Government considers building buffers to strengthen debt repayment capacity

Government is contemplating a plan to build financial buffers and enhance its debt repayment capacity, following the completion of external debt restructuring with the official creditor committee (OCC) and Eurobond holders.

Dr. Mohammed Amin Adam, Minister of Finance, during a recent media briefing mentioned this strategy that aims to capitalise on debt relief and economic growth to prepare for future debt obligations.

The minister clarified that while recent debt cancellations and restructuring don’t provide immediate cash inflows, they offer vital financial breathing room.

“The savings and cancellation are not bringing us physical cash,” Dr. Adam said. “What we would have paid, we will not pay.”

Government is considering an approach inspired by strategies employed during the Highly Indebted Poor Countries (HIPC) era. Dr. Adam explained: “Like the HIPC era, when debt service was budgeted for and that amount put into a special account to do what we called HIPC projects. It’s one way of handling this”.

Central to this potential strategy is the utilisation of Ghana’s existing sinking fund. As the economy grows and revenues increase, government is exploring the possibility of making specific allocations to this fund.

“You could do allocations specifically for the sinking fund to increase your debt repayment capacity in future,” Dr. Adam noted.

The plan under consideration also involves implementing reforms to source additional funding for the sinking fund, including improving the financial management of state enterprises. The minister suggested government could decide that dividends paid by the state enterprises should go to the sinking fund also, to build the needed buffers.

This proactive approach aims to create a financial cushion for future debt repayments. The finance minister emphasised: “Even though we are not willing to pay this money, we need to build buffers in readiness to repay; so that when it’s time, when it’s due, then it is easier for us to repay”.

Samuel Danquah Arkhurst, Chief Economics Officer and Director of Treasury and Debt Management Division at the Ministry of Finance, provided context on the debt relief aspects. He highlighted significant reductions in interest payments and debt stock, particularly concerning Eurobonds.

“With regard to the Eurobond, we have total reduction of interest payment by US$4.4billion for the period 2023 to 2026,” Mr. Arkhurst explained. He also noted a 37 percent nominal haircut on Eurobonds, resulting in a US$4.7billion debt cancellation.

Ghana’s debt restructuring journey began in December 2022, with the announcement of a debt standstill. After months of negotiations, agreements were reached with official bilateral creditors and Eurobond holders in June 2024.

The restructuring of official bilateral loans is expected to lead to significant debt service relief. Mr. Arkhurst elaborated: “So we are suspending; that is still a relief, because you don’t have to create funding to pay for it now. So you are suspending an amount of US$2.8billion which you have accumulated for 2023 to 2036.”

For Eurobonds, the agreement involves a 37 percent nominal principal haircut – equivalent to a 45 percent market value loss – resulting in substantial debt cancellation and debt service savings.

Dr. Adam emphasised that these are still proposals under discussion. “…and government really will look into all these proposals and take a decision on the best way forward to make the best use of savings we are making from this debt restructuring,” he stated.

Government is also considering using these potential savings for development projects, similar to the HIPC-era initiatives. “We could also do projects like we did for HIPC. You can call this one, we won’t call it Eurobond projects or OCC projects. We can find a convenient term for that,” Dr. Adam proposed.

The success of this approach will likely depend on several factors, including sustained economic growth, effective implementation of proposed reforms and continued support from international partners.

The upcoming mid-year budget review is expected to provide more detailed figures and potential adjustments reflecting these debt relief measures. This review will likely offer a clearer picture of how government intends to leverage the newfound financial flexibility to strengthen Ghana’s economic position and prepare for future financial obligations.

The proposed buffer-building strategy represents a forward-thinking approach to debt management, aiming to prevent future crises and ensure Ghana’s long-term financial stability. By learning from past experiences and adopting proactive measures, government hopes to create a more resilient economic framework that can withstand future challenges and support sustainable development.