The government of Ghana has stopped payments on part of its foreign debt amid economic crisis as the country undertakes debt restructuring in line with a bailout deal with the International Monetary Fund (IMF). This has caused concern among some creditors, who fear that the country may default on its obligations. Ghana has been in negotiations with the IMF for a bailout package since early this year, when it became clear that the country was facing an economic crisis. The IMF has been pressing for Ghana to undertake debt restructuring as part of the bailout deal, but this has been opposed by the government. The government has now agreed to restructuring as part of the IMF deal, but this has caused some delays in the negotiation process.
The move by Ghana to stop payments on part of its foreign debt now makes the country the latest in a long line of deeply-indebted developing countries to fail to make good on its foreign obligations. This is a serious issue, as it can lead to even more debt and further economic instability in the country. The Ghanaian government has said that it is working to negotiate new terms with its creditors, but it is not clear how successful these efforts will be.
The country’s finance ministry has announced a suspension of all debt service payments on external government debts, including foreign currency bonds, commercial loans, and most bilateral debt. This move is intended to give the country more fiscal space to respond to the Covid-19 pandemic. Ghana has already seen a sharp decline in economic activity due to the pandemic, and this suspension of debt payments will help free up resources to be used for response and recovery efforts.
It underlines the extent of debt distress among developing economies, especially in sub-Saharan Africa. About 60 percent of lower-income countries have debts that are unsustainable or in danger of becoming so, according to the IMF and the World Bank, which has warned of a wave of impending debt defaults. Sri Lanka earlier this year defaulted on external debt payments, while Zambia missed payments in 2020.
Ghana is facing a “major economic and financial crisis,” its finance ministry said, adding that “global risk aversion triggered large capital outflows, a loss of external market access and rising domestic borrowing costs.”
The country is grappling with a number of challenges, including high budget deficits, a large public debt burden and weakening economic growth. In addition, Ghana’s currency, the cedi, has come under pressure in recent months, depreciating sharply against the dollar.
The finance ministry said the government was taking a number of measures to address the situation, including implementing fiscal consolidation measures, accessing international financial assistance and strengthening institutions.
Sharp increases in global interest rates this year, along with a stronger US dollar, high rates of inflation and other disruptions caused by the pandemic and Russia’s war in Ukraine have made it increasingly hard for many developing countries to meet both foreign and local currency debt repayments. Many have taken on new debts since the start of the pandemic to finance an expansion in public spending.
Ghana this month announced an exchange of local currency government bonds with a value of more than $11 billion that will sharply reduce interest payments to its domestic creditors, mostly local banks, pension funds and insurance companies.
Last week, it reached a preliminary agreement on a $3 billion bailout from the IMF that the fund said would be dependent on receipt of financing assurances from Ghana’s external creditors and on progress on the domestic debt exchange.
According to the World Bank data, Ghana owed more than $13 billion to foreign bondholders at the end of 2021. This is the most recent aggregated data available. In addition, Ghana owed $3.2 billion to foreign governments, including China and Korea.
Its total external public and publicly guaranteed debts were $27.4 billion, including about $5 billion in short-term debts not affected by the standstill. Debts owed to multilateral lenders are also exempted, including about $3.4bn in IMF credit and $4.7 billion owed to the World Bank.
Kevin Daly of emerging market specialist fund manager Abrdn said a default on Ghana’s foreign debts had been expected for some months and was largely priced into its sovereign bonds.
A bond maturing in 2049 with a coupon of 8.627 per cent that was trading at more than 100 percent of its face value at the end of 2020 has since fallen to less than 33 per cent, with most of the fall coming this year, according to Refinitiv.
After Ghana missed a $22 million interest payment on its $3 billion eurobond in April, foreign bondholders are taking steps to negotiate a restructuring of the country’s debt. The formation of a creditor committee is the first step in this process, and it is expected that the committee will be announced in the coming weeks.
The restructuring of Ghana’s debt will be a complex process, and it is not yet clear what form it will take. However, the formation of a creditor committee is a necessary first step in order to begin negotiations in good faith. We can expect that the coming weeks will be crucial in determining the outcome of this process.
A separate committee of bilateral creditors is also likely. China’s rapid rise as a major bilateral lender this century has given it an increasingly large role in debt workouts. This year it agreed to co-chair with France a bilateral committee to help restructure Zambia’s foreign debts but progress has been slow.
While the IMF has historically been the primary institution overseeing multilateral debt restructuring, in recent years China has taken on an increasingly important role. This is due in large part to China’s growing status as a major bilateral lender.
The Chinese government has long been involved in the process of restructuring debts, both within its own borders and in other countries. The committee that China has agreed to co-chair with France is just one example of its involvement in debt restructuring. While progress on this particular committee has been slow, it is nonetheless an indication of China’s commitment to the process.
China’s involvement in debt restructuring is not limited to this committee. In the past, the Chinese government has worked with other countries to help them restructure their debts. For example, in 2003, China helped reorganise the debt of Argentina. In 2010, China played a key role in helping to restructure Greece’s debt.