EXPLAINER: Debt restructuring and the ‘haircut’ policy

Following a debt sustainability analysis conducted by the International Monetary Fund, Ghana's debts have been found to be unequivocally unsustainable.

Therefore the government has announced a debt exchange program where domestic bondholders are being urged to voluntarily swap their bonds for fresh ones.

The government has also added that treasury bills and principals of government bonds will not be affected by the "haircut".

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Read the full story originally published on October 14, 2022, by GhanaWeb

Ghana’s growing public debt stock has become a matter of great concern as conversations with the International Monetary Fund for financial assistance continue.

The IMF team was in Ghana in the past weeks to perform a debt sustainability analysis to ascertain the country’s debt status.

But if the country’s debts are found to be unsustainable, the IMF may not provide financial assistance to the country.

So, the government may have to consider debt restructuring, a move many have already hinted at as a solution to the country’s high debt issues.

What is debt restructuring

According to Investopedia.com, debt restructuring is a process used by companies, individuals, and even countries to avoid the risk of defaulting on their existing debts, such as by negotiating lower interest rates.

Instead of waiting to go bankrupt, most institutions are advised to restructure their debt in a manner that gives them a longer duration to pay their debts or makes them less expensive.

Usually, when an agreement to restructure is reached, the lenders either decide to reduce the interest rates on loans or extend the due dates for the repayment of the credit facilities.

This gives the country or business ample time to pay their loans and avoid bankruptcy.

Also, when debts are restructured, it makes it less probable to default on loans as payment becomes more flexible.

In Ghana’s case, debt levels have been on the rise as inflationary pressures, coupled with a deteriorating exchange rate have caused Ghana’s debt to skyrocket to GH¢402 million as of July 2022.

However, even though experts have noted that a restructuring may be the country’s best option, they have also explained that this may have grave effects on domestic investors.

A ‘haircut’ policy on the other hand is a debt restructuring method where the remainder of the debt is written off or the interest rates are reduced to make them less expensive.

Other types of debt restructuring include Debt-for-equity swaps and Issuing callable bonds.