Debt Restructuring Complications

Ghana’s debt service prospects were not improving sufficiently to ensure the country’s debts were sustainable by 2022. Against this backdrop, the Ghanaian authorities arranged a reorganization program to restore macroeconomic and debt sustainability by requesting a 3-year Extended Credit Facility (ECF) from the International Monetary Fund (IMF).

A Debt Sustainability Analysis (DSA) performed on the Ghanaian economy indicated there is a need for debt treatment. A debt sustainability analysis is consistent with IMF policies for Board approval of the program or arrangement (as outlined by the IMF in its 2021 Strategy, Policy and Review). The sustainability of a country’s debt must be assessed whenever a country requests an IMF-supported program. The managers of the Ghanaian economy quickly announced and launched a Domestic Debt Exchange Program (DDEP) in 2022 and concluded in 2023. Some analysts concluded that domestic investors were “coerced” to participate in the program.

The report in the mainstream media currently indicates that Ghana’s attempt to restructure its Eurobonds or external bonds has hit a snag. The immediate factor that can be identified in this hurdle is the limits of the DSA set by the IMF. The Ghanaian authorities are relying on an improved economy that is currently above the expectations of the Fund itself for their negotiations and debt treatment. However, the IMF’s target for Ghana to reduce its debt to 55% of its Domestic Product (GDP) by 2028 will not be met by the current arrangement the managers of the Ghanaian economy intend to resort to. A news report by myjoyonline.com states, “The current bondholder agreement would leave debt slightly above that target” (the target set by the IMF, emphasis mine). The same report indicates the IMF outlined in its statement that “the working scenario” presented by the government of Ghana is not in line with program parameters.”

Indeed, it is clear from the statements that the difficulty in reaching an agreement with the international bondholders is partly caused by the rigidity of the IMF’s Debt Sustainability limits set for the country. The IMF does not have flexible debt sustainability limits that accommodate the current improved economic performance of a country.

Garth Peron Nicholls, a senior economist with the IMF, pointed out in his Selected Debt Restructuring Experiences in the Caribbean report that “sovereign bond restructurings have not always been smooth, and in some cases, negotiations have been protracted.” The report further states, “The IMF’s role in these restructurings has been to provide information and assess the debt sustainability of the proposed offer."

Delays in negotiations can also be caused by holdouts—bondholders who withhold their consent and retain their right to seek the full repayment of original bonds—disrupting restructuring processes. It is also a situation where a creditor or bondholder refuses to agree to the course of action or decision supported by the majority of creditors or bondholders. This situation is possible because the Financial Times (ft.com) reports, “the G20 common framework that is intended to speed up sovereign restructuring processes has been beset by delays and rancour by creditors.” It narrates, “In Zambia, tensions between China and other creditors helped resolve a 2020 default for more than three years until a breakthrough allowed the Southern African nation to announce a deal with bondholders last month.”

The Ghanaian authorities have not reported issues of restructuring holdouts, but this issue could be a major cause of the current international bond restructuring complications. While the debt sustainability thresholds demanded by the IMF-supported program, the ECF, are the reasons the Minister of Finance underscores as a key parameter in meeting the requirements of the IMF’s DSA, bond-restructuring holdouts must not be ignored in the next stage of negotiation.

Emmanuel Kwabena Wucharey
Economics Tutor, Advocate and Religion Enthusiast.