Former Finance Minister Seth Terkper has urged government to use part of the Special Drawing Rights (SDR) money from the International Monetary Fund (IMF) to pay off the zero-coupon sovereign bond it issued earlier on in the year, as waiting for it to mature will be more expensive to the state.
The IMF last month made resources equivalent to US$1 billion available to Ghana in the form of a Special Drawing Rights (SDR) allocation to shore up government revenue which has significantly been affected due to the impact of the pandemic.
But before this resource became available, government, in April, issued a US$3 billion bond of which US$525 million was classified as zero-coupon at an issue price of 78 percent. The terms of a zero-coupon bond do not oblige the issuer to make periodic interest payments over its tenor like a coupon bond, but rather at the end of the bond’s tenor.
This essentially means that, investors have been given a discount of 22 percent of the value of the zero-coupon bond. Therefore, the actual money that will hit Ghana’s account from the issue of the bond is US$409.5 million, but the country will have to pay US$525 million at the end of the four-year tenor, indicating investors will make a return of US$115.5 million on buying the zero-coupon bond.
This, Mr. Terkper, in an interview with the B&FT said, is too expensive for the state to bear such a burden, hence, his call for part of the US$1 billion SDR to be used to retire the zero-coupon bond.
“If you look at the structure of that bond, there are two new elements to the zero coupon. One, you get the money at a discount, which means you are not getting the full amount of the loan. Then, the second element is that, even though we got less for the money, we have to pay the face value. And unlike the other sovereign bonds, the tenure is very short, as it is programmed to mature at 2025. This is debt which is staring Ghana immediately after the 2024 elections and that is what is called the rollover risk.
Given the situation that we are in now and the fact that we have become debt dependent, it means the rest of the budget is dependent on loans. Even if we are going to make a recovery and spend more on all the recurrent expenditure, it is going to take some time. Revenue is not flowing in, and initiatives to boost it takes some time to pick up. And that means in fiscal management, you have to be prudent and conservative and assume that you will not get the revenue, so we have to be planning for paying. And if we cannot repay from our own resources, then that is where my point comes in.
If you have a resource [the IMF US$1bn SDR] like this, you just don’t put everything in the budget. It’s just like when the oil revenue came in 2011, and later, about 2014 – thinking about debt – we could have used all the oil revenue for expenditure or consumption but we created a sinking fund which we used to pay of the first sovereign bond which was staring us in 2017. And in 2015 we used the entire loan from the sovereign bond to refinance to ease the pressure on the domestic market,” he said.
Responding to comments by Finance Minister Ken Ofori-Atta that the SDR funds will be used to support the budget, Mr. Terkper said such a move will only worsen the debt situation and will have severe impact on the economy.
“That would worsen the debt situation. If you say you are going to use it for capital expenditure, your debt will still be waiting for you. Your revenue is still not enough to service the current debt. So yes, you can spend it on current expenditure, your debt will be waiting for you; your zero coupon will be waiting for you.
The IMF itself in its release urged countries that have borrowed on account of COVID to use much of this resource to pay off. So what I am asking for is that, if you look critically at the budget, arrears should be a priority; we also have the debt situation; and most critical is the rollover risk.
The other element of the debt is that, we are borrowing for amortisation. So if you use part of this money to reduce debt, it means the pressure we are facing in taking current expenditure to pay for amortisation will be reduced,” he said.
