Lessons for Africa from Ghana’s strange debt ‘exchange’

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Calling the exercise “strange” doesn’t fully do it justice. Some of the non-orthodox approaches adopted by the government and the resultant creditor responses have bordered on the bizarre.

When Ghana announced its DDE programme, everyone knew the country was in for some intrigue, but the drama has far exceeded expectations.

No African nation has ever been pushed far enough to undertake a wholesale domestic debt restructuring before; but then again, few African countries have had the mix of conditions to induce or allow one.

Ghana’s assets became liabilities

Ghana’s large domestic bond market, profitable banking system, and relatively sophisticated capital market, once the envy of regional neighbours, had all worked together to ensure a very sizable domestic debt burden. That’s a significant contrast to most African countries where, historically, debt profiles have been usually dominated by obligations to rich countries and international aid and development finance institutions like the World Bank and IMF.

By the time the government declared effective sovereign bankruptcy in 2022, nearly 70% of all domestic tax revenues was being used to service debt, and of that amount a massive 75% went to domestic creditors. Analysts learned this week that things were so tight that the Central Bank was compelled to print cash equivalent to nearly half of domestic government revenue just to support debt servicing expenses.

The runaway inflation and spiralling exchange rate depreciation resulting from the cash-printing and loss of access to international capital markets eventually led to the government dashing to the IMF after months of ruling party swagger about national pride and loud warnings about the perils of IMF programmes.

As a precondition for a $3bn IMF loan, the government was told to restructure its unsustainable debt.

The culture of official impunity

Despite Ghana’s noisy democracy, leaders have substantial latitude in pushing through painful and unpopular policies. After years of ritual democratic practices cohabiting with rampant official impunity, the country has lost many of the ideological bulwarks that in some countries, even in those less ritually democratic than Ghana, stand in the way of socially punitive policies.

Hence, despite near universal hostility, the government implemented a tax on digital financial transactions a few months before the IMF U-turn. Regulated power prices went up in a few short months by nearly 60%. VAT (sales tax) too was jacked up by 20%; all this at a time of crushing cost of living pressures. It is remarkable that these decisions have been met with virtually no serious popular protests.

All this may signal democratic resilience, and in some sense that is true. But such a notion also obscures important facts of elite dysfunction that the debt restructuring has thrown into sharp relief, facts that should resonate with observers across Africa.

A unique debt restructuring exercise

Near as I can tell, Ghana is unique in having launched a debt restructuring exercise without bothering with any serious prior consultations with its biggest creditors. This author has written at considerable length about this bizarre situation in these pages. Should the government finally close the programme today, it would be the most rushed DDE in world history as the table below shows.

Ghana’s approach of diving right in without an informal commitment from creditors is breathtakingly ballsy.

Literally every debt restructuring exercise that has been documented commences with extensive informal consultations before the formal programme is launched. For example, whilst Uruguay’s much praised 2003 exercise formally lasted for only seven weeks, it was preceded by more than two months of detailed deliberations between creditors and the sovereign debtor. Ghana’s approach of diving right in without an informal commitment from creditors is breathtakingly ballsy.

Not surprisingly, it will also be the least successful such exercise in world history. As at the end of the 5th extension on 7th February 2023, 50% of eligible debt principal had been turned in by creditors in exchange for new bonds that guarantee losses of up to 50% (factoring in loss of interest, inflation and the time value of money).

Holding out for dear life

Whilst participating creditors are getting a better deal in the latest version of the prospectus than would have been the case with the government’s original offer, which would have seen some investors lose up to 88% of the value of their bonds, most holdouts have refused to budge, denying the government the pleasure of attaining its 80% participation rate target despite its belated concessions.

Even the least successful completed debt exchange programme in recent years, Argentina’s tempestuous 2000 episode, still managed to secure participation above 75%. The likely outcome of between 50% and 70% participation rate for Ghana’s DDE by close of Friday, potentially lower than even the figures projected by pessimistic analysts, clearly deserves explanation.

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Source: IMF, ECB, and Cruces & Trebesch (2013)

The obvious reason for the remarkably low rate is of course that the programme was rushed. An analysis of debt restructuring programmes in the Caribbean, a region noted for such exercises, shows that on average it takes about 13 months to go through the motions of consultations, negotiations and settlement. Ghana originally attempted to do all that in less than one month. Even the five extensions so far have been packed into a period less than 3 months.

Hardball government

Upon facing inevitable resistance, the government still refused to accede to creditor requests to pay for the setting up of a formal coordination committee to co-create the exercise. Stuck in policy impunity mode, government actors were pretty sure that a fragmented creditor front would be far more amenable to its strategy of ritual consultations rather than true engagement.

This is of course understandable. A government unused to true participatory democracy cannot be expected to change its stripes so quickly.

