Ghana’s Domestic Debt Exchange 2022 – Exchange Memorandum

Dear all,

On behalf of the Government of Ghana, I wish to set out the background of a debt exchange programme that will allow our country to restore sound public finance and sustainable debt levels, and to kickstart economic growth following the impact of the COVID-19 pandemic. This invitation is to exchange certain domestic notes and bonds of the Republic of Ghana, E.S.L.A. Plc, and Daakye Trust Plc (collectively, the “Eligible Bonds”) for new bonds of the Republic of Ghana. The details of the offer are provided in this Exchange Memorandum.

The Invitation to Exchange is an arrangement through which holders of Eligible Bonds will submit their holdings of Eligible Bonds governed by Ghanaian law and denominated in Ghanaian Cedis (GHS) for new benchmark Government of Ghana bonds with the same aggregate principal amount, and which have in the aggregate a lower average coupon and extended average maturity than the Eligible Bonds. The exchange will take place at certain defined percentages as set forth in the Exchange Memorandum.

This transaction is an essential element of the economic reform programme which we are undertaking and for which we are seeking support from the International Monetary Fund (the “IMF”) and our other development partners.

Ghana is facing a very challenging economic situation amid an increasingly difficult global economic environment. The COVID-19 pandemic severely worsened our fiscal and debt situation at a time when investor concerns triggered capital outflows, loss of external capital market access and rising domestic borrowing costs. This year, the global economic shock created by the war in Ukraine hit hard our economy when it was still recovering from the pandemic. These adverse developments have exposed Ghana to a surge in inflation, a large exchange rate depreciation and have increased stress on the financing of our budget.

To address the ongoing economic crisis, Ghana has requested financial assistance from the IMF. We expect to reach a staff-level agreement soon on an IMF programme aiming at restoring macroeconomic stability and debt sustainability while preserving financial stability and protecting the most vulnerable. To this end, the Government is determined to implement wide-ranging structural and fiscal reforms to kick-start growth and restore fiscal stability and debt sustainability.

The latest debt sustainability analysis has demonstrated unequivocally that Ghana is faced with a significant financing gap over the coming years and that our public debt is unsustainable. The Government is currently discussing the contours of a comprehensive international financial assistance package and a debt re-arrangement covering our domestic and external creditors. The objective is to reduce the excessive burden created by our debt on our economy and reach the debt sustainability targets defined by the IMF staff for the period through 2028 and beyond. In particular, to restore debt sustainability, we plan to reduce our total public debt-to-GDP ratio to 55% in present value terms.

To alleviate the debt burden in the most transparent, efficient and expedited manner, a treatment of domestic debt is necessary. In this context, the least painful set of restructuring efforts to be borne by the domestic financial market is sought. In particular, the Invitation to Exchange does not embed any principal haircut on Eligible Bonds. It involves an exchange for new Government of Ghana bonds with a coupon that steps up to 10% as soon as 2025 and longer average maturity.

This domestic debt exchange is part of a more comprehensive agenda to restore debt and financial sustainability. External debt restructuring parameters will be presented in due course.

The successful completion of this domestic debt exchange is a critical component of both the debt reduction programme and the IMF programme discussions; it will contribute to unlocking the support of the international community and will allow Ghana to reach debt targets agreed with the IMF. We need the full participation of all bondholders in this transaction. Anything less will not make us eligible for assistance. There can be no exception.

Contingency plans have been prepared with applicable regulators to assist certain sectors of the economy (including the financial sector) after its participation in the exchange, to minimize negative spill-overs and safeguard the domestic economy including the establishment of a financial stability fund to provide a backstop for liquidity.

The alternative to the debt exchange would be a far worse economic crisis, with protracted closure from international markets (including imported goods and services) and further domestic economic instability both for the real economy and the financial sector. It would also mean depleted fiscal resources to support the neediest.

We are acutely aware of the upfront cost of this transaction, and other aspects of our adjustment programme, to participating holders. To that end we are carving out from this exchange treasury bills (up to one-year maturity) typically held by retail investors. To further protect small and most vulnerable investors, we have also carved out of this exchange individual investors. Further, there is also a positive trade-off for debtholders as a group: this transaction, though resulting in reduced coupon payments from 2023, will make a positive contribution to a safer and brighter future for all Ghanaians.

On behalf of the Government and the people of Ghana, I ask for your full support for this Invitation to Exchange and for your partnership as we carry forward our economic reform programme.

Source: Ministry of Finance