Debt cancellation holds major risks - 1st Deputy Governor

Although debt cancellation can provide enormous relief to enable countries deal with their current debt challenges, there are major risks involved, which include the signal it sends to the market about creditworthiness, Dr. Maxwell Opoku-Afari, First Deputy Governor of the Bank of Ghana, has told an international conference on financing low-income countries.

To help developing countries deal with the economic crisis caused by the Covid-19 pandemic, the G20 launched the Debt Service Suspension Initiative (DSSI), which freezes low-income countries’ external debt service payments to official bilateral creditors until the end of 2020.

However, not all eligible countries have taken advantage of the initiative, for reasons such as fear of losing access to private capital markets, which have become a major source of funding for the more mature developing economies.

Speaking this week on a Debt Sustainability Panel at the Centre for Global Development (CGD) Conference on Financing Low-Income Countries, the First Deputy Governor said, already, the announcement of the DSSI has contributed to the significant reductions in the sovereign bond spreads of most emerging market economies, including even those that did not participate in the programme.

He said the potential loss of market access in the medium to long term, the signal sent about a country’s creditworthiness, and the possibility of increased external funding costs are among the risks associated with signing up for any debt relief initiative.

Ghana, whose public debt stock rose to GH¢263.1bn at the end of July, equivalent to 68.3 percent of Gross Domestic Product (GDP), has not yet requested debt relief from its official creditors.

Forty-two percent of Ghana’s external debt stock is in the form of sovereign bonds, while one-fifth of the domestic debt stock is held by non-residents.

According to Dr. Opoku-Afari, due to the relatively complex structure of the Ghanaian debt stock, “debt management should include regular access to domestic markets, with keen attention to non-resident investors, regular access to the international capital market, maintaining a stable exchange rate and inflation, sustaining real sector growth at a rate enough to pay down existing debt, and minimising the interest cost on the various components of the public debt stock.”