Analysing impact of the Debt Exchange on financial and real sectors of the economy

GSIA debt exchange programme

This study set out to analyse the impact of Ghana’s debt exchange on the financial and real sectors of the economy. Data for the study were collected from the secondary sources Based on the monthly bulletin published by the Central Securities Depository for September 2022, the total bonds and domestic notes issued by government were GHS 160.1bn. Banks were the largest holders with 31.6%, Firms & Institutions with 25.3%, Others (including retail) with 13.9%, Foreign Investors with 10.8%, Bank of Ghana with 10%, Pensions with 5.6%, Rural Banks with 1.4%, Insurance Companies with 0.9% and SSNIT with 0.4%. T-Bills represented 16.4% of total securities, medium tenor bonds (2yrs to 5yrs) are 49.5% and long tenor bonds (6yrs and above) are 34.2%.

Accordingly, the Ministry of Finance announced that eligible domestic bonds and notes of GHC 137.3 billion will be split into four (4) new amortizing bonds maturing in 2027 (17%), 2029 (17%), 2032 (25%) and 2037 (41%) paying equal step-up coupons of 0% in 2023, 5% in 2024 and 10% from 2025 onward to 2037. Data were analysed using the total NPV of Bond values of domestic banks, Bank of Ghana, firms and institutions, foreign investors, pension funds and rural and community banks from Ghana’s debt exchange program. Findings showed that using NPV of Bond values of local banks, firms and institutions, foreign investors, Bank of Ghana, Pension funds and rural and community banks of GHC367,635,790,772 with estimated net present value losses of GHC76,215, 595,896. The research limitation is the exclusion of the retail and individual investors holding about GHC 22.8 billon (13.9%) of the total domestic debt from the debt exchange. In principle, all the government’s domestic debt liabilities must be included in the debt exchange program. According to Breuer, IIyina and Pham (2021), some creditors may try to use their political influence to protect themselves from burden –sharing, thereby shifting the burden of the adjustment to other creditors. But casting the net wide and relying on voluntary mechanisms could have helped in boosting participation in the debt exchange by lowering the relief sought from each creditor group. Originality/Value of paper. The value of the paper lies in that the results provide, for the first, evidence of how the Ghana’s debt exchange impact on the financial and real sectors of the economy.


 Maturity period extended to 15 from 5yrs with an average rate of 10% from 22% Interest Savings to GoG
62,409,090,909 62,409,090,909
0.8 0.6
 BoG 47,468,850,737 39,317,773,926 8,151,076,811
230,000,000,000 230,000,000,000
0.8 0.6
 Banks 174,939,828,645 144,900,171,934 30,039,656,711
184,090,909,091 184,090,909,091
0.8 0.6
 Firms & Inst 140,021,009,093 115,977,410,343 24,043,598,751
67,401,818,182 67,401,818,182
0.8 0.6
 Foreign Investors 51,266,358,796 42,463,195,840 8,803,162,956
30,909,090,909 30,909,090,909
0.8 0.6
 Pension Funds 23,509,700,292 19,472,750,379 4,036,949,914
8,737,272,727 8,737,272,727
0.8 0.6
 Rural Banks 6,645,639,103 5,504,488,350 1,141,150,754
 Estimated gain to government/loss to bondholders 76,215,595,896


The estimated bondholders’ net present value losses could have negative and significant impact on Ghana’s economy. Given that Ghana’s financial system held large amounts of government debt (51.6 per cent of the domestic debt stock), the expectation is that a collapse in confidence in government of Ghana solvency would lead to large‐scale deposit runs and a credit crunch.  Some of Ghanaian domestic banks could face the associated risk of deterioration in the credit quality ratio. Some financial institutions may not be able to make adequate provisions for these risks and would have to curtail lending as their balance sheets shrink.  Consequently, as the Russian experience demonstrated, implementing a liability management operation without full support from the financial sector can be catastrophic. In July 1998, Russia attempted a debt swap of short‐term Ruble Treasury Bills (GKOs) for new long‐term Eurobonds as part of a multilateral rescue program that included fiscal and structural reforms as well as a substantial liquidity injection. However, the liability management operation triggered a currency and debt crisis. This was in a context where the market realized that the debt swap would not result in transformation to public debt sustainability.

Consequently’ there were sharp jumps in bond yields reflecting significant devaluation and default risks. The debt exchange perception has increased risk of Ghana government securities as expected to significantly blunt confidence in the Ghanaian economy in general, thereby affecting the creditworthiness of private institutions as well individuals. This would translate into a further cut in letters of credit lines to domestic banking institutions, which would have grave implications for external trade and the stability of the foreign exchange market. Ghana had already suffered the effects of cuts in credit lines and margin calls as a result of the downgrade by international credit rating agencies since the beginning of 2022. Further withdrawal of credit lines and margin calls would be devastating to the payments system, financial markets and the economy in general.

