Economic Issues

Analysing Ghana’s domestic debt restructuring: From perspectives of debt reduction; debt rescheduling; and debt reprofiling and their impact on the economy

Analysing Ghana’s domestic debt restructuring: From perspectives of debt reduction; debt rescheduling; and debt reprofiling and their impact on the economy

Feb 8, 2023 4:20 PM

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According to IMF (Policy Paper No. 2021/071) posited that the key to determining whether or not domestic debt should be part of a sovereign restructuring is weighing the benefits of the lower debt burden against the fiscal and broader economic costs of achieving that debt relief. The fiscal costs may have to be incurred in the context of restructuring because of the need to maintain financial stability, to ensure the functioning of the central bank, or to replenish pension savings. A sovereign domestic debt restructuring should be designed to anticipate, minimize, and manage its impact on the domestic economy and financial system. Debt restructurings in Ghana will raise complex issues for both external and domestic debt.

Ghana has experienced a deepening of sovereign-bank links, with larger holdings of domestic sovereign debt at domestic banks. On the external side, increased diversity in creditor composition raises important coordination challenges. On the domestic side, there will be difficult trade-offs between the need to restructure sovereign debt owed to domestic banks, in some cases, and the impact of those restructurings on financial stability and domestic banks ability to finance growth. Recent case studies show that the negotiation process and the basic restructuring mechanics are very similar when comparing domestic debt restructurings to external debt restructurings ( Erce and Diaz-Cassou, 2010, and Sturzenegger and Zettelmeyer, 2006). However, there are also important differences. One difference is that domestic debt is adjudicated domestically, often leaving litigation in domestic courts as the only recourse available to investors.

A second difference is that investors in domestic instruments are normally mostly local residents (i.e., domestic banks, insurance companies, and pension funds), in which case a restructuring of domestic debt instruments will directly affect the balance sheets of domestic financial institutions and can affect the country’s overall financial stability. Furthermore, exchange rate considerations and currency mismatches play a lesser role in domestic debt than in external debt restructurings. Another difference is the duration of renegotiations. Since 1998, domestic debt restructurings were implemented in less time than external debt restructurings. Argentina’s domestic debt was restructured in November 2001, while the external bond exchange took four more years. Russia’s domestic GKO bonds were restructured within six months (between August 1998 and March 1999), while the restructuring of external bank loans took until 2000 to complete.

In Ukraine, the domestic debt exchange was implemented in less than two months, with separate offers for resident and non-resident holders ( Sturzenegger and Zettelmeyer (2006) for details). In Jamaica, the restructuring of a sizable stock of domestically issued debt took about two months. In addition, there have been instances of differential treatment of domestic versus external debt during restructurings. In Belize (2007), the government restructured only the external bonds. In Ecuador (1998–2000), the authorities restructured both short- and long-term bonds held by nonresidents, but not medium- and long-term domestic debt. In a similar vein, Ecuador’s (2008– 2009) default and debt buyback only affected two outstanding international bonds, but no domestic debt. The Jamaica (2010) restructuring is the opposite case, where externally issued Eurobonds were excluded from the restructuring.

From literature, 68 episodes of outright de jure domestic debt default and domestic restructuring documented by Reinhart and Rogoff (2011c), a range of mechanisms was used: forcible conversions; lower coupon rates (for example, China and Greece in the 1920s and 1930s); unilateral reduction of principal, sometimes in conjunction with a currency conversion (for example, Ghana in the 1970s and 1980s; Austria, Germany, and Japan in the 1940s and 1950s), and suspensions of payments (for example, Bolivia in the 1920s, Peru and Mexico in the 1930s, and Panama in the 1980s).

5.0 Theoretical review of domestic debt

Domestic debt refers to that portion of country’s public debt borrowed from within the confines of the country. These borrowing are usually obtained from central bank, deposit money banks, discount house, non-bank financial institutions, corporate bodies and individuals. Domestic debt consists of government borrowing from within the domestic economy. This type of debt, unlike the external debt does not increase the total resources available to the country. There is simply a transfer of resources from one end to the other public services purpose (Nuredeen & Usman, 2010)[1]. Also, the interest payment only transfers resources from the tax payers to the bondholders. Domestic debt only effects a transfer of purchasing power among the citizenry of the country, thus there is no giving up of real output to another country. Instruments used for domestic debt include treasury bills, bonds, treasury certificates and others.

The government borrows from domestic market to finance budget as well as financing capital projects. The oppressive burden of expensive domestic debt has fostered the initiative by various governments to borrow externally at the cheaper rate of interest. For example, in 2018, the government of Ghana through the Ministry of Finance and Economic Planning borrowed US$500 million from Global Depositary Notes (GDN) to refinance expensive domestic cedi denominated debt. The advantage of issuing domestic currency debt is that it can serve as an effective strategy for the country to reduce its vulnerability to exchange rate valuation effects caused by excessive capital inflows followed by sudden outflows and capital reversals.

