Bad Economics is Keeping the DDEP Alive

First Published on 1st February, 2023

It is a house of cards.

Ghana’s Domestic Debt Exchange Program will not survive a rigorous analysis of its economic foundations as I will show in this write up. Simply put, it doesn’t make economic sense as it creates a bigger problem in the form of a real sector income crisis over the next decade while doing nothing to solve the present issue of inability to honour external payments on our debt and import obligations because we have been locked out of the external debt market.

So why has the DDE survived till now as the establishment’s solution to the current balance of payment crisis facing the country? Why have almost all opinionated intellectuals seem to come to the conclusion that a Domestic Debt Exchange Program is an inevitability?

Bad Economics.

But before we get into that; this is also about pressure from external creditors who seem to have gotten it into their heads that Ghanaians are not being punished enough for the crisis and somehow we need to burden share in a debt program. When they should really be focusing on Government’s ability to pay in the future – which is about fiscal adjustments and curbing Ghana Government’s unsatiable appetite for excessive borrowing.

There is also politics. Despite running the country into a ditch, Nana Addo still intends to leave legacy projects and win the next elections; if just to spite his detractors. So he is not considering any meaningful fiscal adjustments – until we make him.

Now let’s come to the Economics.

The rationale that has been pushed for Ghana to embark on a Domestic Debt Exchange Program is that it will help restructure our debt sufficiently enough to reduce our Debt to GDP ratio from about a 100% to 55%. This is being presented as a pre-condition to receiving balance of payment support from the IMF to the tune of 3 billion dollars over 3 years.

Ghana’s domestic debt is held by the Bank of Ghana, Commercial Banks, other financial institutions and some individuals.

Traditionally, interest rates on domestic debts have been high due to inflationary pressures and structural cost issues in our financial sector. Government’s over-reliance on the financial sector for debt issuances has also contributed to a merging of a sorts of Ghana’s financial industry and the domestic public debt sector – hence, they are almost one and the same.

This is where the problem is, from an economic perspective.

Government’s Domestic debt is Ghana financial sector and is Ghana’s economy. To paint the picture consider that *Total domestic debt in currently about 196bn cedis; total banking assets is 200bn cedis and the total government expenditure for this year (which is a huge chunk of our GDP) is 205.4bn cedis.* They are the same fungible funds or simply the same pot of money.

These three are also in all practicality not separate economic actors where economic benefits can be gotten if one gives and the other takes. So while an external debt restructuring will benefit the sovereign – Ghana; a Domestic restructuring is just a merry-go-round that will reduce trust in the economy and cause potentially catastrophic effects.

A good practical example of this is the haircut that Government will be giving to the Bank of Ghana under the DDE in a case of robbing Peter to pay Paul. *In fact about 40% of the currently agreed Domestic Debt Exchange Program is between the Government of Ghana and the Bank of Ghana itself.* So who is forgiving who what?

Another example of how this incestuous economic manipulation will not work is that Government who is being forgiven its debt apparently by the financial institutions must find more debt to maintain a Fund to rescue the institutions forgiving it its debt.

This is inexcusable bad Economics and is every reason why the DDE should fail to be considered as a serious path to solving our current challenges.

Furthermore as mentioned above, the Program will just not work out as it is supposed to but it will rather have a devastating effect on the economy. *One such unmitigated disasters is already coming into view as the secondary bond market will trade similar instruments issued by the same government but with significantly different discount rates in terms of the newer DDEP bonds and the exempted (or self exempted) bonds. In the end, if the market functions as it is supposed to then the value of the DDEP bonds will crash to near zero.* A voluntary DDEP cannot work in practice.

Ultimately however, this is all just politics. The IMF needs to tick a box that it has put the government on a path to debt sustainability before it doles out 3 billion dollars to increase our debts.

The government needs to show external creditors, who really hold the cards to actual debt relief; that they can sufficiently punish their people to deserve their dollars.

And the President must exit office in a dignified manner; having protected his Free SHS Program, built his Cathedral and injected enough projects and money into the ‘system’ to break the eight. That is why it doesn’t make sense for the Opposition NDC to say they have nothing against the DDE – because in reality the DDE is the only way by which this government can maintain its patronage programs to try to win the next elections. You will think an Opposition party will know this and resist the Program. It is not only self defeating on the part of the NDC, but it is an abdication of national political leadership.

To conclude, the above analysis makes the case for deep and extensive expenditure cuts even more urgent. If government expenditure is virtually the same pot of money as government debts, then any extra additional expenditure items government incurs this year, apart from in debt servicing; will have to be financed by new and fresh debt. Every road, bill, staff, project that this President undertakes this year means a deeper hole for us to climb out of in the near future.

If we agree and conclude the DDEP as currently set out, Ghana as a country will be studied for generations to come as a textbook example of economic stupidity.