Ghana has reached a preliminary IMF deal and suspended debt payments

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Kand Ofori-Atta, Ghana’s finance minister, likes to include scripture in speeches on the economy. Recently, as the country was losing its domestic debt, he found solace in the first book of Samuel saying “nothing shall be lost, nothing shall be wanting.” But the Bible is a bad guide to macroeconomics. Domestic bond holders can lose a good chunk of money. Now foreign creditors are getting a big cut, too. On December 19, Ghana suspended interest payments to foreign creditors, effectively defaulting, pending negotiations.

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He has also appealed to the high priests of economic orthodoxy, agreeing to initial aid of $3bn (about 4% of GDP) since IMF. He must help them. Public debt exceeds 100% of GDP and local and foreign interest payments eat up 70-100% of the income, according to Mr Ofori-Atta. Inflation is running at 50% and the central bank has raised its key interest rate to 27%. In past crises Ghana has wisely called in the IMF early to stop trouble and avoid cuts that were too painful. This time, however, he suffered so long that hardship alone will not save him.

The government is blaming covid-19 and increasing global inflation for its pickle. But its problems can also be traced to overspending, overborrowing and overconfidence. This is hardly new. Ghanaian governments tend to blow their budgets to win votes in election years. But recent splurges have largely been financed by foreign currency bonds, leaving Ghana particularly vulnerable to fluctuations in exchange rates.

However, Mr Ofori-Atta was far from naive when he announced the deal with the IMF. “Let us all gather the harvest with joy,” he said. He even thanked his disgraced deputy, Charles Adu Boahen, who was sacked by President Nana Akufo-Addo last month after he was accused of demanding a $200,000 fee to set up a meeting with the vice president. The turmoil will upset long-suffering Ghanaians. Many believe that Mr Ofori-Atta, who is the president’s cousin, should be sacked for mismanaging the economy.

The fund contract brings pain. But it also gives hope. It aims to cut debt to 55% of GDP in the medium term, possibly by 2028, and foreign currency debt servicing costs to 18% of government revenue. Next year’s budget includes spending cuts worth 2% of GDP. (A massive national cathedral on which Mr Ofori-Atta committed $58m of public money will remain an unstoppable construction site.) Social programs will be protected, the fund says, although some worry that Mr. Ofori-Atta promised to review them for effectiveness. sorry for further cuts. The agreement is already building confidence in Ghana’s economy. The currency, the cedi, had been in decline all year but has jumped since the bailout was announced (see chart).

The government is trying to make progress on debt restructuring, as a condition of the agreement. In early December Mr Ofori-Atta said that holders of domestic bonds worth 137bn cedis ($15.2bn) should exchange these for ones paying a lower interest rate and that will be paid. back over a longer period of time. The exchange, which was to be completed by December 19, would represent a loss of about 50% of the value of the bonds, according to JP Morgan, a bank.

This will create a new set of problems. Ghana’s banks are highly exposed to government debt. For some it represents more than half of the total assets. A major impact on the banking system could cause lending to collapse, which in turn would harm the wider economy. The biggest risk will be next year, when the new government bonds will not pay interest at all, warns Ernest Addison, governor of the Central Bank of Ghana. “Immediately there are liquidity issues,” he says.

Ghanaians are already pulling money out of mutual funds, says Frederick Duvor of Apakan Securities, a brokerage firm in Ghana. “People want to save what’s left of their investments.” Pension schemes will also be hit. By the time many pensions are paid out, “it’s worth next to nothing,” he says. worry. Banks, pension funds and insurers have all asked for better terms. Last week the government stepped in and extended the deadline to the end of the year. It may also change the scheme.

Nervous policymakers are trying to prop up the banks. The central bank will loosen liquidity and capital adequacy requirements. The government promises that a donor-supported fund worth 15bn cedis will help ensure financial stability. Mr Addison says the World Bank has promised him $250m. This should all help. But when asked if he’s not too worried, Mr Addison simply says, “It’s early.”

Raising debt

Investors holding $13bn of Ghana’s foreign currency bonds won’t get off lightly, either. The government has previously talked about a 30% cut in the face value of the debt it repays and a halt to some interest payments. This, too, could lead to a fight, although some bondholders say they expect an agreement very soon.

There are plenty of long-term obstacles to Ghana’s recovery. Badly hit banks will not lend much as long as it takes to rebuild their balance sheets. Interest rates will remain attractive for some time. Government spending will be tight for years. And the weak global economy will be a drag on growth as well.

But Ghana has been here before – 16 times in fact. All these crises and aids have not stopped it from being the richest country on the West African continent as measured by per capita income. It has a relatively educated workforce and widely available (if expensive) electricity. Some of its lavish spending went on much-needed infrastructure. “We could get very good growth within two or three years,” said Charles Robertson of Renaissance Capital, an investment bank, “driven by cheap money and low debt overhang.”

Ghana has one more amazing advantage: an incredibly stable reputation with donors and foreign investors based on its strong democracy, its history of development and the experience of its leaders to sell good news about the country. Ghana managed to contract with the imf in less than six months it shows that its reputation as a country worth supporting is still miraculously complete. Other donors are likely to follow suit.

The recent increase in the cedi indicates that some investors are already believing again. If the global economic picture improves, more could be thrown back. That would give Ghana an opportunity. But before he can emerge into this promised land of growth, his people face a painful journey. For this they blame the government, despite the appeals they made to a higher authority.

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