A flurry of announcements this week was meant to signal that momentum was building towards a successful close of Ghana’s unorthodox domestic debt restructuring program (DDE). Banks, insurance firms and most capital market players have consented to revised terms for the orderly resolution of the country’s unsustainable domestic debt.

At a plush conference in the Ghanaian hinterlands, at a resort featuring Australian emus and llamas from Argentina, the Finance Minister had a literal spring in his step as he mounted the podium to praise the government’s commitment to “African prosperity”.

All this flourish might suggest the beginning of the end of the country’s most debilitating fiscal crisis in recent memory. Considering analyst unanimity about how harsh the Ghanaian DDE has been for domestic savers and investors, it is perhaps not too difficult to understand why the mere fact of some traction is enough to lift government’s spirits. Using the framework of its own advisors, Lazard, the government’s DDE offer definitely merits the investor-unfriendly tag.

And yet, here we are, on the verge of closure. A sober assessment of the situation, as I hope to explain in a second, would however recall Churchill’s famous statement in 1942 after the Allies blocked a massive Nazi incursion into Egypt and secured the vast oil fields of the Gulf in one of the most dramatic turns of World War II:

“It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

The deals agreed between Ghana’s Finance Ministry and the key financial market players, welcome relief from the stress and anxiety of recent weeks though they are, are significantly caveated.

In addition to the government revising its earlier stance of paying no interest on bonds this year and paying just 5% interest next year, it will instead pay 5% interest in 2023 and an effective rate of 9% (down from the roughly 19% weighted average rate on the old bonds) for the remainder of the term of the new bonds. Significantly, consenting domestic creditors are not getting a concession on the extended maturity of the reprofiled instruments, a major contributor to the Net Present Value (NPV) losses estimated by analysts.

To understand the provisionality of the agreements reached, one needs to carefully read the latest announcement, the one announcing a deal between the capital market operators (GSIA) and the Finance Ministry.

Just like the banks and insurance firms, the deal was brokered on the back of a promise by the government to set up a $1 billion Financial Stability Fund (FSF) to cushion any industry player that finds its solvency or liquidity threatened following the restructuring exercise.

As analysis of similar structures proposed for the European Union, and used in the Greek and Jamaican debt restructuring episodes, attests, a loan-based FSF is indeed the appropriate mechanism to use in these kinds of situations.

The only problem is that the design of the proposed Ghanaian version of an FSF is entirely in the heads of mandarins at the Finance Ministry. So far, they have studiously refused to share any details about the interest rate, maximum term, collateral requirements, eligibility criteria, or, indeed, any of the major features one needs to know to properly asses a Fund of this nature.

At one point the Finance Minister even appeared to suggest that the Fund was for mere show because the Jamaican version ended up redundant. He ignored the Greek example, in which a decade after it was set up, the Greek FSF is still dealing with the lingering effects of the bank bailouts partially attributed to the country’s debt saga.

Worse still, there is no money as yet for the Ghana FSF. The government says it has approached the World Bank to cover 30% of the costs of the FSF. The World Bank operates within its strategic plan for Ghana. Making additional resources available is contingent on satisfactory progress on a whole host of pending issues about already committed resources. The other expected funders of the program, like Germany’s KfW, have elaborate processes for agreeing to new programs and disbursing funds and, at any rate, would also like to see this whole FSF embedded in a detailed economic recovery strategy, of which none has been forthcoming from the government.

In short, the FSF is pretty much conceptual at this stage. It is thus not clear whether the financial sector players expect incorporation of language concerning the FSF into an amended debt exchange prospectus. The answer will be interesting come Tuesday, the 31st of January, the deadline of the DDE.

On the GSIA front, the caveats are more striking. A good chunk of the holdings of these capital market operators are in Collective Investment Schemes (like mutual funds and unit trusts). The chains of exposure are quite complex, entangling some corporate treasuries as well as individuals. For example, the country’s fintech industry parks some assets using these and other bank custodianship arrangements. Under the terms of the provisional agreement with GSIA, government bonds owned by the Collective Investment Schemes (CIS), regardless of ultimate beneficial ownership, must be treated on the same terms as those owned by individual bondholders.

Any contingencies of the CIS kind imply that the creditor group concerned cannot sign a blanket DDE agreement on Tuesday. A revised document meeting legal muster must be prepared and reviewed before any prudent fund manager can proceed to sign.

But even if such agreements are signed in short order, they will still be subject to a fuller resolution of the caveated matters before actual immolation of the old bonds and issuance of the new bonds can proceed at the depository of the Ghana Fixed Income Market. It will be interesting how all this unfolds in the coming days, considering the government’s rush to have everything done and dusted in the first week of February.

And that is only in relation to the creditors signing on to the DDE. We can safely project that the vast majority of individual bondholders and offshore investors would not consent to the DDE by the 31st deadline. A significant number of corporate treasuries will also hold out. Taking that fact into account, and considering the earlier exemption of Pension Funds and the contingencies around the CIS holdings, one can also project a participation rate (on principal basis) in the DDE of about 65%, and debt service relief of less than 50% of the original expected amount.

