A Frank Examination of Ghana's Domestic Debt Exchange Programme (DDEP)
Uncertainty and concerns among creditor groups identified as the main setbacks in the implementation of the Debt Dynamics and Debt Exchange Programme (DDEP)
Last Friday, as the deadline for voluntary participation of the contentious Domestic Debt Exchange Programme (DDEP) approached, Dr. Richmond Atauhene and K.B Frimpong's analysis, published by the Business & Financial Times (B&FT), highlighted several issues plaguing the DDEP: inconsistencies, poor flow of information, lack of transparency, questionable objectives, and the mistreatment of creditor categories.
The authors slammed the government for failing to educate the public on the fiscal space the DDEP is expected to provide upon successful implementation. They argued that the narrative surrounding the programme has consistently lacked tangible figures and numbers, prompting criticisms.
Government's strategy to implement the debt exchange programme has also been under scrutiny. Critics claim that it has been presented as a mere financial transaction instead of an integral piece of Ghana's strategic economic programme, which should also include significant fiscal reforms and the elimination of fiscal deficit.
The authors estimated potential losses using the Net Present Value (NPV) of the 23 local banks to be approximately GH¢41.3 billion, which may negatively impact their solvency and liquidity. They emphasized that fiscal space reforms should focus on stricter compliance and enforcement of the Fiscal Responsibility Act 2018 and the implementation of a revamped tax administration program.
The aggressive approach toward achieving full participation in the programme, or at least the 80 percent threshold, has been criticized as lacking proper stakeholder engagement, with stakeholders only being consulted after the programme launch.
The authors suggested that the strategy for government debt exchanges should have convinced creditors of the transformative potential of the debt-swap on the path to public debt sustainability. However, they contend that the lack of clarity and poor communication of the DDEP's objectives has failed to convince bondholders to participate in the prolonged programme.
The review concluded by advocating for ongoing constructive dialogue between government and creditors, with binding commitments to share the benefits arising from cooperation. This, according to the authors, is vital in inducing a switch in expected outcomes and transforming the programme into a success.
Backstory
On December 5th, 2022, Ghana's Ministry of Finance invited holders of 60 old domestic debts to exchange their bonds and notes worth GH¢137.3 billion (US$14.3 billion) for a package of 12 new eligible domestic bonds. Although voluntary, the debt exchange aimed to garner participation from local creditors, including banks, firms, institutions, insurance companies, foreign investors, pension funds, and, eventually, individual bondholders.
The initial exclusion of retail and individual bondholders faced resistance from trade unions and insufficient voluntary participation. Consequently, they were later incorporated into the programme. The debt exchange faced repeated deadline extensions, with modifications such as the addition of new bonds, changes in exchange ratios, setting a minimum participation level, and offering accrued interest and cash payments to holders of eligible bonds.
At the final deadline of February 10th, 2023, individual bondholders aged below 59 and retirees were offered new domestic bonds with a maximum maturity of 5 years and a 10 percent coupon rate for the former, and 15 percent for the latter. This marked the fourth extension of the debt exchange programme's deadline.
Despite the criticism, it's worth noting that the DDEP achieved an impressive 85% participation rate among domestic creditors, with follow-up exchanges for foreign currency bonds, pension funds, and cocoa bills boasting over 90% uptake. The programme aligns with Ghana's commitment to IMF-backed reforms and participation in the G20 Common Framework for Debt Treatment, ensuring coordinated debt relief and restructuring efforts for long-term fiscal sustainability. However, challenges such as rollover risks, debt sustainability, and strategic economic integration remain significant concerns.
- The Business & Financial Times report criticized the government for not adequately explaining the fiscal benefits the Domestic Debt Exchange Programme (DDEP) would provide, and for presenting it primarily as a financial trade rather than a crucial part of Ghana's business and sustainability strategy.
- The authors of the report proposed that fiscal space reforms should focus on stricter compliance with the Fiscal Responsibility Act 2018 and the implementation of a revamped tax administration program, as these measures could help bolster the insurance industry's solvency and liquidity.
- The strategy for government debt exchanges should ideally demonstrate the transformative potential of debt-swap on the path to public debt sustainability, persuading bondholders to participate, according to the authors. Improved communication and clarity of the DDEP's objectives could lead to more effective stakeholder engagement, benefiting both the government and the finance industry.
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