Ghana debt lessons for Kenya

CS Treasury Prof Njuguna Ndung'u. PHOTO | DIANA NGILA | NMG

What has happened in Ghana is a sovereign debt default by another name. The government in Accra calls it a ‘debt operation programme’.

But as we all know, any unilateral scheme by a sovereign to postpone payment, reduce or not pay interest on government securities as contracted, amounts to a sovereign default.

If there is a big lesson for Kenya to learn from what Ghana has done, it is that difficult and bold decision on restructuring and managing debt are options you cannot postpone forever.

Until recently, we were still able to borrow from the credit markets to fill gaps in our budgets. These options won’t last forever.

The second lesson: when you consistently run primary budget deficits — when your revenues minus expenses are perpetually negative, and when your expenditure exceeds your revenues before you factor in debt repayments persistently, it will only be a matter of time before you end up where Ghana is right now.

The government of former President Mwai Kibaki used to run primary budget surpluses. Since 2013, we have been persistently running primary budget deficits.

And, when your problems spread into a situation where the centre can no longer hold, it’s hypocritical to start quoting from the Bible and invoking the name of the Almighty.

An unsustainable debt situation is an economic consequence of over-reliance on borrowing instead of living off currently produced wealth. This is a man-made problem.

I confess how I was thoroughly amused to hear Ghanaian finance minister, Ken Ofori-Atta, resorting to quoting the Bible even as he announced unilateral haircuts on domestic bonds.

He quoted from 1 Samuel 30:19 which says ‘Nothing was missing, small or great. I say to you, nothing will be lost, nothing will be missing and nothing will be broken. We will, together, recover all.

Then Mr Atta continued, "We shall overcome our current difficulties, and with the help of God, put our economy back on the path of renewed and robust growth difficulties'.

How do you insist that nothing will be lost when you will be paying nothing to bondholders for the whole of 2023? In brief, the so-called debt operation programme has the following planks.

First, as of December 1, 2022, existing domestic bonds will be exchanged for a set of new bonds maturing in 2027, 2029, 2032 and 2037.

The coupon on the new bonds will be at zero per cent in 2023, five per cent in 2024 and 10 per cent from 2025 until maturity.

Pension funds that hold those pieces of paper that were until recently deemed to be risk-free will pay a heavy price from the imposed haircuts.

The impact will be felt on balance sheets of commercial banks, especially in cases where the bonds are marked to market.

The Ghanaians have announced they are creating a financial stability fund to help the situation. It’s as futile as applying a bandage on a festering wound.

The third lesson: the IMF will be the first to ask you to reduce your debt to a level they deem as sustainable as per their own numbers.

When you default, the playbook for the IMF is the same for all its clients: ‘You must impose haircuts on your debts first before we bail you out'.

The IMF will only give an umbrella when it is not raining. When rains, they take the umbrella away.

Is Kenya headed to the situation in Ghana? I don’t want to shout fire in a crowded hall.

A recent IMF mission reportedly asked us to table a workable proposal on how we intend to repay a huge $2 billion Eurobond maturities that will be crystalising in 18 months.

A Treasury official told me the visitors from Washington DC opposed the idea of creating a sinking fund to settle the 2024 Eurobond maturities that represent the biggest challenge for Kenya in the management of its external debt liabilities.

According to official statistics, the projections are that as a consequence of the 2024 Eurobond maturities, total maturities on the country’s stock of external debts will rise exponentially to nearly twice the annual average to a massive Sh 475.5 billion within 18 months from now.

Sooner or later, Kenya will be prepared to make some very difficult and politically unpopular decisions.

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