Both at the individual and institutional level, debt can be a powerful instrument for good or bad effects. States rely on borrowed funds to build or repair vital infrastructure aimed at improving quality of life and to spur economic growth. All over the world, long-term debt – bonds maturing in 10 or more years – are used to fund capital projects such as roads, bridges, ports, houses, schools, colleges and universities among others. But governments may not have enough revenue to finance large expenses simultaneously, so they borrow and spread debt-costs over time to generations of taxpayers.
Given Ghana’s current debt profile, generations yet unborn will be compelled to pay debts they did not consent to. Ideally, if past and current governments had prudently invested borrowed money, future generations would reap the benefits; in which case, helping to pay the debts would be fair to them. Unfortunately, that is not case – as we continue borrowing to service debts while underinvesting in the productive sector, to the detriment of current and future generations.
While governments are under obligation to borrow to finance capital expenditure, payment of such debts and interests accruing often become a matter of contention between governments and lenders. While governments have some authority over the path to debt settlement, a wrong path can create economic and financial instability…judging from previous debt management deals in Argentina and Mexico. Two options are the state-centred approach and society-centred approaches to debt management. Government can use the state-centred approach: that is, the use of legislation and policy to reschedule foreign and domestic debts, with dire consequences for holders of government bonds and securities or the society-centred approach which accounts for stakeholder interests.
State-centred approach
It is now clear that the domestic bond deal is a condition of the IMF bailout, which the government is using as a last resort and is being backed by legislation. In the Amended and Restated Exchange Memorandum of the domestic debt management agreement, it is clearly stated that the Republic of Ghana is a sovereign state; and consequently, it may be difficult for Eligible Bond Holders to obtain or realise awards against the Republic.
The Republic has submitted to the jurisdiction of the courts of Ghana and waived any immunity from the jurisdiction (including sovereign immunity) of such courts in connection with any action arising out of or based upon the Invitation to Exchange or any securities issued under the Invitation to Exchange brought by any holder of such securities.
The Republic has not, however, waived immunity from execution or attachment in respect of its assets in some cases. In my opinion, this is a clear use of state power to dictate terms of the debt rescheduling while absolving government officials from future legal action. This is the approach Ken Ofori-Atta chose, and I wonder whether this approach had the consensus of all Economic Management Team members. To what extent was the Vice President, Dr. Mahamudu Bawumia, involved in this debt management deal. To what extent is the Vice President playing his role as head of the Economic Management Team?
Society-centred approach
The other option government could have used is the society-centred approach. This involves putting a human face to managing the debt. This demands broader consultation with stakeholders, especially institutional and individual bond holders who responded to government’s invitation and purchased bonds to provide liquidity so government could undertake infrastructure development.
Bond issuance is a time-tested approach for government borrowing, even in developed countries. However, negotiating domestic debts requires more than just using state-power as government is currently doing. In fact, I am more inclined toward using the society-centred approach to debt management than the state-centred approach – for the simple reason that ordinary people must not be punished for dealing in government bonds and securities. Given the continuing impasse between government and various interest groups, I suggest that the 31 January deadline for acceptance be reconsidered to make room for a critical review of the deal.
That said, it is good news that the Council of State has joined the brokering and negotiation of the debt management, and is thus holding broader discussions with stakeholders. It will be in the interest of all parties for the Council of State not to just push state interest over individual and institutional interests, since people’s livelihoods are at stake.
Therefore, the negotiation should aim at promoting a win-win outcome. In fact, where necessary the Council of State should advise government to back away from the debt exchange deal in its current form. While acknowledging that the IMF bailout remains one of the key strategies for government’s debt management, its government’s Economic Management Team should fashion out an alternative to the current debt deal.
Purpose of borrowing
African states, including Ghana, commonly borrow to finance budget deficits; for monetary policy management purposes; to obtain foreign currency for balance of payments support; to build foreign currency reserves; or to refinance loans. The key issue is borrowing to finance expenditures that do not fall within state policy on the use of resources, if indeed there is any such. For this reason, the purpose of borrowing must be prescribed in state legislation. This requires countries to establish a Medium-Term Debt Strategy (MTDS) to guide their public borrowing activities.