A 65% participation rate would be the least impressive DDE performance in the world for a program that went to completion. It would certainly fall short of the government’s preferred target of 80%.

The underwhelming results of the exercise can be entirely traced to the highly unorthodox approach taken by the Finance Ministry to launch consultations only after the debt exchange had commenced instead of before as has been the case with most DDEs undertaken elsewhere over the course of this decade, most of which saw participation rates above 90%.

When the exercise commenced in early December, this author said the following about certain financial industry players in Ghana:

Not only are they few in number, and their client base predominantly middle-class, but the government also wields massive regulatory power over banks and funds and expects them to do as they are told.

True to form, the government’s approach so far has been to ram the DDE down their throat. It was only after humiliating setbacks that it changed tack midway and grudgingly tried to do some co-creation. It goes without saying that launching consultations much earlier and mobilising a national consensus behind the DDE would have resulted in a higher participation rate and more debt relief whilst also spreading the pain more optimally. But even so, a 65% participation rate is comfortably above the 60% this author considers necessary for the program to have minimal viability.

It is important, moreover, to bear in mind that the resources freed up by the DDE, holdouts and exemptions notwithstanding, sum up to a figure just below the government’s largest revenue lines like Corporate Income Tax, Oil & Gas and Personal Income Tax. The DDE’s expected debt relief amount is considerably larger than proceeds from trade, energy and communications taxes etc. The banks alone may be “sacrificing” income of 15 billion GHS to the benefit of the government’s purse. Imagine attempting to haul that kind of dough through financial sector taxation.

So, where does all this leave us?

First, given the significant variance from the initial debt relief expectations, analysts expect some delays in finalising the full contours of the ECF before presentation to the IMF Board, likely straining the relationship between the IMF and the Finance Ministry. The government’s preferred timeline of IMF Board approval of March 2023 looks overly aggressive at this stage. In particular, earlier contentions by analysts that the fiscal consolidation component of the upcoming ECF program isn’t credible will be thrust back into sharp relief. Finance Ministry mandarins should not wait till the last minute before reworking the expenditure spreadsheets.

The IMF may choose to overlook the fact that the original debt sustainability strategy needs to be fully overhauled in view of the lower than expected debt relief and still present a program where the government only makes fiscal tightening pledges to the Board for approval. But doing this could dash the government’s hopes of the IMF frontloading tranche 1 disbursement, amounting to about $1 billion, to shore up the country’s forex reserves. Ghana’s reserve position is under unprecedented pressure, with gross reserves dipping below $4 billion, from nearly $10 billion a year ago, without even accounting for some not so liquid items on the Bank of Ghana’s balance sheet.

The IMF may in turn argue that any such disbursement should happen after successful completion of the first review of the ECF program, perhaps about three months after Board approval. It is highly unlikely that the Finance Ministry will consent to any arrangement that delays forex injection.

Which is why some analysts are beginning to ponder a scenario where government brings forward deferred domestic debt restructuring plans. Because the current DDE only covers 68% of the primary domestic public debt and less than ~56% of total public sector liabilities, the government may be tempted to initiate additional restructuring exercises earlier than planned in pursuit of additional debt relief.

The recent episode of Cocobod forcing a rollover of maturing debt (after the giant parastatal failed to raise a new facility to refinance expensive bills and the Bank of Ghana refused to step in) offers a clear hint of the government’s posture. Given that the country’s credit rating is already at rock-bottom, few restraints on debt repudiation remain. Apart from treasury bills and Bank of Ghana’s liquidity management tools, like swaps, every public liability in Ghana today is fair game.

External investors, keenly observing all these developments, are unlikely to agree quickly to total moratoria on debt service, as is the government’s wish. Trying to play total hardball may protract discussions and interfere further with the IMF Board approval timeline. It will be helpful for the government to be strategic this time around unlike in the leadup to the IMF engagement last July. That time, Ghana literally had to make a mad dash to Washington after a desperate attempt to hustle dollars from all manner of institutions between April and June failed to turn up even a dime.

Since then, everything has been a mad rush. It would be tragic if the government dilly-dallies with the outstanding creditor concerns until mid-March by which time the country’s forex situation would be completely dire before scrambling to pursue options that were obvious from the start (like abandoning zero percent coupon in 2023 during the DDE standoff).

It would be foolhardy in these circumstances for economic actors, and indeed the general public, to begin acting as though Ghana is nearly out of the woods. The rising chorus of governance reforms and the push for fiscal discipline should now intensify and not abate. The partial success of the current DDE is a mere lull in a storm that is still gathering.

All eyes should firmly remain on the foredeck, on the crew steering the ship of state, and no voice should stay calm if signs of rudderless maneuvering emerge.