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Ghana reaches tentative deal with IMF and halts debt payments

Potassiumen Ofori-AttaGhana’s finance minister likes to quote scriptures in his economic speeches. More recently, with the country defaulting on its domestic debt, he found solace in Samuel’s first book, “Nothing is lost, nothing is lost”. However, the Bible is not a good guide to macroeconomics. Domestic bondholders will lose a lot of money. Now, foreign creditors have also been hit. On December 19, Ghana suspended interest payments to foreign creditors, effectively defaulting, pending negotiations.

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It also called on the high priest of economic orthodoxy to agree to an initial bailout of $3 billion (roughly 4% of the economy) gross domestic product) from International Monetary Fund. It needs help. Public debt above 100% gross domestic product According to Mr Ofori-Atta, local and foreign interest payments account for 70-100% of revenue. Inflation is at 50% and the central bank has raised its key interest rate to 27%.In past crises, Ghana has wisely called International Monetary Fund Avoid trouble early and avoid too painful spending cuts. This time, however, it dragged on for so long that austerity alone couldn’t save it.

The government blamed its pickle on covid-19 and soaring global inflation. Yet its troubles can also be traced to overspending, overborrowing and overconfidence. This is nothing new. The Ghanaian government tends to spend a lot of its budget in election years to win votes. But the recent splurge has been largely funded by foreign currency bonds, making Ghana especially vulnerable to exchange rate swings.

Nonetheless, Mr Ofori-Atta, in announcing the International Monetary Fund“Let us all reap the harvest with joy,” he declared. He even thanked his disgraced deputy, Charles Adu Boahen, who was fired by President Nana Akufo-Addo last month for his Accused of soliciting $200,000 in fees to arrange a meeting with the Vice President. Tribalism will anger long-suffering Ghanaians. Many believe Mr Ofori-Atta, the president’s cousin, should himself be fired for economic mismanagement.

The fund’s trades create pain. But it also offers hope. It aims to cut debt to 55% gross domestic product In the medium term, perhaps by 2028, foreign currency debt service costs will account for 18% of government revenue.Next year’s budget includes 2% spending cuts gross domestic product(Mr Ofori-Atta’s massive $58 million national cathedral will remain a stalled construction site.) The fund says social programs will be protected, though some fear Mr Ofori-Atta’s pledge to scrutinize Their efficiency may defeat the excuse of further cuts. The agreement has already boosted confidence in Ghana’s economy. The currency, the cedi, has fallen all year but has risen sharply since the bailout was announced (see chart).

The government is trying to make progress on debt restructuring, a condition of the deal. In early December, Mr Ofori-Atta said holders of domestic bonds worth 137 billion cedis ($15.2 billion) should swap them for bonds with lower interest rates and longer repayment periods. The deal, which was supposed to close on Dec. 19, would represent a loss of about 50% of the bond’s value, according to estimates from JPMorgan Chase & Co.

This creates a new set of problems. Ghana’s banks are heavily exposed to government debt. For some, it accounts for more than half of total assets. A huge hit to the banking system could cause lending to plummet, hurting the wider economy. Ernest Addison, governor of the Central Bank of Ghana, has warned that the greatest danger will come next year, when the government’s replacement bonds will pay no interest at all. “Immediately there will be a liquidity problem,” he said.

Frederick Duvor of Ghanaian brokerage firm Apakan Securities said Ghanaians have already started withdrawing money from mutual funds. “People want to save their remaining investments.” Pension plans will also be hit. He fears that by the time many pensions are paid, “the money will be worthless”. Banks, pension funds and insurance companies are all demanding better terms. Last week, the government blinked and extended the deadline until the end of the year. It may also adjust plans.

Nervous policymakers are trying to shore up banks. The central bank will ease liquidity and capital adequacy ratio requirements. The government has pledged that a donor support fund worth 15 billion cedis will help ensure financial stability. Mr Addison said the World Bank had committed $250 million to it. All of these should help. However, when asked if he was less worried because of this, Mr Addison said simply, “It’s still early.”

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Investors holding $13 billion in Ghanaian foreign currency bonds are not taking their guard lightly. The government had previously offered to cut the face value of debt repayments by 30% and suspend some interest payments. It could also lead to a fight, although some bondholders said they expected the deal to happen relatively quickly.

Ghana’s recovery faces many long-term obstacles. As long as battered banks need to rebuild their balance sheets, they will not lend heavily. Interest rates will remain high for some time. Government spending will remain austere for several years. A weak global economy will also weigh on growth.

Garner, however, has been here before – 16 times, in fact. All these crises and bailouts haven’t prevented it from becoming the richest country in per capita income on the West African continent. It has a relatively well-educated workforce and widely available (if expensive) electricity. Some of its loose spending goes to much-needed infrastructure. “We can actually do pretty good growth in two or three years,” estimates Charles Robertson of investment bank Renaissance Capital, “thanks largely to cheap money and a low debt overhang.”

Ghana has another strong advantage: a surprisingly resilient reputation among donors and foreign investors based on its strong democratic institutions, development record and its leaders’ knack for spreading the good news about the country.Ghana managed to work with International Monetary Fund In less than six months, its reputation as a country worth supporting has miraculously remained intact. Other donors may follow suit.

The recent surge in the CEDI suggests some investors have become believers again. If the global economy improves, more may be drawn back. This will put Ghana on a firm footing. But before it can enter this promised land of growth, its people face a harrowing journey. For this, they blame the government, despite repeated appeals to their superiors.

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