The same debt restructuring carried out by Kufuor has drastically reduced government debt servicing costs – CDS Africa
The Center for Democracy and Socio-Economic Development (CDS), an independent think tank that recognizes democracy as a critical principle for development, said of the Domestic Debt Exchange program (DDEP) that similar debt restructuring programs were implemented in the past. closing Ghana’s fiscal deficit by restructuring the existing debt stock.
Senior Research & Policy Analyst at CDS Africa, Dr Frank Bannor said that when he assumed office in January 2001, the John Agyekum Kufuor administration faced a challenging macroeconomic environment inherited from the late Jerry John Rawlings National Democratic (NDC) President.
At the end of May 2001, he added, the stock of domestic debt stood at ¢6.1 trillion, represented by T-91 and 182-day bills and 1-year treasury notes alone.
Interest payments on government debt in 2000 totaled ¢1.446 billion (25% of total government expenditures and 39% of total revenues).
“As a result of the program, the government’s borrowing costs were reduced drastically, with savings of ¢197 billion and ¢481 billion achieved in 2002 and 2003, respectively.
“Besides the direct fiscal impact of the Government of Ghana Index-Linked Bond or GGILB (GGILB), it is also a catalyst for the development of the GoG bond market,” said Dr Bannor.
The Government of Ghana is seeking to implement the DDEP as part of measures to address the fiscal challenges facing the country.
Finance Minister Ken Ofori-Atta has urged as many as possible to join the DDE.
He said that if the government does not get enough people to participate in the program, the economic recovery will take a long time.
“Honestly, non-participation or lower-than-expected participation for DDEP will prolong efforts to resolve the current economic crisis.
“In addition, the prospect of international financial support and other financial guarantees will be jeopardized,” he said in a statement on Monday, February 6.
He added, “This development could add tension and stress to the Government’s capacity to honor 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 companies; delivering joint and inclusive growth; and increasing incomes and livelihoods.”
Below is the full statement from CDS Africa…
Debt Restructuring in 2001
1. It should be noted that similar debt restructuring programs have been implemented in the past to close fiscal deficits by restructuring existing debt stocks.
2. When it assumed office in January 2001, the JA Kufuor administration faced a challenging macroeconomic environment inherited from the late President Jerry John Rawlings NDC.
3. At the end of May 2001, the stock of domestic debt was at ¢6.1 trillion, represented by 91 and 182 day T-bills and 1 year treasury notes only.
4. Interest payments on government debt in 2000 totaled ¢1,446 billion (25% of total government expenditure and 39% of total revenue).
5. The burden of domestic debt is recognized as one of the main factors that led to the fiscal deficit that stood at 8.5% of GDP at the end of 2000.
6. During the 2001 National Budget Statement to Parliament, the Minister of Finance, Mr. Yaw Osafo Maafo announced the Government’s intention to reduce its debt burden by converting existing short-term domestic debt obligations into medium-term instruments.
7. The international and local advisory team appointed by the government proposed an approach to restructuring the existing debt stock as follows:
i. Issuance of 3-year inflation-linked bonds (Ghana Government Index Linked Bonds or GGILB) with the following features:
• Coupons and principal are indexed to the Consumer Price Index (CPI).
• Each GGILB has a nominal value of ¢1,000,000, which must be repaid at the end of the 3-year term.
• The real coupon rate is set at 5% which approximates the annual real GDP growth rate of the period.
ii. The coupon is paid semi-annually while the accumulated inflation (CPI) is deferred until maturity.
iii. At least 50% of the existing domestic debt stock must be converted into GGILB by the end of 2001, with the BoG and commercial banks as GGILB anchor holders.
iv. The BoG requires banks to retain 15% of their deposit liabilities in the GGILB. This represents 43% of the bank’s secondary reserves.
v. Non-banking financial institutions (NBFIs) regulated by the BoG and other financial institutions (SSNIT, insurance, broker/dealers) are encouraged to convert part of their holdings in short-term GoG paper into GGILB.
The Actual Results and Impact of the 2001 Debt Restructuring
1. The cost of government debt was reduced drastically, with savings of ¢197 billion and ¢481 billion achieved in 2002 and 2003, respectively.
2. In addition to the direct fiscal impact of the GGILB, it is also a catalyst for the development of the GoG bond market
In conclusion, the GGILB was a significant success, as the objectives of the policy were to (I) reduce debt service costs and make the overall debt burden more sustainable; and (II) providing incentives for the Government to help reduce inflationary pressures through fiscal discipline, they found.
By Laud Nartey|3news.com|Ghana
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