The Centre for Democracy and Socio-economic Development (CDS), an independent think tank that recognizes democracy as a critical tenet for development, has said regarding the Domestic Debt Exchange programme (DDEP) that a similar debt restructuring programme was undertaken in the past to close Ghana’s fiscal deficit by restructuring the existing debt stock.
Senior Research & Policy Analyst at CDS Africa, Dr Frank Bannor recounted that on the assumption of office in January 2001, the John Agyekum Kufuor administration was faced with a challenging macroeconomic environment inherited from late President Jerry John Rawlings National Democratic (NDC).
At the end of May 2001, he added, the domestic debt stock stood at ¢6.1 trillion, represented by 91 and 182-day T-bills and 1-year treasury notes only.
Interest payments on government debt in 2000 totalled ¢1,446 billion (25% of total government expenditures and 39% of total revenues).
“As a result of the programme, the government’s debt service cost was drastically reduced, with savings of ¢197 billion and ¢481 billion achieved in 2002 and 2003 respectively.
“In addition to the immediate fiscal impact of the Government of Ghana Index-Linked Bond or GGILB (GGILB), it also became a catalyst for the development of the GoG bond market,” Dr Bannor said.
The government of Ghana is seeking to implement the DDEP as part of measures to tackle the fiscal challenges facing the country.
Finance Minister Ken Ofori-Atta has urged as many as possible to participate in the DDE.
He stated that if the government does not get as many as possible to take part in the programme, economic recovery will take a long time to achieve.
“Frankly, non-participation or a lower-than-expected turnout for the DDEP will prolong efforts to resolve the current economic crisis.
“In addition, the prospects of international financial support and other financial assurances would be jeopardized,” he said in a statement on Monday Febraury 6.
He added “This development could further put strain and stress on the Government’s capacity to honour key commitments. This is not what we want for our economy.
“What we want is an economy that is back on track, stable, vibrant, productive, dynamic; meeting the needs of individuals, households, and enterprises; delivering shared and inclusive growth; and improving incomes and livelihoods.”
Below is CDS Africa’s full statement…
Debt Restructuring in 2001
1. It is instructive to note that similar debt restructuring program has been undertaken in the past to close our fiscal deficit by restructuring the existing debt stock.
2. On assumption of office in January 2001, the J.A. Kufuor administration was faced with a challenging macroeconomic environment inherited from late President Jerry John Rawlings NDC.
3. At the end of May 2001, the domestic debt stock stood at ¢6.1 trillion, represented by 91and 182-day T-bills and 1-year treasury notes only.
4. Interest payments on government debt in 2000 totalled ¢1,446 billion (25% of total government expenditures and 39% of total revenues).
5. The domestic debt burden was recognized as one of the major contributing factors to a fiscal deficit that stood at 8.5% of GDP at the end of 2000.
6. During the 2001 National Budget Statement to Parliament, the then Minister for Finance, Mr. Yaw Osafo Maafo announced Government’s intention to ease the total debt burden by converting existing short-term domestic debt obligations into medium-term instruments.
7. A team of international and local advisors appointed by the government proposed an approach for restructuring the existing debt stock as follows:
i. The issuance of a 3-year inflation-linked bond (the Government of Ghana Index-Linked Bond or GGILB) with the following features:
• The coupon and principal were indexed to the Consumer Price Index (CPI).
• Each GGILB had a face value of ¢1,000,000, repayment of which was due at the end of the 3-year tenor.
• The real coupon rate was set at 5% which was the estimated underlying annual real GDP growth rate at the time.
ii. The coupon was paid semi-annually while the accumulated inflation (CPI) was deferred to maturity.
iii. At least 50% of the existing domestic debt stock was to be converted into GGILBs by the end of 2001, with BoG and commercial banks being the anchor holders of the GGILB.
iv. BoG required banks to hold 15% of their deposit liabilities in GGILBs. This represented 43% of banks’ secondary reserves.
v. Non-bank financial institutions (NBFIs) regulated by BoG and other financial institutions (SSNIT, insurance, broker/dealers) were encouraged to convert a portion of their existing holdings in short-term GoG paper into GGILBs.
Actual Results and Impact of the 2001 Debt Restructuring
1. Government’s debt service cost was drastically reduced, with savings of ¢197 billion and ¢481 billion achieved in 2002 and 2003 respectively.
2. In addition to the immediate fiscal impact of the GGILB, it also became a catalyst for the development of the GoG bond market
In conclusion, the GGILB was a significant success, in that its stated policy objectives of (I) reducing debt service costs and making the overall debt burden more sustainable; and (II) providing an incentive for Government to help to reduce inflationary pressures through fiscal discipline, were met.
By Laud Nartey|3news.com|Ghana