In a nutshell, prudent debt management frameworks should restrict government borrowing so that it only serves critical needs, and also safeguard against abuse. I am not sure if borrowing to pay-off debts as the present government did was a prudent decision. With hindsight, government should have allowed some of the debts to reach their maturity – but with a payment plan to ensure that the financing needs and payment obligations were on track. I stand to be corrected, though.
Poorly-structured debts
The IMF recognises that poorly-structured debt in terms of maturity, currency or interest rate composition have been important factors in inducing economic and financial crises in many countries across the world. Financial crises have often arisen because of an excessive focus on possible cost savings associated with large volumes of short-term or floating rate debt. This has left government budgets seriously exposed to changing financial market conditions – including changes in the country’s creditworthiness, when debts must be rolled over.
Also, excessive reliance on foreign currency debt can lead to exchange rate or monetary pressures if investors become reluctant to refinance government’s foreign-currency debt. This is what happened to Ghana when foreign-currency bond holders withdrew their investments at short notice. With a government’s debt portfolio usually constituting the largest financial portfolio in the country, it was only a matter of time before foreign-exchange bond holder’s withdrawals affected Ghana’s balance sheet and the country’s financial stability. In the long-term, government must respect a debt-ceiling (debt to GDP ratio) to determine the maximum amount of debt governments can borrow externally.
Transparency
Henceforth, government must adopt the practice of disclosing debt management information to stakeholders in order to avoid any future debt exchange programme being engulfed in uncertainty. Moving forward, our laws should require that the finance ministry accurately reports to parliament and publishes debt management reports periodically; including debt management strategies and borrowing plans. In other words, there should be enough information on Ghana’s debts for all of us to use in holding present and future governments accountable for borrowing and debt management decision-making.
In fact, the current debt exchange is shrouded in secrecy to the point of creating uncertainties about Ghana’s future economic prospects. In the past, lack of clarity with respect to the objectives for borrowing created uncertainty within the financial community. This reduced our sovereign rating and increased debt servicing costs, because investors incur costs to monitor and interpret government’s objectives and policy framework.
In the context of macroeconomic stability, governments should seek to ensure that both the level and rate of growth in their public debt is sustainable and can be serviced under a wide range of circumstances, while meeting cost and risk objectives. Several debt-market crises have highlighted the importance of transparent and sound debt management practices, and the need for an efficient and sound capital market. Even in situations where there are sound macroeconomic policy settings, risky debt management practices increase the economy’s vulnerability to financial shocks.
Public action
The IMF has suggested that governments should regularly publish information on the stock and composition of its debt and financial assets; including their currency, maturity and interest rate structure. The public sector’s financial position should be disclosed regularly. It is also important that the tax treatment of public securities be clearly disclosed when they are first issued. Besides, the investing public has a stake in governments’ borrowing and interest payments – so should be able to ensure they do not reach unsustainable levels that jeopardise their investments, like what is now unfolding. In fact, the loss of confidence in government bonds and securities will take years to reverse unless the current situation is managed prudently and swiftly.
Moreover, Parliamentary Committees can play an important role in ensuring that officials of the Ministry of Finance and other ministries entrusted with debt management are compelled to transparently disclose their expenditure, and must be held accountable for non-disclosure. Furthermore, the Public Accounts Committee should ensure that public debt activities are aligned with the country’s laws.
Despite the constitutionally guaranteed role of Public Accounts Committees in controlling public management debts, the laws of most African states make them irrelevant. For years now, Ghana’s Public Accounts Committees have presented adverse findings against state agencies and public officials for misappropriating public funds, but no prosecutions have occurred – and besides, very little effort has been made to retrieve public funds.
The practice of auditing public debt management activities and policies is another important way to ensure transparency in public debt management. In most African countries, the Auditor-General has the mandate to promote transparency in public expenditure management and ensure debt activities adhere to the law. But the Auditor-General’s offices in many African countries, including Ghana, are often subservient to the desires of government and public officials.
References
IMF. 2011. Guidelines for Public Debt Management
Soko, B. 2022. Debt management and governance in Africa. Friedrich-Ebert-Stiftung & African Union.