A series of unilateral extensions then followed during which the disorganised mass of creditors started to self-coordinate, but increasingly in opposition to the government’s wishes and hopes. The high holdout rate reflects this structural antagonism.

Worrying prospects ahead

The government is now set to receive less than half of the debt relief it needs to stay the course of its new debt sustainability strategy. Going forward, this will complicate other fiscal adjustment operations.

Ghana’s negotiations with external creditors may be more fraught than otherwise as overseas creditors can now point to disorderly exemptions and concessions to question the real extent of sovereign insolvency.

Ambitious plans to ensure that the IMF deal is completed in March now look even less realistic

Deferred restructuring of the remaining 40%-plus of domestic public and public-exposed debt may now have to be brought forward, setting off additional adverse ripples for the financial system.

Ambitious plans to ensure that the IMF deal is completed in March now look even less realistic despite the finance ministry’s insistence of imminent economic collapse if that timeline is breached.

What are the biggest lessons for Africa here?

Official impunity ritualises democracy

In Ghana, activists know that they have more freedom than in many African countries to voice complaints about official policy, but they also know that informed public opinion rarely shapes policy. Years of uproar about perennial revelations of administrative incompetence, and even corruption, in auditor general reports have led to no serious reforms.

Even in the midst of a major fiscal crisis, the government continues to bend and game procurement rules and enter into highly opaque arrangements exposing the country to large financial liabilities like the so-called “National Cathedral” and “Gold for Oil” programme, among others.

Once a country has advanced beyond the lower rungs of democracy, and the population has become used to the basic tenets of freedom, the costs of moving into higher stages of democratic accountability and bureaucratic quality fall disproportionately on elites, who must invest far more than the average citizen in grappling with the more intensive, multi-level, effort of policy accountability.

When it becomes routine for the state to disregard non-state contributions to policy making, the majority of elites switch off and democracy becomes increasingly frozen at a level of substandard quality.

In such a democracy, only massive agitations generate accountability. Unfortunately, a perpetual state of intense agitation is really in no one’s interests as it blocks citizens from enjoying the real dividends of lower-rungs democracy, such as basic human rights. Over time, tolerance of bad governance sets in, creating inertia against further propulsion of democracy onto the higher rungs. This is the “mediocrity trap” of middling democracies.

A democracy that becomes locked to this setting is not a sham democracy because the benefits of the lower rungs remain real. However, the policy layers of that democracy become increasingly ritualistic as the government no longer makes decisions about complex, usually technical, matters (which nowadays encompasses all “important issues”) with any serious feedback from outside a close-knit clique of political power brokers. Such a democracy becomes a ritual democracy in all important respects.

Throughout the ongoing fiscal crisis, Ghanaian government decision-making has resisted even the most basic scrutiny. Unlike the case in Argentina, Greece, Barbados, and other countries, even the Parliament has been shut out of the debt restructuring process.

The independent “fiscal councils” that elsewhere have been used to assure creditors of the government’s commitment to fiscal discipline post-restructuring are nowhere to be seen. Even basic commitments to data transparency are missing from the terms of the exchange. Virtually none of the feedback mechanisms that are becoming popular in sovereign debt restructuring instruments have been included in Ghana’s strange version.

Such an approach is however consistent with the general pattern of state action in Ghana. Most of the government’s choices appear designed to go directly counter to whatever policy think tanks and civil organisations counsel. Trade unions and other social forces have had to use raw protest power to get a word in as no one in government is interested in their views. Such behaviour is, tragically, standard in ritual democracies.

Ritual democracy corrodes public sphere consensus

When technocratic elites, organised social forces and others engaged in the public sphere lose confidence in the participatory aspects of policy decision-making, they become disengaged critics. They no longer invest in the heavy-lifting needed to sharpen policy choices and select optimal pathways for problem-solving.

Elite alienation in this fashion is, surprisingly, rarely seen as something to worry about in discourses about democracy because of a widespread confusion about the nature of policy design in political society. Most policies require considerable technical capacity. Consensus about the technical design of policies thus follows a very different subsurface path in contrast with broader social consensus about their necessity, appropriateness, ethical justification, and even validity.

Hence, even in so-called non-democracies, policy design can be subject to far more rigorous debate than people assume, emerging ultimately on top of a highly refined consensus based on learning-feedback-loops.

When Ghana most needed elites with influence in the financial sector and among the middle classes to mobilise behind the government’s plans for debt restructuring, the elites kept quiet

One only needs to follow China’s ecosystem of think tanks, party schools, consultative networks, academic institutions and specialised policy press to understand this point about “policy refinement”. Or recall the complex, multi-stakeholder, industrial policymaking culture during the authoritarian Park Chung-Hee era in South Korea.

