countries defaulted in 1820s; Greece defaults 2010 and 2015; USA defaults in 1970s; Puerto Rico’s default in 2019; Lebanon 2020 default due to years of government corruption and wasteful borrowing and Argentina’s 1999-2002 defaults.
Sovereign defaults across space and time had been due to several factors
There are several reasons why governments across the globe default on their debts and these broadly include:
- reversal of global capital flows;
- unwise lending,
- fraudulent lending,
- excessive foreign debts,
- poor credit rating history,
- unproductive lending,
- degree of dependence on external financing and rollover risks,
- weak revenues, general state of the economy and public finances,
- rising interest rates and level of purchasing power;
- change of government as was the case with Denmark’s default in 1850 and Russian default in 1917;
- demise of states as occurred when Russia metamorphosed into Estonia, Russia, Georgia, Ukraine and others;
- incidence of wars and revolutions as were the cases of World Wars I and II and Russia invasion of Ukraine in 2022 due to imposition of economic sanctions; (xiii) incidences of force majeures and pandemics likes Spanish flu, Malaria and recent incidence of Covid-19;
- economic mismanagement and degree of openness to external trade; (xv) political corruption;
- size of exploitable natural resources and (xvi) incidence of financial crises.
Debt restructuring is an option governments exercise whenever they become debt distressed
Ghana recently became debt distressed due to incidences of Covid-19 and Russia-Ukraine war and certain domestic challenges and had successfully restructured her domestic public debt in her bid to bring public debt to sustainable level. This debt exchange accounted for best practices across the world by persuading creditors to write off part of their debts in exchange for reduced debt service payments. It is an open secret that drama has unfolded following Ghana’s debt restructuring with notable being Pensioner Bond Holders Forum picketing at Ministry of Finance in protest of their inclusion in Domestic Debt Exchange Programme and payment of their coupons when they fell due.
Ghana risks paying dearly should she default in repaying her restructured sovereign debts in August when they mature.
Governments the world over are typically not in favour in defaulting on their debts, since doing so has serious economic, social and political implications. Generally, cost of sovereign debt defaults are dire and that Ghana should do whatever it can to make bond repayments in August when her restructured bonds fall due. Historically, nations which defaulted on their sovereign debts suffered from: (a) Financial/banking crises; (b) steep economic downturns manifesting as recessions, excessive currency devaluations and high interest and inflation rates; (c) credit downgrades from credit rating agencies(i.e. S&P, Fitch, Moody’s, etc) that caused some to be shut out of debt markets for years; (d) probable seizure of assets oversees; (e) foreign lenders deliberately fighting to undermine defaulting nations’ monetary sovereignties; (f) political upheavals(unrest) and even an invasion of countries(e.g. UK invasion of Egypt in 1882; US ‘gunboat diplomacy’ in Venezuela in mid-1890s and US occupation of Haiti in 1915); and (g) slow or reverse economic growth
Government honours its bond obligations or forgets about breaking the 8
In the current fragile political environment in Africa, particularly West Africa where citizens are more likely to back military takeovers as witnessed in Niger and Burkina-Faso the last thing NPP Government should do is to think of defaulting on its sovereign debt and then threatens’ Ghana’s hard-own democratic credentials for the last 30years. It is in this line that concern citizens seek to advise Nana Akufo-Addo NPP-led administration to do all within its means to honour its restructured bonds when they fall due anytime. This certainly will affirm government’s commitment to rebuilding Ghana’s economy; cements Finance Minister’s assertion that Ghana has turned the corner” and sincerely demonstrates NPP’s resolve to break the 8 in the upcoming 2024 elections.
The government certainly could have printed more Cedis to make repayments for its domestic bonds denominated in cedis and/or raise more tax revenue. However, with IMF conditionality of zero-financing from Bank of Ghana, printing money to avert probable public debt default in August is plainly off the table. Government must then work hard and smart by innovatively raising more revenue from digitalization, setting appropriate rates to widening the tax net and discovering new sources of revenue. Indeed, the last thing this government should do is to shoot itself in the foot by defaulting on its sovereign debt as doing so may derail our current economic recovery efforts with IMF supported Post Covid-programme for economic growth (i.e. PC-PEG) and make things difficult for Ghanaians since many banks, pension funds and individuals have kept their assets in sovereign bonds.
Because credibility is at stake and the stakes are high, government of Ghana must act in good faith by promptly repaying its restructured bonds that fall due this month. Investors expect the government to meet its obligations. Ghanaians are anxiously waiting on how government repays its matured bonds to determine if NPP is a government that keeps its words. Yes, to gauge if NPP is caring enough to warrant breaking the 8 in the upcoming 2024 election. The entire world is watching to see how Ghana successfully handles its restructured domestic bonds. Government must then do all it can by rising to the occasion as default on its restructured domestic bonds will have dire consequences on not only its external debt restructuring but also on the general economic recovery process currently underway.