In 2017, a newly elected government embarked on a sweeping reform of the financial sector, with the primary goal of purging it of instability and systemic risk. This reform agenda included the aggressive closure of financial institutions that were judged to be unviable due to poor financial health or non-compliance with new regulatory standards. Additionally, the government significantly increased the capital requirements for banks, compelling them to shore up their financial bases or face closure.

These measures were part of a broader strategy aimed at reinforcing the structural integrity of the banking sector and restoring public and investor confidence in the financial system. However, the implementation of these reforms was met with critical challenges.

The government’s approach, though assertive, lacked the nuance necessary to prevent widespread disruption. Many of the closures and consolidations were conducted hastily and without transparent criteria, leading to perceptions of political interference and targeting.

Simultaneously, the broader economic landscape was characterized by mismanagement and fiscal imprudence. The government’s over-reliance on borrowing led to ballooning public debt, with little oversight or strategic planning on how this debt would be managed without stifling economic growth. This fiscal dominance, where government borrowing crowded out private investment, combined with a lack of fiscal discipline, exacerbated the economic situation after covid-19 pandemic.

The cumulative effect of these banking reforms, coupled with unchecked government spending and poor economic governance, precipitated a significant downturn in the economy. The rapid changes in the banking sector, instead of stabilizing the financial environment, led to instability. Investor confidence waned as the market perceived these interventions as symptomatic of deeper economic issues and governance failures.

The resultant debt crisis further strained the country’s financial systems, leading to a vicious cycle of economic contraction and reduced fiscal space to manoeuvre. This period marked a challenging phase in the nation’s economic history, setting the stage for a complex interplay of financial reform, economic downturn, and a critical reassessment of governance and economic management practices.

Banking Sector Clean-up (2017-2018)

In a bold move to revamp the banking landscape, the Bank of Ghana (BoG) embarked on a series of decisive actions from August 2017 to December 2018, aimed at consolidating and stabilizing the banking sector. This period of intense regulatory reform saw the closure of nine domestic banks. Four of these banks underwent a process of asset and liability transfers to healthier banks—a strategic move designed to preserve banking operations and customer deposits without the usual turmoil associated with bank failures. The remaining five banks were amalgamated into the newly formed Ghana Consolidated Bank, a bridge institution that was capitalized by the state to ensure a smooth transition and continuous operation of banking services.

Parallel to these closures, the BoG instituted a significant policy shift by raising the minimum capital requirement for banks nearly fourfold, from GH¢120 million to GH¢400 million (approximately US$83 million), effective December 2018. This increase was intended to bolster the financial base of banks, ensuring they had sufficient capital buffers to withstand economic shocks and maintain customer confidence.

As a direct consequence of this raised capital threshold, the banking landscape saw three mergers as smaller banks combined resources to meet the new requirements. Additionally, one bank chose to downgrade voluntarily to a Savings and Loans institution to align with its operational capabilities and market focus, while another bank opted for voluntary dissolution rather than attempting to meet the heightened financial demands.

Ghana Amalgamated Trust (GAT)

In a further step to support indigenous banks struggling to meet new capital requirements, the government established the Ghana Amalgamated Trust (GAT). This financial vehicle was designed to pool funds from various investors and acquire equity stakes in five indigenous banks. After compounding annually at a rate of 22% for 6 years, a beneficiary bank that received an initial sum of 200 million cedis would have a final amount of approximately 659.46 million cedis. ​​Top of FormHowever, given the hostile economic environment at that time, most of these banks placed these funds into government securities, which later suffered losses due to the Debt Exchange Programme.

This investment strategy, influenced by the economic conditions, turned out to be problematic as industry players felt the government could have ring-fenced this investment to protect the banks’ interests, but this did not happen. Now, the GAT bailout, rather than providing relief, has become an albatross around the necks of the beneficiary banks, significantly worsening their financial positions.

Moreover, the access to GAT funds was restricted to banks that were favoured by the government, raising concerns about the fairness and transparency of the support process. This selective allocation led to further exclusions and, ultimately, the closure of several other banks that did not receive government backing. Questions also continue to circulate regarding the source of the GAT bailout money, adding to the controversy and scepticism around the government’s handling of the financial sector reform.

The consolidation process did not end with the commercial banks. In 2019, the BoG extended its clean-up campaign to smaller financial institutions, closing 411 entities that included a broad spectrum of microfinance companies, micro-credit institutions, savings and loans companies, finance houses, a leasing company, and a remittance company.

This extensive closure affected a significant portion of the financial sector, particularly impacting those at the grassroots level. The shutdown of these institutions resulted in widespread job losses, with over 10,000 workers displaced, contributing to financial hardship and economic destabilization in several communities.