Ghana debt exchange program can have an adverse impact on the financial sector   for several reasons. First, the asset side of banks’ balance sheets may have to take a direct hit from the loss of value of the restructured assets, such as government bonds. Second, on the liability side, banks could experience deposit withdrawals and the interruption of interbank credit lines. These issues can negatively affect their ability to mobilize resources at a time of stress. Finally, restructuring episodes have also triggered interest rate hikes, thereby increasing the cost of banks’ funding and affecting their income positions. Together, these factors may impair the financial position of domestic institutions to such a degree that financial stability is threatened and pressures for bank recapitalization and official sector bailouts are increased. However, as an incentive, to improve financial stability the Bank of Ghana has established financial stability support fund of GHC 15 billion (US$1.2billion) to support financial institutions participating in the debt exchange program. In addition to financial stability fund, Bank of Ghana has issued policy and regulatory reliefs for domestic banks to address potential impacts for the banks participating in the debt exchange. Whether these policies will be addressed potential risks in debt exchange we must wait as see

Another observation is that Ghana’s debt exchange program could have cross-border implications for banks from Nigeria, Togo, South Africa, France, United Kingdom and Trinidad and Tobago.  Banks and financial institutions exposed to sovereign risks in a country that undergoes restructuring could transmit the shock across borders, either directly by loss of value of government securities or indirectly through their exposure to the banking sector of that country. Among the larger restructuring episodes, German banks and funds were most heavily exposed to the Russian default of 1998, and U.S. financial institutions and European retail investors were most affected by the Argentine default and debt exchange of 2001–05.

In terms of the banking sector regulation, the Basle Core Principles recommended specific risk weights to various asset categories, against which proportionate capital is required to be held.  Prior to the debt exchange, the regulatory authorities applied a zero weight (implying zero risk) to domestic and foreign currency government of Ghana bonds and notes on the basis of the Government’s strong track record and commitment to debt repayment and the supporting constitutional provisions in this regard. A rating downgrade of government of Ghana debt to default or restructuring into debt exchange would automatically place this debt in the category of impaired and poorly rated assets, thus immediately triggering higher risk weighting and provisioning requirements applicable to such categories of assets.  The risk weight normally applicable would be at least 100.0 per cent and would thus require very significant increases in capital of the entire financial system.  A further point to note is that the financial sector, especially securities dealers, held a significant level of government of Ghana debt in the trading book against which it would have to absorb losses from falls in market value consequent on further rating downgrades. Because of the above, Bank of Ghana has recently issued policy and regulatory reliefs for banks to address potential impacts for the participation in the government domestic debt exchange. As researchers, we may have to wait the for potency, efficacy and effectiveness of the regulatory directives.

There is also a real risk of capital flight and financial market instability associated with these types of liability management program. In the case of Uruguay, which undertook similar ‘market friendly’ debt exchange to Jamaica, within six months of the announcement of the restructuring program in April 2003 capital outflows surged by over 700.0 per cent. The outflows continued into the following year. Although not as severe, Ukraine had a similar experience. Ghana would not be able to withstand even a mild form of capital flight in the recessionary periods surrounding debt exchange. This would precipitate massive exchange rate depreciation and general macroeconomic instability.  The tightening of monetary policy that would be required to restore stability would lead to higher debt service costs to the Government and defeat the main objective of the debt swaps. By the same token, the further weakening of the Ghanaian economy would work against any improvement in the country’s fiscal and debt profiles There is also strong evidence that domestic debt crisis coincides with a banking and/or a currency crisis, resulting in considerable output losses over the medium term. The implication is that it may be less costly to program a measured amortization of debt than to restructure debt.  However, the costs and consequences of debt exchange should be carefully considered and compared with the alternative of not restructuring. There appeared to be reputational spillovers from sovereign default and restructurings such as debt exchange on other parts of the economy, in particular foreign direct investment and access to credit. Countries such as Ghana that undergoes debt exchanges typically see a drop in private sector access to external credit, of up to 40 percent in each year with ongoing debt renegotiations (Arteta and Hale, 2008; and Das, Papaioannou, and Trebesch, 2010). Other research suggests a drop in foreign direct investment flows of up to 2 percent of GDP per year (Fuentes and Saravia, 2010).

However, on the positive front, if the debt exchange is fully participated by all local bond holders, debt service relief from the debt exchange program along with stronger fiscal consolidation efforts will assist the government in bringing debt on a sustainable path by 2028 to 55% debt to GDP. According to Reuters Daily Briefing of 15/122022, Pine-Bridge Investments advocated that if the debt exchange program if fully participated by all local bondholders, the government of Ghana could save as much as equivalent of 8% of GDP in 2023 whilst Barclays Analyst Michael Kafe (15/12/2022) calculated cash flow savings of total US$7.1 billion between 2023-2028. The debt exchange transaction could significantly reduce the burden of interest repayments on the Government of Ghana; the initiative will release approximately US$ 1.2 billion in interest savings each year in 2023,2024, 2025, 2026,2027 and 2028, or 8% of GDP. From the above that debt exchange if successful, it will provide significant fiscal space for the government of Ghana whilst local bond holders will suffer significant losses for their investment in government domestic bonds.

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