The Domestic Debt Exchange Program (DDEP), implemented by the Ghanaian government in response to a severe debt crisis, aimed to alleviate unsustainable debt levels and stabilize the economy. Although it achieved some fiscal savings, the program has had far-reaching and detrimental consequences across various sectors, the effects of which continue to reverberate through the economy nearly two years later. The DDEP involved exchanging existing government bonds for new ones with lower interest rates and longer maturities, effectively imposing a haircut on bondholders. While this provided short-term fiscal relief, it inflicted substantial pain on individuals, businesses, and the financial system, creating a ripple effect that has hampered economic growth and exacerbated existing vulnerabilities.
The DDEP was triggered by a confluence of factors that culminated in a debt crisis. Ghana’s public debt had spiraled to unsustainable levels, reaching 92.2% of GDP by the end of 2022. This was accompanied by acute financial pressure, escalating inflation, and slowing economic activity, leading to increased poverty and unemployment. The government’s initial resistance to external assistance eventually gave way to an agreement with the International Monetary Fund (IMF) in July 2022, paving the way for the DDEP as a necessary step towards debt restructuring. The program resulted in the exchange of approximately GH¢203 billion worth of domestic bonds, generating fiscal savings of around GHS61.7 billion (US $5.23 billion). However, these savings came at a steep cost.
The impact of the DDEP was widespread and devastating. Individual investors, including pensioners, suffered significant losses as the value of their bond holdings diminished. The banking sector, holding a substantial portion of government bonds, experienced significant losses, liquidity constraints, and increased solvency risks, particularly among smaller banks. The insurance sector and pension funds were similarly affected, jeopardizing their ability to meet their obligations. The ripple effect of the DDEP extended to the broader economy, exacerbating existing challenges and creating new ones.
The DDEP contributed to a rise in poverty levels. Reduced credit availability to the private sector, coupled with constrained public spending due to the strain on the banking sector, hampered economic activity and pushed more people below the poverty line. The World Bank estimates that poverty in Ghana increased from 26.8% in 2022 to 30.3% in the aftermath of the DDEP, with projections suggesting further deterioration. The DDEP also had a detrimental impact on the banking sector. Banks incurred substantial losses on their bond holdings, leading to liquidity constraints and heightened solvency risks. This resulted in a tightening of lending conditions, further impeding private sector growth and contributing to a credit crunch. Several domestic banks required recapitalization, highlighting the severity of the DDEP’s impact on the financial sector.
The DDEP also choked the private sector’s access to credit. Banks, grappling with their own financial challenges, became more risk-averse and curtailed lending. This credit squeeze hampered private sector investment and expansion, further hindering economic growth. The reduced supply of credit also drove up borrowing costs, adding another burden to businesses already struggling in a challenging economic environment. Data from April 2024 revealed a significant decline in private sector credit growth, indicating the lingering effects of the DDEP on businesses’ access to finance. Additionally, banks increased their allocations to government and Bank of Ghana instruments, a phenomenon known as “crowding out,” further limiting the availability of credit for the private sector.
The DDEP’s impact on pension and insurance funds was equally profound. These institutions, which had invested heavily in government securities, faced deferred principal payments until 2027 and 2028. This disruption in cash flow significantly impacted their ability to meet their obligations and posed a threat to their long-term financial stability. The DDEP also damaged Ghana’s reputation in the international community and eroded investor confidence. The debt restructuring led to market exclusion, higher borrowing costs, and the withdrawal of correspondent bank credit lines. This loss of access to international capital markets further constrained Ghana’s ability to finance its development needs.
The DDEP has had far-reaching consequences for Ghana’s economy. It has exacerbated existing vulnerabilities, including poverty and unemployment, while creating new challenges for the financial sector and the private sector. While the program achieved some initial fiscal savings, its long-term impact has been detrimental, raising questions about its overall effectiveness as a solution to Ghana’s debt crisis. Furthermore, the reputational damage and loss of investor confidence resulting from the DDEP have created additional hurdles for the country’s economic recovery.
Moving forward, Ghana faces the daunting task of rebuilding investor confidence and restoring economic stability. This requires robust fiscal reforms, strict government expenditure controls, and sustainable debt management strategies. Addressing rising refinancing risks and the potential for future defaults is crucial to preventing a recurrence of the debt crisis. While stakeholder interventions have provided some relief, particularly for pension funds, the interconnected nature of the financial system means that the lingering effects of the DDEP will continue to pose challenges for the foreseeable future. The DDEP serves as a cautionary tale about the potential consequences of drastic debt restructuring measures and highlights the need for proactive and sustainable debt management practices to avoid similar crises in the future.