Debt denominated in the local currency also increases the policy space because it allows the monetary authority such as Bank of Ghana counter external shocks such as commodity price shocks (cocoa and oil) or slowdown in world demand through exchange rate depreciations without bringing about a sudden jump in the debt/GDP ratios, and possibly, debt crisis (IFS, Working paper no 3/2015)[2]. However, issuance of domestic debt does have its drawbacks, as it is costly to obtain because government will have to offer higher interest rates on domestic bonds and bills relatively compared to external bonds issued in the global market. Furthermore, domestic debt increases the exposure to refinancing risk owing to its short-term maturity. Finally, the secondary market for domestic bonds has not been properly developed.

As various governments from developing countries including Ghana decide to borrow excessively from the domestic markets to finance its budget deficits, they would compete with local companies thereby crowding them out on the domestic market thus leaving little funds for private sector development. Patenio and Agustina (2007)[3] opine that reduction in a country’s capacity to service its debt obligation as a resulting from crowding out effect could leave a little capital for domestic investment thus affecting the economic growth and development. On the domestic front, the consequences of such a huge and growing domestic debt are that, first, a sizable portion of government revenue will be channeled to servicing the debt; and second, the likely increase in interest rates will lead to high cost of borrowing by the private sector which will crowd-out private sector investment (AFRODAD, 2011)[4].

Also, investor confidence in the country could be dampened by the deteriorating debt-GDP ratio as increased borrowing may further deter international investment and hinder private sector growth (IMF Country report, 2013)[5]. Excessive domestic debt affects the interest rates and interest rate structure. When the government borrows from the domestic market, there emerges a fund crisis (due to excess demand) which raises interest rates. The interest rate is an important determinant in investment decisions, so high interest rates reduce profit margins and deter investment especially since retained earnings are an important source of finance.

The second impact is through taxation. Debt has to be paid and the economy has to generate the revenues to service debt through taxation. A high debt burden sends signals on the magnitude of government liability and thus the taxation expectations for debt service. High taxes are a disincentive to investment.  Lastly, domestic debt cannot be defaulted, unlike external debt. This is because domestic debt is mostly held by the banking sector and default may trigger a banking crisis. Hence, rising domestic debt levels increases default risk in the financial sector players who in turn increase interest rate levels on funds loaned to the private sector.


There had been much media attention over the past months on what domestic creditors will do in the case of Ghana’s domestic debt restructuring.   It seems there will be three approaches: the government as debtor may prefer a debt reduction i.e Haircut (Debt reduction) whereas other creditors like universal banks would seem to prefer rescheduling and reprofiling with lower interest. Grossman & Van Huyck (1988) explained the variation of Haircut across debt restructuring episodes that countries that have suffered very severe shocks including wars, armed conflicts, coup detat, output collapses, declines in terms of trade suffered from higher Haircuts than countries that have not faced these major disturbances but poor countries with larger debt burdens such as Ghana may also experience larger Haircuts.

There is the countervailing effect of debt reduction. First, countries imposing high Haircut will reduce their indebtedness more significantly, making them more solvent at least in short run. Second, high haircut could be seen as a signal of untrustworthy economic policies and expropriative practices by the government, with adverse consequences for country spreads and capital market access (Cole and Kehoe.1998). Finally, it is possible that countries like Argentina in 2005 (75%); Greece in 2012 (64%) that imposed higher haircuts were in a worst shape than those countries imposing lower haircuts like Uruguay in 2003 (13%).


5i. In debt restructuring, a haircut is the reduction of outstanding interest payment or a portion of a bond payable that will not be repaid or both the portion outstanding interest payment and bond are reduced. In general, is a “haircut” better than both debt rescheduling with lower interest rates and debt reprofiling?”

Haircuts are computed as the percentage difference between the present values of old and new instruments, discounted at the yield prevailing immediately after the exchange. Federico Sturzenegger and Jeromin Zettelmeyer(20051 )found average haircuts ranging from 13 percent (Uruguay external exchange) to 73 percent (2005 Argentina exchange).

[1] Nuredeen, A and Usman, A (2010) Government expenditure and Economic Growth in Nigeria. 1970-2008. A Disaggregated Analysis. Business Economics Journal 4; 1-11.

[2] IFS, Working paper no 3/2015) debt crisis and high Debt/ GDP ratio in Ghana

[3] Patenio, J.A.S and Tan-Cruz, A (2007) Economic Growth and External Debt Servicing of the Philippines 1981-2007. A paper presented during 10th National Convention on Statistics.

[4] AfroDad (2011) Debt Management in Africa: The Case of Ghana. Available; http//afrodad files. Word Press com/2013/10.domestic debt

[5] IMF Country report, (2013) Country Assessment Report on Ghana Financial System Stability

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