Debt exchange to recalibrate interest rate regime – Ofori-Atta

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domestic debt exchange programme

Finance Minister Ken Ofori-Atta has argued that the recently-initiated domestic debt exchange programme (DEP) will be a necessary tool to recalibrate the prevailing interest rate regime and return the country’s debt situation to more sustainable levels.

He, therefore, called on holders of domestic debt to voluntarily exchange approximately GH¢137billion of the domestic notes and bonds – including E.S.L.A. and Daakye bonds – for a package of new bonds to be issued by the Treasury.

The finance minister made this call during a press briefing on Monday, December 5, 2022, at the Ghana Domestic Debt Exchange Programme launch.

Currently, the Debt Sustainability Analysis (DSA) demonstrates that the country’s debt servicing absorbs more than half of total government revenues and almost 70 percent of tax revenues. Additionally, the total public debt stock, including that of State-Owned Enterprises among others, exceeds 100 percent of gross domestic product (GDP).

“The extent to which our interest charges consume some 70 percent and sometimes 100 percent of our revenues is something that is not sustainable, and this is really therefore a recalibration of the whole interest rate regime so that we move into a sustainable level.

“This demonstrates unequivocally that Ghana’s public debt is unsustainable, and that government may not be able to fully service its debt down the road if no action is taken,” he admitted.

Government’s key objective for this programme, Mr. Ofori-Atta added, is to alleviate the debt burden in a “most transparent, efficient and expedited manner” by means of an Exchange offer while minimising impacts of the domestic debt exchange on investors holding government bonds.

Elaborating on modalities, the finance minister said under the arrangement government proposes to exchange existing domestic bonds as of December 1, 2022 for four new bonds maturing in 2027, 2029, 2032 and 2037. These new instruments will pay no interest in 2023, 5 percent interest in 2024 and subsequently 10 percent interest per annum until maturity.

“The predetermined allocation ratios are: 17 percent for short-term bonds, 17 percent for intermediate bonds, 25 percent for medium-term bonds and 41 percent for long-term bonds,” he added.

This, when completed, will afford government some fiscal space to operate as it envisages reducing, particularly, the domestic interest cost in 2023 – which is estimated at GH¢31.29billion out of the total GH¢52.55billion.

Citing instances of such domestic debt operations in the last 10 years, Mr. Ofori-Atta noted that Jamaica resorted to such operations in the past, notably in 2010 and 2013: “…in both cases, it chose to trust the sense of responsibility of the Jamaican people and proceeded through a voluntary approach. This approach was highly successful, as more than 99 percent of domestic bondholders participated in the exchange”.

NO Principal Haircut

The minister emphasised that the arrangement does not embed any principal haircut on eligible bonds, as promised.

“Let me repeat this fact as plainly as I can: in this debt exchange, individual holders of domestic bonds are not affected and will not lose the face value of their investments. So let us remove any doubt and discard any speculation that government is about to cut your retirement savings or the notional value of your investments. That is not the case,” he said.

In effect, Treasury bills are completely exempted, and all holders are expected to be paid the full value of their investments on maturity.

“There will be no haircut on the principal of bonds. Individuals who hold bonds will also not be affected at all.

“This domestic debt exchange is part of a more comprehensive agenda to restore debt and financial sustainability. This is a key requirement to allow Ghana’s economy to recover as fast as possible from this crisis. This is also a key requirement to secure any IMF support. We are also working toward a restructuring of our external indebtedness, which we will announce in due course,” Mr. Ofori-Atta said.

Financial Stability

To bring the metrics within prudential confines, particularly in view of securing a bailout from the International Monetary Fund (IMF) for the 17th time, Mr. Ofori-Atta during the 2023 budget presentation confirmed there will be a restructuring of outstanding facilities under a Debt Exchange Programme.

During a televised broadcast 10 days after the budget presentation – on the eve of the DEP’s formal launch – the finance minister provided preliminary details of its broad application.

To mitigate the plan’s sizeable impact on financial institutions – banks, pension funds, insurance companies, fund managers and collective investment schemes (CISs) – government announced the establishment of a Financial Stability Fund (FSF) in collaboration with development partners to provide liquidity support to ensure they are able to meet their obligations to clients.

Additionally, during the broadcast Mr. Ofori-Atta stated that his outfit is working with the financial sector’s various regulators to “put in place appropriate measures and safeguards to minimise the potential impact on the financial sector and ensure financial stability is preserved”.

Already, the Bank of Ghana (BoG) has expressed a willingness to support regulated entities, especially banks which have a high level of exposure to Treasury securities, to remain liquid and solvent.

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