Although it’s been almost two years following the end of the Domestic Debt Exchange Program (DDEP), it appears that its devastating impact will linger for a very long time.
Financial Analyst and Banking Consultant, Dr. Richmond Atuahene believes it is one of the major blows suffered by the economy and the wound will take a considerable number of years to heal.
The Domestic Debt Exchange Program (DDEP) was a bitter pill meant to give the economy that was hanging on a thread a lifeline, however, its devastating impact on individuals, businesses, and the financial system as well as other sectors of the economy can never be underestimated.
A research paper on the effects, implications, and outlook of the exercise authored by the finance expert copied to The High Street Journal reveals that the harm caused by the DDEP should be a major learning curve for the managers of the economy.
The Trigger
The woes began when it became apparent that the country’s debt had hit unsustainable levels in 2021. This was coupled with very acute financial pressure, soaring inflation which was pushing many into extreme poverty, and slowing economic activity leading to rising unemployment.
This among other pressures brought distress to the government, businesses, and individuals. The government, despite the calls to seek external assistance, remained resolute in using what they described as “homegrown policies” to resolve the challenges. But after it was overwhelmed by the enormity of the challenge, it turned to the IMF in July 2022.
According to Dr. Atuahene, public debt had reached 92.2% of GDP by the end of 2022. The crisis led to the country defaulting to the tune of about US$30 billion on its external debt obligations as of December 2022 after the government suspended payments due to the inability to pay. This began the effort of the government to restructure its unsustainable debt.
The completion of domestic debt restructuring in September 2023 led to the exchange of about GH¢203 billion worth of domestic bonds for longer bonds with lower interest rates. The government of Ghana achieved substantial fiscal savings of about GHS61.7 billion (US $ 5.23 billion) which is approximately 30% of domestic debts and 7% of GDP.
The Most Affected
The exchange of bonds with higher interest rates and shorter maturity periods for bonds with lower interest rates and longer maturity times meant the holders took a huge hit.
Individual investors including pensioners took a huge hit. The banking sector, since the majority of the government bonds at the time were held by banks also felt the pinch.
The insurance sector and some pension funds were not spared bringing untold difficulties on them.
The Impact
Let’s take a closer look at some of the lingering impacts the purported panacea for Ghana’s economic stability further caused.
Increase in Poverty
With squeezed credit to the private sector as well as limited public spending due to the stress the banking sector experienced, poverty levels increased. This means many people were pushed below the poverty line. As revealed by the World Bank and quoted by Dr. Atuahene, poverty increased to 30.3% an increase of 3.5 percentage points since 2022. It is projected that the situation could further worsen to 31.8% this year.
Insolvency for Banks
The DDEP caused significant losses, liquidity constraints, and solvency risks for banking institutions, especially smaller banks. Some private domestic banks sought for recapitalization under the Ghana Financial Stability Funds as well as shareholders. Domestically-owned banks took the most hit as they lost a significant portion of their net Net Present Value (NPV). Their capital declined forcing them to seek assistance from the Ghana Financial Stability Fund (GFSF).
Increase in Cost of Borrowing/Crowding Out of Private Sector
The private sector also suffered a severe repercussion from the exercise. Credit to the sector to grow and expand was squeezed due to the stress caused to banks. The situation still lingers as most banks have not fully recovered. By simple demand and supply theory, the limited supply has caused the cost of credit to increase which is struggling to decrease currently.
“As of April 2024, private sector credit growth stood at 10.8 percent of GDP, contrasting starkly with the 19.8 percent growth observed in April 2023. In real terms, credit growth contracted by 11.4 percent in April, only a modest improvement from the 15.2 percent contraction recorded a year earlier, reflecting the persistence of risk aversion among banks due to the macroeconomic crisis and consequent increase in non-performing loans (NPLs) of banks,” Dr. Atuahene indicated in his paper.
Moreover, by February 2024, banks’ allocations to Government and BoG instruments had surged to ₵53.6 billion, marking a significant year-on-year increase of 67.6 percent, surpassing the 36.9 percent increase recorded for the corresponding period in 2023. This trend raises concerns as it underscores the phenomenon of crowding out private-sector borrowing, with potentially adverse implications for overall economic growth prospects.
Impact on Pension & Insurance Funds
The exercise, Dr. Atuahene says has had a ripple impact on pension funds. Since most of these funds had invested in these government securities, the DDEP has resulted in deferred principal payments until 2027 and 2028. This has reduced significantly the cash flow of these pension funds and insurance companies.
Reputational Damage & Loss of Investor Confidence
Ghana’s reputation has been severely impacted in the eyes of investors and the international community. The restructuring led to market exclusion, higher borrowing costs, and the withdrawal of correspondent bank credit lines, making it impossible for Ghana to access international capital markets for at least four years. Investors, once confident in government securities, now demand higher risk premiums, increasing debt servicing costs.
The financial sector has been hit hard, with fund management firms facing liquidity crises and banks suffering capital losses, forcing them to tighten lending and triggering a credit crunch. This lack of financing is stifling business expansion and economic growth, while Ghana’s poor credit risk rating has also disrupted international cocoa syndication. The country now faces rising debt costs, reduced foreign investment, and prolonged financial distress, threatening long-term economic recovery.
Amid these and many other lingering impacts of the DDEP, Dr. Atuahene recommends robust fiscal reforms and strict government expenditure controls to ensure long-term debt sustainability. While stakeholder interventions have softened the initial blow, particularly for pension funds, the interconnected nature of the financial system means that delayed coupon and principal payments will eventually affect pension returns.
The government must also address rising refinancing risks and potential defaults by implementing sustainable debt management strategies. Without these measures, the DDEP risks merely postponing Ghana’s debt crisis rather than resolving it.
Source: thehighstreetjournal.com
