Plans to issue new bond smacks of desperate state of Ghana’s finances – Joe Jackson

Government’s proposal to issue zero coupon bonds is thus an effort to avoid paying interest on the bonds during its lifespan. Interestingly the proposed tenor is four years just long enough for the huge one –time payment of principal and accumulated, compounded interest to become the obligation of the administration that succeeds this one which will use the money.

This will generate considerable controversy. The use of back-ended zero coupon bonds would improve the country’s cashflow by enabling it borrow over the medium term without having to meet debt servicing costs of paying interest every year – debt servicing costs have been rising to inordinate levels and this year will take away 49.5 percent of the country’s expected tax revenues – but would leave the next administration, which will succeed this one with a huge debt servicing bill to meet almost immediately it assumes office, comprising the principal amount being borrowed now and the interest accumulated over four years. Indeed, if Parliament had not already approved the planned bond issuance already, government would have found it very difficult, if not altogether impossible to secure legislative approval for issuing the zero bonds it intends, especially without having a clear majority in the house.

Even with approval already secured, the intended issuance will generate controversy among parliamentarians politicians, public policy analysts and commentators as well as economists who will question the fairness of leaving the next administration with such a debt servicing bill so early in its tenure. The payment will obviously have to be refinanced rather than paid from the treasury, but the timing will leave the new government with very little time to arrange it, especially if the next government is formed by a party currently in opposition.

On the other hand though, the arrangement is perfectly suited to the incumbent government which effectively will be borrowing without any debt servicing obligations accompanying it while still in office. Considering that debt servicing already is taking half of its tax revenues this will be crucial towards its plans for fiscal consolidation to bring the fiscal deficit back under 5.0 percent as demanded by the currently suspended fiscal responsibility law, by 2024.

The incumbent government’s supporters will argue that the use of zero coupon bonds is not unfair since its inordinate debt servicing costs have been imposed on it by previous administrations – in effect it would be doing to its successors the same thing as its predecessors did to it.

Actually it will not be an easy sell to the international investment community. With Ghana’s public debt to Gross Domestic Product ratio already well above the generally accepted debt sustainability threshold of 70 percent (it was 76.1 percent by the end of 2020)  and the World Bank projecting it to rise to over 80 percent by 2023, even recovering the principal amount lent will be seen as risky; zero coupon bonds  put the interest at risk too, since by the time it falls due for payment Ghana might be having difficulties meeting its debt servicing obligations unless its debt trajectory changes from its current course. ’Basically government will have to convince investotrs that by the time payments fall due, new sources of foreign exchange revenues would have become available to it – most practically from the development of either the impending Pecan oilfield by Aker or the Afina oilfield by Springfield and partners.