Will the economy crash if Ghana does not get an IMF deal by mid-March? - Explainer

The Minister for Finance, Ken Ofori-Atta, has warned that Ghana's economy might crash if the International Monetary Fund (IMF) bailout the government is seeking is not completed by the middle of March 2023.

The Government of Ghana and the IMF reached a Staff-Level Agreement (SLA) in December 2022 for the $3 billion bailout. But for Ghana to get the bailout, it must get the approval of the IMF board after proving that the country’s debts are sustainable, which has now become a matter of contention.

To prove that the country's debts are sustainable, the government must drastically reduce its expenditure, which is made up of capital and current expenditure, including interest payments on Ghana’s debt, the purchase of goods and services, as well as the compensation of workers.

However, it appears that the Nana Addo Dankwa Akufo-Addo government has chosen to reduce its interest payments by deferring them for several years via its Domestic Debt Exchange Programme (DDEP).

However, not everyone to whom the government owes money has agreed to defer payment and has refused to sign on to the voluntary DDEP.

Current situation:

With the DDEP, the government is seeking to restructure approximately GHC137.3 billion of the domestic debts it accrued through bonds it issued including the E.S.L.A. Plc and Daakye Trust Plc and per the requirement of the IMF, 80 per cent of the country’s total debts must be subject to this debt exchange programme.

But the deputy Minister for Finance, Abena Osei-Asare, has indicated that as of February 9, 2023, only 50 percent of government bondholders had signed on to the debt exchange programme.

The entities that have agreed to participate include banks, insurance companies, other financial institutions and the Bank of Ghana. The only group of people who are not totally on board with the DDEP are individual bondholders who have rejected several compromises by the government.

The government has extended the deadline for participation in the DDEP three times with different terms to encourage participation. The deadline for participation in the DDEP was extended again to February 10, 2023 but this time around the government explained that it was because of technical problems.

So, as it stands now, only about 50 percent of government bondholders have agreed to participate in the DDEP instead of the required 80 percent needed to prove that Ghana’s debt is sustainable for the IMF bailout to be completed.

Why the government needs DDEP and hence the IMF deal done:

Not getting the IMF deal done by March will mean that the government will not have access to the $3 billion which is needed to help resolve the balance of payment difficulties of the government. In other words, the $3 billion bailout will inject foreign currency into the system, which is required for Ghana’s import needs and will, to some extent, help stabilise the country's currency.

But, is Ofori-Atta saying that the $ 3 billion bailout will solve all of Ghana's problems which is why the DDEP must be successful? No.

The debt operation will also alleviate the pressures on the national budget and restore debt sustainability. That is, with the government deferring its debts for several years, it will not be under pressure to pay them. The spacing of the debts also makes it easier for the government to repay the debts, hence the country’s debt becomes sustainable.

Possible consequence

1. Continuous depreciation of the Ghana Cedi

With the government not getting the much-needed balance of payment support from the Fund (the $ 3 billion bailout), Ghana’s currency, the Ghana cedi, will continue to depreciate due to continuous pressure for foreign currency for imports. The depreciation of the cedi has its consequences, which will be stated later.

2. Chaos in the financial sector

Most financial institutions in Ghana including banks invest vertically all their capital in government bonds. The government is currently broke and it will not be able to pay institutions that have lent it money. Therefore, these financial institutions will not also have the money to pay their depositors and people who have invested in their private bonds.

So, there will be a situation of people queueing at banks and other financial institutions and not getting their monies as is currently being seen at some banks – just that this time around it will be worse.

Economist and financial analyst, Joe Jackson, has warned of this consequence of the debt exchange programme failing.

“If we don’t achieve our debt right, if we have to stress them again then IMF will not come when it is due or back off and then, the chaotic debt reforms we are trying to prevent will now happen with all the dark consequences of not being able to access any funds anywhere,” he is quoted by 3news.com

3. Stalling of government projects:

Another consequence is that with a government broke, a government whose access to the international market has been blocked and a poor domestic money market, government projects which have not been pre-financed will be stalled because there is no money to continue them.

4. Inflation:

With the Ghana cedi depreciating, one direct effect is an increase in the price of fuel products, which will almost certainly lead to an increase in the price of goods and services, aside from the fact that depreciation has an upward pressure on the prices of imported goods and services. So, if the DDEP is not done by March, the astronomical increases in prices are likely to continue.

The Bank of Ghana with the government being broke will be forced to print money to finance the government’s budget as it did in 2022 (printing over GHC45 billion) and might be currently doing. The government injecting more money into the system without any significant increase in the supply of goods is likely to lead to inflation, as economic theory propounds.

5. Collapse of business and unemployment

One of the consequences that most people are concerned about is the collapse of businesses and an increase in unemployment if the IMF programme is not sorted out fast.

The first group of businesses many analysts have predicted are likely to go down, which are already struggling, are banks and other financial institutions. Financial institutions not getting the capital they have invested in government bonds consistently will not be able to operate effectively which will force some of them to close down leading to people losing their jobs.

A lot of private businesses have their capital in banks, which means that they are likely to collapse if their capital gets locked up, leading to more unemployment.

The government also not having money to pay its workers will be forced to lay off public sector workers.

Way forward

It is not clear what the hold-up with the DDEP is because the only group of people who have objected to participating in the programme are groups of individual bondholders.

Many experts including the immediate past Minister for Trade and Industry, Alan Kyeramaten, have said that the government does not need to include individual bondholders in the programme because only 80 percent of its debts are required to be part of the programme.

"The requirement under the funds (the International Monitory Fund’s) parameters is that 80 per cent of your total debts must be subject to this exchange... institutional holders have almost about 70 per cent (of the government’s debts) and 15 per cent is held by the Bank of Ghana.

“So, if you combine Bank of Ghana and let's say the banks, insurance and other entities, you will have more than 80 per cent of the total bondholders that will have been subject to this debt exchange in which case the vulnerable groups that you are protecting are not up to 20 per cent,” he explained.

Finance expert, Prof Williams Kwasi Peprah has also re-echoed the point made by Alan Kyeremanten.

“If you look at the entire domestic bond portfolio in Ghana, individual bondholders are less than 20%...So, if all individual investors decide not to buy into government programme, the government will still achieve a significant 78-80% of the said target which is in the hands of institutional investors excluding pension funds which is 1,” in an interview with Accra-based Asaase Radio on February 10, 2023.

So, hopefully, the government will resolve the challenges it is having with the DDEP so that it can close the IMF deal and avert the consequences stated above.

Also, some experts including the Dean of the University of Cape Coast, Prof John Gatsi, have said that nothing shows that the Ghanaian economy will crash without securing an International Monetary Fund bailout.

Commenting on the deadline of the DDEP on Morning Starr with Francis Abban, Prof Gasti stated the Finance Minister is painting a picture as if the nation is at war hence everybody should sacrifice.

“Now, we are saying that if they don’t get the IMF deal in March the economy will collapse, collapse how? Because there is nothing in the government arrangement that shows that we are in a dire economic situation and that if we don’t sign the IMF deal by March we will collapse. The expenditure arrangements do not reflect that,” he said

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