These sweeping reforms, while aimed at creating a more robust and resilient banking sector, were met with mixed reactions. On one hand, they were necessary to weed out systemic inefficiencies and restore confidence in the financial system. On the other hand, the manner in which they were implemented—rapid and with a perceived lack of adequate planning and transparency—led to significant disruptions in the livelihoods of many and raised questions about the long-term implications for the financial landscape in Ghana.

Domestic Debt Exchange and Fiscal Impact (2022-2023)

In an ambitious effort to address its escalating public debt, the Ghanaian government initiated the Domestic Debt Exchange Program (DDEP) in December 2022. This program targeted the restructuring of GH₵203 billion in domestic debt, encompassing a diverse array of bond types with GHC 61.7 fiscal savings. The primary goals of the DDEP were to extend the maturity periods of these bonds and reduce the coupon rates, strategies intended to ease the immediate fiscal burden on the government by lowering annual debt servicing costs.

The restructuring was comprehensive, affecting various securities including Treasury bonds, Energy Sector Levy Act (ESLA) bonds, and Daakye bonds. Notably, the program adjusted the average coupon rates from a high of 19.1% down to 9.1%, and extended the average maturity from a relatively short 3.8 years to a more manageable 8.3 years. These adjustments were critical in mitigating the immediate financial pressure on the government’s budget, allowing for a redirection of funds towards growth-inducing expenditures and essential services.

The fiscal impact of these measures was significant. In 2023, the government estimated a reduction in debt servicing costs by GH₵61.7 billion due to the DDEP. This substantial fiscal breathing space helped alleviate some of the pressures on Ghana’s domestic financial markets, potentially stabilizing interest rates and improving the government’s creditworthiness in the eyes of domestic investors and international rating agencies.

However, the benefits of the DDEP came with substantial costs to certain stakeholders. The restructuring inflicted heavy losses on bondholders, notably including the Bank of Ghana, which faced a significant diminution in asset values due to the reduced coupon rates and extended maturities of its bond holdings.

This impact was not limited to the central bank; other domestic financial entities, such as banks and non-bank financial institutions, also experienced erosion in the value of their bond portfolios. The revised terms of the bonds meant that these institutions had to mark down substantial assets on their balance sheets, affecting their overall financial health and stability.

The losses extended across the financial sector, causing a ripple effect. Reduced asset values strained the liquidity positions of many financial institutions, potentially impacting their ability to lend and invest. Additionally, the negative repercussions were felt in the broader economy, where confidence in government bonds—a cornerstone of many investment portfolios—was shaken.

In essence, while the DDEP provided necessary fiscal relief and helped avert a more acute financial crisis, it also redistributed financial strains across the economy, particularly impacting institutional investors who bore the brunt of the financial adjustments. This complex outcome highlights the intricate balance required in debt management strategies, where the benefits of reduced debt servicing costs must be weighed against the potential destabilizing effects on the financial sector and investor confidence.

Effects on Investor Confidence and Economic Consequences

The extensive debt restructuring efforts and selective support measures within the banking sector undertaken by the Ghanaian government have had profound impacts on investor confidence both domestically and internationally. These initiatives, though aimed at stabilizing the financial system, have inadvertently resulted in a significant erosion of Ghana’s financial credibility. This has been most visibly exemplified by Ghana’s difficulties in securing favourable terms during the 2023 Cocoa Loan Syndication, a critical event that underscored the international financial community’s waning trust in the country’s economic management.

Distress in the Financial Sector

The Domestic Debt Exchange Program (DDEP), which included substantial haircuts on bond values, has particularly distressed the fund management sector. Many fund management companies, which held large positions in government bonds, found their assets sharply devalued, leading to a crisis of asset-liability mismatches. These companies are now facing severe liquidity challenges, struggling to meet withdrawal demands from their clients, which further amplifies the atmosphere of financial instability.

Banks, too, are experiencing acute liquidity challenges as a direct consequence of the debt exchange. The restructuring of government bonds has led to significant capital losses for banks, forcing them to tighten credit in an effort to shore up their balance sheets. This reduction in lending capacity has precipitated a ‘credit crunch,’ severely restricting the availability of loans for businesses and consumers. This contraction in credit is particularly damaging in a developing economy like Ghana’s, where access to finance is crucial for business operations and expansion.

First, domestic debt exchange in the medium to long term tends was expected to reduce uncertainty and but has affected the market confidence in the country and its policies, thus plummeted future economic growth in doubt and the domestic debt exchange programme has reduced capital inflows which has weakened confidence in the government structural reforms and the new policies introduced recently.

This has led to a decrease in domestic investment and an increase in the cost of borrowing for the government and local businesses. The decreased domestic investment has a ripple effect on the local economy. As businesses including SMEs have struggled to access the funds they need to grow and hire workers, the unemployment rate in Ghana has dramatically increased. This lack of investment has also led to an increase in the cost of borrowing for the government and local businesses, making it more difficult for them to finance their operations and invest in growth.

