Risk analyses of the country’s debt show that about 46.5% of the debt portfolio is exposed to exchange rate risk. The finance ministry revealed this in its 2021-2024 Medium-Term Debt Management Strategy (MTDS). Notably, the US Dollar and the Euro remain the main exposure of Ghana’s debt portfolio.
“About 46.5 % of the debt portfolio is exposed to exchange rate risk. The main exposure of the debt portfolio still remains the US Dollar and the Euro”.
These two currencies, according to the Ministry of Finance, make up about 70.66% and 16.75% of the external debt stock respectively.
“The Cost of debt as measured by the Weighted Average Interest shows a marginal increase from 11.0% in 2019 to 11.7% in 2020. The external weighted average interest rate increased slightly from 5.1% to 5.3% on the back of longer tenor coupons of government financing in 2020”.
Cumulatively, the Ghana Cedi depreciated by 3.9% and 12.1% respectively against the US Dollar and the Euro in 2020. Nevertheless, the finance ministry lauded the performance of the Ghana cedi against the US dollar in 2020. As such, it described it as the best performance recorded in the Fourth Republic, notwithstanding the COVID-19 pandemic.
Moreover, the finance ministry expects the fiscal deficit to reduce significantly between 2021-2024. The ministry’s expectations rely on government’s planned revitalization and transformation agenda within the context of debt sustainability. As a result, it expects the fiscal deficit to reduce from the provisional 11.7% in 2020 to 9.5% in 2021. Also, the ministry is optimistic that the deficit will reduce further to 4.5% by 2024. The government expects to finance the deficit from domestic and external sources.
Optimal Financing Strategy
The government intends to diversify the investor base and currency structure. As a result, it has resorted to finding an optimal strategy among all combinations of strategies to meet its objective. However, the ministry stated that the ideal strategy is the extension of tenor, the introduction of new instruments, and effective communication with the markets. According to the finance ministry, this strategy also seeks to commence a liability management program. This program aims to manage the risks embedded in the public debt portfolio for both external and domestic debt.
Moreover, the finance ministry noted that the Strategy assumes a continuous issuance of medium to long-term domestic bonds in 2021. It also assumes the issuance of domestic benchmark instruments in 2021. Likewise, it recommends an international capital market issuance for Eurobond, Sustainable bonds. Another recommendation of the strategy is the Diaspora Bonds or syndicated loans of up to a limit of US$ 5.0 billion
The Medium Term Debt Strategy
The MTDS is prepared by the Ministry of Finance as per the requirements of Section 59 of the Public Financial Management Act, 2016 (Act 921).It spans the period 2021 to 2024 and is based on the debt management objectives as stated in Section 58 of Act 921. The MTDS aims to ensure that the government meets its financing needs for the medium term on a timely basis. It also ensures that borrowing costs are as low as possible and consistent with a prudent degree of risk. The MTDS also promotes the debt market and pursuing any action considered to impact positively on public debt.
Meanwhile, the finance ministry has assured that government will pursue liability management of the debt portfolio based on non-distressed debt transactions. This forms part of the measures to reduce debt management risk. According to the ministry, this could indirectly affect cash flows from government fiscal operations. Yet, this can happen when the timing of Liability management coincides with negative carry-on idle cash.
The 2021-2024 MTDS considers the costs and risks embedded in the current debt portfolio and future borrowing requirements for the medium term. It also covers the 2021 macroeconomic framework, the prevailing market conditions, and other factors necessary to develop the strategy.
Overall Debt stock
Meanwhile, data from the Bank of Ghana show that the debt stock as of End-December 2020 stood at GH¢291,614 million, representing 76.1 percent of GDP. The external debt is GH¢141,780.60 million, representing 48.6 percent of total debt. Conversely, domestic debt amounted to GH¢149,833.89 million, accounting for 51.4 percent of the total public debt stock. However, the external and domestic debt represented 36.99% and 39.09% of GDP, respectively.
READ ASLO: Debt stock hits 76.1% of GDP