DDEP, one year on: Strong fiscal consolidation key — Analyst
One year after the Domestic Debt Exchange Programme (DDEP), the programme has failed to directly address the country’s debt overhang challenges, Banking Consultant Dr Richmond Atuahene has said.
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The financial analyst said although the exercise had led to some savings, concerning the government suspension of debt repayments, the current debt stock and its structure still pose significant risks to the economy.
“Ghana’s debt outlook remains vulnerable to a wide range of issues, including fiscal and structural, as well as to external factors such as the path of the global recovery after COVID-19.
“DDEP did not trigger any meaningful fiscal consolidation beyond the temporal reduction of the interest bill, as it has begun to rise again in recent times,” he stated.
After a difficult two years which saw inflation hitting a 22-year high of 54.1 per cent in December 2022, and an unsustainable public debt which crossed 94 per cent of the country’s GDP, in July 2023, the government formally approached the IMF for a fund programme.
An Executive Board level approval which would pave the way for the disbursement of the US$3 billion support, was, however, dependent on the country’s ability to restructure both its domestic and external debt.
On December 4, 2022, the government announced the DDEP in a bid to restructure domestic bonds of about GH¢137 billion.
The DDEP became necessary as debt servicing was, at the time, absorbing more than half of total government revenues and almost 70 per cent of tax revenues. The total public debt stock, including that of State-Owned Enterprises and all, had also at the time exceeded 100 per cent of GDP. The DDEP was, therefore, announced to restore the country’s capacity to service debt.
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The initial terms of the programme were, however, met with stiff opposition, forcing the government to withdraw it and replace it with 12 new ones at a reduced coupon rate of nine per cent and a haircut of about 30 per cent.
In the end, the DDEP was described as a success, as the government swapped old bonds valued at GH¢82 billion for 12 new ones at reduced coupon rates and longer tenors after further engagements with bondholders.
One year on
One year after the exercise, the country’s public debt accumulation has slowed down significantly, declining from 73.1 per cent of GDP at the end of 2022 to 66.4 per cent of GDP as of September 2023.
The weighted average interest rate for domestic debts has also reduced from 21.2 per cent at the end of December 2022 to 12.7 per cent at the end of September 2023.
Additionally, the Average Time to Maturity (ATM) has also improved from 2.7 years at the end of December 2022 to 6.2 years at the end of September 2023. On the total debt portfolio, the ATM improved from 8.4 years at the end of December 2022 to 9.3 years at the end of September 2023
The DDEP also led to some moderation in T-bill rates in the first quarter of 2023 but picked up again as T-bills remained the key debt instrument in the debt market after the DDEP.
The 91-day Treasury, for instance, declined from 35.5 per cent in December 2022 to 18.5 per cent in March 2023 but has since increased again to 29.58 per cent as of Monday, December 11, 2023.
Fiscal consolidation
Speaking in an interview with the Graphic Business, Dr Atuahene advised that the DDEP should be backed by a strong fiscal consolidation programme that would ensure debt sustainability, adding that the DDEP is not the panacea for the country’s debt challenges.
He said one year after the DDEP, the government must learn some lessons by reducing borrowing significantly and putting measures in place to encourage private-sector investment.
He noted that the sense of additional fiscal space created by the DDEP led to more pressures on the public wage front, which led to the recent 23 per cent wage increase for public sector workers.
He said this had built permanent pressures into the fiscal outlook and weakened the overall net impact of the DDEP in the medium term.
“Another critical aspect that may have gotten worse around the timing of DDEP (having been exacerbated by the global commodity prices and its implications on the domestic economy) that could jeopardise its achievement and debt sustainability, in general, is contingent liabilities.
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“All in all, there is an urgent need to implement policies that would help restore debt sustainability and investor confidence, as well as safeguard the stability of the financial sector,” he stated.
He said a multi-year credible fiscal adjustment framework would be required to put the debt ratio on a downward trajectory.
He added that in contrast to consolidation attempts in the past, this effort would have to be underpinned by efforts that would aim to substantially strengthen expenditure management, including reduction of the government size and expansion of the scope of public liability management to include state-owned enterprises, which have, in the past, had a significant drain on public resources, mostly taking place off-budget.
“Ghana’s debt overhang is likely to be a key factor behind the weak economic growth and financial market volatility, which until addressed, would remain a drag on economic progress for years to come,” he said.
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External environment
Dr Atuahene also pointed out that the experiences of many of the countries that have undertaken some form of debt restructuring suggest that the transformation of sustained macroeconomic improvement to a virtuous cycle hinged strongly on a substantially improved external environment which facilitated an export‐led recovery.
He noted that Russia (1999, 2000) and Ecuador (2000), for example, benefited from the dramatic rise in oil prices following their restructuring.
Similarly, Uruguay (2003) and Argentina (2001) had significant positive terms of trade windfalls arising from commodity prices with average growth rates of about 8.0 per cent between 2004 and 2008.
Ukraine’s post‐crisis recovery was primarily driven by a rapid expansion in exports to Russia. The x‐axes in the graphs depict quarters, where quarter two coincides with the debt exchanges and China, as well as buoyant international liquidity conditions in 1999.
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Dr Atuahene said the global conditions to reinforce a meaningful post‐restructuring recovery did not exist at the end of both debt transactions for Ghana, especially given its very narrow export base.
He said despite the absence of a favourable external economic climate, a depreciated but stable real exchange rate was a critical component of Ghana’s economic programme, which would increase the profitability of the tradable sector.
“This boost in competitiveness is expected to catalyse strong GDP growth, reduce unemployment and strengthen the current account, which should result in a more sustainable reduction in Ghana’s debt‐to‐GDP,” he stated.