What is important is thus the set of incentives for public sphere actors to invest in shaping the quality of policy. Since “impact” is a major goal, non-state elites will disengage if they feel that official impunity prevents serious consideration of their contributions.

When Ghana most needed elites with influence in the financial sector and among the middle classes to mobilise behind the government’s plans for debt restructuring, the elites kept quiet or openly campaigned against the programme.

Financial specialists, economists and policy wonks have spent the last few weeks debunking government arguments that the old, higher yielding, bonds will have lower liquidity than the new bonds they are handing out to replace them. They have provided extensive guidance to unsophisticated, small-time, bondholders about the losses implied in the debt exchange and the dangers of new legal provisions inserted into the new bonds to reduce creditor legal protections.

Since the government has limited use for their knowledge, they have deployed it to benefit their class interests, and against the government’s objectives.

State dyslexia is a constraining factor for economic reform

What is surprising is that Ghana’s fiscal crisis began as far back as October 2021 when the government went back to the Eurobond market to raise more money within a few months of securing $3bn in March of that year. The seeming desperation for money spooked investors who began to look more closely at Ghana’s strained macroeconomic indicators.

When investors walked away from the deal, the episode left Ghana’s market reputation in tatters, setting off a sell-off of the country’s Eurobonds. Soon thereafter the deadlocked Ghanaian parliament failed to pass the government’s budget, casting further uncertainty on the country’s economic programme. The ratings agencies scrambled to update their outdated risk models on Ghana and commenced a series of downgrades that shut the country from international markets.

Starting from the November 2021 parliamentary stalemate, entirely the result of perennial non-consultation, the government has chosen at every turn in the crisis to dismiss counsel from the broader public policy sphere rather than act in ways that can mobilise a national consensus. All its policies are partisan and none enjoy multi-partisan support.

Its widely criticised digital financial taxation programme (e-levy) was rammed down the throats of citizens despite clearly superior analysis showing that the programme was misguided. Its approach to fiscal adjustment and debt restructuring has likewise been bulldozed through. As a former chief justice has described things, the fiscal crisis has become one for the “disrespectful” government alone to bear.

With each successive act, Ghana’s rulers have alienated more and more public sphere actors, blunted goodwill, and put the reform agenda at risk as timelines for critical milestones, like passing the budget or securing IMF deals, stretch more than they should.

So, why doesn’t the government ever learn?

Elsewhere, the author of this essay has explored in elaborate terms how certain states struggle to learn and course-correct over their developmental trajectory. In this essay, we simplify the issues.

States like Ghana suffer from a condition of dyslexia that can be analogised with the better-known individual learning disability version. The three-part model of neurobiological, cognitive and behavioural dimensions used in characterising individual dyslexia has mirror attributes in State Dyslexia too.

Following decolonisation, many African governments soon became hopelessly dependent on a global aid system.

State Dyslexia is dimensioned into political history, institutional structure and policymaking practice. Most African states have political cultures seeded by colonial experience whereby an “alien” policy elite imported the technocratic process wholesale from overseas. The effects have been hard-coded into the DNA of power on the continent.

Following decolonisation, many African governments soon became hopelessly dependent on a global aid system thoroughly reliant on external consultants for policy design. Institutional memory has often been seriously impaired when these consultants leave.

With the diversification of global development financing sources, for reasons as varied as the rise of China and the emergence of “frontier markets” as an investment category for international private capital, African countries are increasingly fully responsible for the technical design of elaborate, and important, policy matters. Yet, for a long time, governments never had to cultivate domestic policy networks for the technocratic refinement of ideas through feedback loops. For the most part, political bosses have been dismissive of the utility.

Because most policy ideas lack feedback-driven refinement, public ownership tends to be very low, creating widespread distrust in the quality, integrity, robustness and comprehensiveness of policies. It is thus easy for each new government to dismiss previous national plans with total impunity as there are no serious constituencies behind the plans.

Major factions of the elite, in business, the civil service, and the professional classes, who are supposed to take government policies and convert them into various outputs frequently discount, arbitrage, game, and second-guess them; and that is when they are not dismissing them altogether.

The feedback loops meant to improve policies and lower implementation risks are thus eroded, making course-corrective learning by the state impossible, and greatly elevating the risks facing all actors, especially those in the financial and economic spheres. The mess becomes “priced in”, breeding even more tolerance for dysfunction.

All the above explain why, despite the poor outcomes so far of Ghana’s ongoing fiscal crisis resolution effort, major changes in approach are unlikely and why no analyst in the country is looking forward with any great enthusiasm to the prospect of the country’s 17th IMF programme making any fundamental difference to the culture of governance.

The sad fact, of course, is that much of this diagnosis applies to much of Africa.

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