By Jonathan S.K. AMABLE
– How do we stable the bolted horses?
…In the first part of this series, we set the context for this paper, highlighting the dividends our forebears expected our democracy to yield and the broad framework for actualising the dividends of equal opportunity and prosperity for all.
In this second part, we continue to examine the causes of our national economic woes and what it will take to successfully achieve the key planks of the new Government’s economic reset agenda
The sorrows of our forebears
In its inaugural Finance and Prosperity Report, which was published in 2024 to focus on the sovereign-bank nexus (i.e. the relationship between a country’s government and banking sector), the World Bank analysed data from emerging and developing economies (EMDEs) such as Ghana and found that between “2012 and 2023, the exposure of banks to government debt in EMDEs rose by over 35 percent as governments borrowed more, partly to deal with the COVID-19 pandemic.
The exposure rose even more- by over 50 percent- in debt distressed countries. A moderate increase in government debt holdings by banks can reflect healthy financial sector deepening and development. However, these exposures currently stand at a decade high and subject the financial sector to additional risks through elevated government debt and fiscal pressures.
Countries with a high sovereign-bank nexus also tend to be less prepared to deal with financial stress, which can amplify adverse feedback loops. This heightened potential for financial stress contagion could threaten macroeconomic and financial sector stability. Even a 5 percent loss on banks’ government debt would render one-fifth of sample banks in debt-distressed countries undercapitalized, potentially precipitating a banking crisis. Such crises – especially joint banking-government debt crises – have been very costly throughout history.”
This underscores the importance of ensuring that the treasury instruments which create these risks are issued on the back of documentation which clearly sets out the legal rights and duties applicable to holders of these instruments. Secondly, this approach enables Parliament to play its oversight and financial control roles more effectively. Through Parliament’s ability to approve debt ceilings, maximum interest rates and other key terms of loan agreements and debt securities, Parliament can prevent the Executive from driving up interest rates in, and crowding the private sector out of, the capital/money markets.
Under the current dispensation, the Executive is a law unto itself, with the Ministry of Finance determining which interest rates are acceptable. Consequently, the Executive is able to dispense with these limitations where it is politically expedient regardless of the broader economic implications. For instance, the Ministry of Finance refused to accept the bids submitted at its auction of treasury bills on 3 March 2023 because it considered the 30percent interest rate being quoted to be too high. The Executive subsequently accepted bids at even higher rates as its financial situation became dire.
Any serious attempt at facilitating economic recovery must increase access to capital for small and medium sized enterprises (SMEs). This means diversifying funding sources by leveraging the capital markets and fintech products such as crowdfunding platforms to complement traditional banking channels. In fact, crowdfunding was borne in the US out of a deliberate policy to increase the funding sources available to SMEs and spur economic recovery through an entrepreneurial drive, after the global financial crisis of 2007/2008.
We have recently created the regulatory framework for crowdfunding in Ghana; however, with current treasury bill rates trending around 30percent, all investors (including the financial institutions that are responsible for financial intermediation) are bound to channel their investible resources into treasury bills or seek investments which provide similar returns, leaving SMEs without access to the capital they require to produce more, hire more and spur economic growth.
By way of a final illustration, we have also convinced ourselves that the constitutional requirement to seek prior parliamentary approval of the terms and conditions of new loan transactions does not apply to loan transactions between the Executive and the Bank of Ghana. Conventional economic wisdom indicates that excessive central bank financing of government expenditure is a chronic source of inflation.
In fact, this view has led many countries to reform their central bank legislation in order to restrict such practices, and the IMF has observed that ‘limiting such financing is critical for building central bank credibility, which is a key ingredient for achieving monetary policy effectiveness’. The relationship between central bank financing of budget deficits and inflation suggests that this form of borrowing is among the most pernicious forms of debt financing the Executive can undertake. As already stated, Ghana’s recent economic challenges lend credence to this view – the IMF 2023 staff report on Ghana provides that (among others) “large monetary financing of the government pushed inflation up to 54 percent in December 2022”.
In recognition of this fact, the conditions for securing our US$ 3 billion bailout package from the IMF included a requirement for the Executive to enter into a memorandum of understanding with the Bank of Ghana under which both parties have agreed to zero central bank financing. The fact that it took a non-Ghanaian (and not the Parliament of Ghana, based on its constitutional financial control mandate) to prevent the Executive from borrowing from the Bank of Ghana, demonstrates how much we have strayed from our forebears’ intentions.
It must be stated emphatically that Parliament has contributed to our current predicament by failing (as an institution) to actively and jealously safeguard and enforce its oversight mandate. Business-as-usual in Parliament has meant that the majority consistently seeks to facilitate government business and fiscal measures regardless of its public interest implications, creating the impression that parliamentary oversight is the preserve of the minority in Parliament. The recent debt restructuring exercise paints a clearer picture of how Parliament’s oversight mandate has been undermined and eroded.
The Executive did not lay the new terms of the restructured domestic debt before Parliament for approval before issuing new instruments to investors under debt restructuring agreements. The 8th Parliament did not even raise an alarm when the revised terms agreed with the Eurobond holders were implemented without recourse to Parliament. Meanwhile, the Executive’s agreement in principle with the Steering Committees of the Eurobond holders included revised financial terms such as payment of consent fees and special consideration payments, as well as new amortisation schedules and maturity dates.