Public Sentiment and Economic Impact

The public’s reaction to the debt restructuring has been one of apprehension and fear, particularly because of the direct financial impact on individual investors, including pensioners. The haircuts applied to bonds have not only diminished the value of pensions and savings but have also instilled a deep-seated reluctance among the general populace to engage in future investments. This lack of confidence is crippling for the investment climate and has led to a withdrawal of private capital from the market.

Broader Economic Consequences

The ripple effects of these financial disruptions are manifold. The decrease in investment and lending has stifled economic growth and innovation, leading to increased borrowing costs for both the government and private entities. As financial institutions pull back on lending, businesses face higher costs of capital, reducing their ability to expand and hire, which in turn has led to rising unemployment rates.

The culmination of these factors has placed additional strain on Ghana’s fiscal capacity. The government finds itself in a precarious position, with diminished fiscal space to address developmental and stabilization needs. As public and private investments recede, the government is compelled to increase its borrowing to fund essential services and development projects, potentially leading to a vicious cycle of debt and economic stagnation.

In summary, while the debt restructuring was necessary from a fiscal standpoint, the manner and scale of its implementation have led to severe unintended consequences, undermining economic stability and eroding investor confidence at a critical time for Ghana’s economy.

These developments highlight the need for a balanced approach to financial reform, one that safeguards investor confidence while pursuing fiscal health. The social implications of the public debt crisis, meanwhile, have been exceptionally severe. Ghana has suffered from a rapid increase in poverty; there has been a decline in quality primary health care; quality primary and secondary education have faced cuts in resources.

The contraction of output has also led to a collapse of small and medium enterprises, while at the same time, taxation on SMEs has increased substantially. A report released by the World Bank has revealed that high inflation rates in 2022 pushed an overwhelming 850,000 Ghanaians into poverty. The report indicated that the severe economic crisis in 2022 characterized by soaring inflation rates had devastating consequences on food security and poverty in the country.

According to the World Bank country’s “international poverty” rate was estimated at 27% in 2022, an increase of 2.2% points since 2021. Ghanaian households have been under pressure from rising prices in utilities, persistent depreciation of the local currency against all major trading currencies, high inflation, and slowing down economic activities. Poverty has been projected to worsen between 2023 and 2025, increasing to nearly 34% (international poverty line) by 2025, consistent with a muted outlook on growth in services and agriculture and rising prices which are outpacing the income growth of those at the bottom of the distribution.

External Investors Reject Ghana’s Debt Restructuring Proposal

In a recent development exacerbating Ghana’s financial woes, external bondholders have rejected a government proposal to restructure over $13 billion in debt, aimed at reducing external debt repayments and interest costs by $10.5 billion from 2023 to 2026. The proposal faced objections from two key international bondholder groups—Western Asset Managers and Hedge Funds, and Regional African Banks.

The bone of contention primarily lay in the government’s refusal to accept terms that linked interest payments to future GDP growth rates, as suggested by the bondholders. Such terms would have increased coupon payments if economic growth exceeded IMF targets.

Additionally, the government resisted the inclusion of a “loss reinstatement clause” that would revert the bonds to their original values in the event of another default, along with restrictions on the government’s ability to legally challenge the deal. The bondholder groups also balked at the offered heavy discounts and low coupon rates on the new bonds, viewing them as too severe given the long-term maturity and the nominal face-value haircut of 33% proposed on the bonds. This standoff marks a significant setback in Ghana’s efforts to navigate out of its current economic crisis and default situation, signalling ongoing challenges in restoring financial stability and investor confidence.

Conclusion: Navigating Financial Reforms and Restoring Stability in Ghana

Ghana’s ambitious financial sector reforms and debt restructuring efforts highlight the complexities and challenges inherent in managing economic crises and restoring financial stability. The government’s initiatives to clean up the banking sector and restructure domestic debt were essential in addressing systemic weaknesses and reducing unsustainable fiscal pressures. However, these measures have had mixed outcomes, with significant repercussions for the economy and investor confidence.

The domestic banking clean-up and the Debt Exchange Program, while necessary, led to extensive job losses, liquidity challenges, and a contraction in economic growth, exacerbating the financial distress faced by both businesses and individuals.

The recent rejection by external bondholders of the government’s debt restructuring proposal adds another layer of complexity. This impasse underscores the difficulties in balancing the need for fiscal relief with the expectations and interests of international investors. The failure to secure an agreement with external creditors not only hampers Ghana’s immediate financial recovery efforts but also poses a long-term risk to the country’s financial reputation and its ability to engage with international markets.