Dr. Kwadwo Opoku, a Research Fellow at the Centre for Social Policy Studies (CSPS) at the University of Ghana, has stated that government could have achieved the same results by using financial repression instead of the debt rescheduling program it has adopted.

According to him, government could have allowed inflation rate to remain high where real interest rates would remain in the negatives for at least two years.

The Senior Research Fellow explained that if government relies on inflation to achieve the same thing, people wouldn’t complain that much because they will not see the government’s physical hands in it as they are currently witnessing.

“I would have wanted to use financial repression where real interest rates may even be negative. That one even if the real interest rate is negative, you will be willing to go through it rather than taking away their principal… that’s why they are fighting back but if real interest rate is negative, there’s nothing they can do. I would have opted for that but because of the IMF conditionality.

“For me, if not because of the IMF conditionality, I wouldn’t go for it [debt exchange]. I would go for government operating an inflation rate of above 30 percent for the next two years. That will also actually do the same thing, wipe out a huge portion of the principal… It’s the same thing. That could be one way for government to reduce debt servicing in real terms.”
Dr. Kwadwo Opoku

Despite raising concerns about the debt restructuring option adopted by government, Dr. Opoku noted that many countries that have once found themselves in similar positions have done that in the past and not only Ghana. According to him, government had no choice because debt restructuring was a prerequisite for an IMF program to be reached.

“So, the domestic debt restructuring which I think the government hesitated to do is just a condition for them to get the IMF program. And so, really, they do not have much say or choice as to whether they want to do it or not. It is a condition for them to get the bigger thing that they are looking for, the IMF program, so that’s fine.”
Dr. Kwadwo Opoku

Unavoidable Losses

The Economist pointed out that once it comes to debt restructuring, there will always be a fallout especially given “our history with regards to financial problems”. To this end, government, he said, must have to put in place measures to address any liquidity challenges that may occur as a result of the implementation of the program.

“It looks good but as you are seeing, it’s going to be protracted, people may not be happy. Of course, they [government] didn’t choose the haircut option, they chose the rescheduling. There are many ways of doing debt restructuring, we have the haircut option and the debt rescheduling option. They rather chose the rescheduling where they reschedule the maturity…reducing the coupon rate.”
Dr. Kwadwo Opoku

Dr. Opoku clarified that rescheduling is not the same as haircut as many people are trying to portray. He explained that haircut technically means reducing the principal or the face value of the bond by a percentage or something.

However, he noted that irrespective of the option chosen by government, “definitely, there is a loss to investors”.

“I think if they are able to convince investors to accept it, that’s fine but as you know, there is a possibility to free-ride. Investors will be happy if other people accept it while they all benefit from it; pay the price for the stability that we are all looking for.”
Dr. Kwadwo Opoku

Dr. Opoku further indicated that the pension funds of labor unions will be the worst hit by the instability in the economy because their funds are prevented by law to be put elsewhere aside government funds. He noted that once inflation is high, it will affect the pension funds the most because other private investors have the option to pullout their investments and send it elsewhere.

“But for these ones [pension funds], there is no option for them. So, I think they should really consult their financial experts, probably economists to evaluate, do a cost benefit analysis to assess if they accept this, how would it affect them.”
Dr. Kwadwo Opoku

Dr. Opoku noted that for now, government will have to engage with various stakeholders because “there is no win-win situation, everybody will lose”.