Further, the restructured Eurobonds include new non-financial terms such as a most-favored creditor clause that requires the Government to prevent certain creditors from receiving better net present value terms. The restructured Eurobonds also create a liability for the Government to pay loss reinstatement until 2032 if certain events occur; contain an estoppel provision that precludes the Government from raising legal challenges to the validity of the new bonds; and require the Government to pay liquidated damages (based on the loss reinstatement measure) in the event that the Supreme Court of Ghana declares that the restructured Eurobonds are invalid under Ghanaian law (which is obviously the case because the Executive did not seek prior parliamentary approval of the restructured terms).
These failures represent a new low in terms of Parliament’s abdication of its constitutional oversight role because prior to the debt restructuring, Parliament, at the very least, jealously guarded and exercised its oversight role in respect of international loan transactions entered into by the Executive. It remains to be seen whether the terms of the recently concluded memorandum of understanding between the Executive and the official creditor committee, and the consequent bilateral agreements, will be laid before Parliament for approval.
Due to the erosion of Parliament’s constitutional oversight mandate, there were no independent measures to ensure that the terms of our restructured debt were feasible and favourable to the Ghanaian economy as a whole. As a result, our medium term (i.e. up to 2028) debt obligations have placed unprecedented financial pressure on the new administration. Some figures will help to illustrate how precarious our economic situation is. Projected revenue and grants for quarter 1 of 2025 stands at GH¢42.5 billion, while projected expenditure is GH¢68.1 billion, leaving a deficit of some GH¢26 billion.
Interestingly, GH¢20 billion out of the projected GH¢68 billion expenditure will be used for interest payments alone. With a projected total revenue of GH¢170 billion for 2025 (based on the first quarter figures and the target for 2024), it is obvious that the Government cannot meet interest payment obligations, pay salaries, fund its other financial obligations, and retire over GH¢ 115 billion in maturing treasury bills from its revenue. If the maturing treasury bills are refinanced through a rollover, the Government will carry, at least, that same quantum of debt into 2026, to be added to GH¢8 billion in maturing domestic bonds and related interest payment costs.
The scenario looks bleaker for 2027, with the Government needing at least GH¢51 billion and US$ 386 billion for principal repayments related to restructured domestic DDEP bonds, in addition to funds for interest payments and maturing treasury bills. For 2028, the Government needs at least GH¢ 48 billion and US$ 246 million for principal repayments related to restructured domestic DDEP bonds, without factoring funds needed for interest payments and maturing treasury bills. These are in relation to domestic debt securities alone – we have not yet mentioned payment obligations due under multilateral and bilateral loan agreements as well as international capital market transactions.
In relation to Eurobonds, investors who did not participate in the external debt restructuring are due principal repayments under some bonds maturing in 2026 and 2027 respectively. For the restructured Eurobonds, the Government has to pay US$208 million in each of 2025 and 2026 in respect of down payment new notes, US$122.4 million each year from 2025 to 2028 in respect of post-default interest new notes, and US$ 719 million each year for 2026, 2027 and 2028 (with 5-6percent interest) in respect of short term discounted new notes.
The staggering quantum of the Government’s medium term debt obligations makes it all too clear that another sovereign default is imminent unless the Government secures new loans to refinance its maturing obligations. This will be a challenge, considering that the Government is obligated to issue new domestic bonds and Eurobonds on the same terms as the restructured instruments or give the restructured instruments the benefit of any beneficial terms. At a time when investors can earn at least 4.25percent interest per annum on funds invested in the US, Ghana will struggle to attract investors if it has to issue new Eurobonds based on the 5percent to 6percent per annum interest rates applicable to the discounted Eurobonds.
Parliamentary oversight is therefore critical to ensure that the new borrowing is undertaken in a manner which puts our aggregate debt stock on a declining trajectory. Clear documentation is required to facilitate certainty of legal rights in the event that treasury bills are included within the debt perimeter in the event of a future default and restructuring.
The IMF has, in its October 2024 Fiscal Monitor Report, summarised the Government’s quandary as follows: “Many of the aspects relevant for policymakers can be summarized in a fiscal policy trilemma. In an environment of high deficits and high and rising debt, governments everywhere face a seemingly impossible choice involving three incompatible imperatives: (1) irresistible pressures to spend more in a variety of areas, such as defense, climate change, competitiveness, growth, education, health, and infrastructure; (2) an absolute political resistance to taxation; and (3) the objective of macroeconomic stability encompassing public debt sustainability, monetary stability, and financial stability. The trilemma puts countries in a bind: if a country caves to spending pressures without raising taxes, deficits and debt will continue to rise, which will eventually prove unsustainable and cause instability.”
The IMF’s policy proposals for resolving the fiscal trilemma include front-loaded fiscal adjustments aimed at increasing revenue and cutting expenditure, strengthening fiscal governance through independent fiscal oversight, spending to alleviate extreme poverty and hunger, promoting good governance and eliminating vulnerabilities to corruption, improving the tax system, and prioritising education and health. If Parliament were to function as our forebears intended it to, it has all the legal power to ensure that the Executive’s fiscal measures will be consistent with broader public interest and macroeconomic stability.
We will continue to highlight how deviations from the constitutional accountability framework have contributed to our present national economic crisis and consider the steps needed to ensure economic recovery in the next part of this series.
>>>the writer is a lawyer with niche expertise in finance law and corporate & commercial law. He has advised sovereigns, parastatals and the private sector on diverse capital market and banking transactions, as well as financial sector regulatory compliance. Jonathan may be reached by email on [email protected]
