The politics of government re-entry into Domestic Bond market: Is it a myth or reality?’

Ghana’s macroeconomic instability is largely traceable to the ballooning public debt, as it has been challenging to tame inflation under this weak fiscal regime. Ghana exited the 16th IMF-supported program in 2019.

However, the IMF and World Bank’s debt sustainability analysis revealed that Ghana was at a high risk of debt distress and was also classified as having a medium debt-carrying capacity.

The institutions recommended fiscal discipline to ensure debt sustainability and maintain market confidence. Borrowing to finance deficits and subsequent debt accumulation contributed to the crystallization of the country’s fiscal vulnerabilities, resulting in the loss of international market access in the 3rd quarter of 2021.

Subsequently, the country was priced out of the medium to long-term end of the domestic market. Treasury bill auctions and money printing from the Central Bank became the most suitable options available to the government.

The signal of losing market access should have prompted the authorities to engage the IMF, but they delayed it until July 2022. The critical indicators for debt sustainability are the Present Value (PV) of the total public debt to GDP ratio and external debt service to revenue ratio.

Whereas the former measures the country’s ability to service its long-term public debt obligations (a solvency measure), the latter examines the ability of the country to meet its short-term foreign debt obligations (an external liquidity measure). The DSA showed that Ghana had practically breached the thresholds for solvency and external liquidity for a country with a medium debt-carrying capacity (ACEP/FSD Africa 2024).

The government officially launched the Domestic Debt Exchange Program (DDEP) on December 5, 2022, amidst several agitations and concerns reflecting a lack of broader consultation. Although the original version of the Program did not include the pensions sector, the government subsequently announced a successful consensus with bondholders to include the pension sector.

Previous research on the impact of the DDEP on banking institutions in Ghana revealed significant impairment losses, liquidity constraints and solvency risks. The effects were particularly acute for smaller, less-capitalized banks, which struggled to absorb the losses. This precedent raises important questions about the potential impact of the debt exchange on the pension sector (ACEP/FSD Africa 2024)

Ghana’s domestic debt restructuring in 2022/2023 stands out in Africa’s history of sovereign debt restructuring. The government of Ghana reported that it had achieved substantial savings of about GHS61.7 billion (approximately 30% of domestic debts and 7% of GDP) with minimal financial disruption using the domestic debt exchange program.

The restructuring, unprecedented on the African continent, so decimated the local bond market that the government has been forced to lean more heavily on short-term, and more costly, Treasury bills and private placements.

In December 2022, Ghana announced it would default on most of its external debt totaling about US$28.4 billion. Ghana’s successful Eurobond debt restructuring, which involved a 37% haircut, resulted in a $5 billion reduction in the nominal value of its debt and a $4.3 billion debt service savings during the IMF program. IMF agreement came as part of Ghana’s comprehensive strategy to address its unsustainable debt levels.

The restructuring aims to achieve several critical objectives, including reducing the debt-to-GDP ratio to below 55% by 2028 and lowering the debt service-to-revenue ratio to under 18% from 2028 onwards.

Ghana’s default in 2022-2023 and subsequent domestic debt restructuring had affected the domestic economy as well as loss of investors’ confidence and the government’s inability to provide liquidity.

In the model, banks that do not have good investment opportunities invest in public debt to transfer their wealth across time. In December 2022, Ghana announced it would default on most of its domestic debt totaling GHC 229 billion.

Cumulatively, the government has restructured about GHS203 billion of domestic debt out of an outstanding principal of approximately GHS229 billion. These represented an average participation rate of about 89%.

This move was part of an effort to restructure its domestic and external debt burden amid a severe economic crisis driven by high inflation and a depreciating currency. The country engaged in IMF –backed debt restructuring plan.

One negative effect of debt restructuring is that it had caused investors to lose confidence in the country’s ability to repay its debt on time. This has led to a decreased in foreign investment and an increased in the cost of borrowing for the government and local businesses.

The decreased foreign and domestic investment has a ripple effect on the local economy. As businesses struggled to access the capital 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.

Ghana’s debt default and its subsequent debt restructuring had caused loss of market access, collateral damage for the economy, spillovers on the domestic banking sector, loss of investors’ confidence and destroyed the wealth of citizenry wealth. The negative consequence of DDEP, of course, has reduced trust in Ghana debt in the future.

As Ghana struggles to haul itself back to fiscal health it could be a disaster to re-enter into domestic bond market, why can’t the Government wait until 2028 when the country reduces the PV of total debt-to-GDP and external debt service-to-revenue ratios to 55 and 18 percent, respectively.

The domestic debt reduction had also created a situation known as an inverted yield curve. An inverted yield curve occurred as short-term interest rates on Treasury bills were being quoted between 22% and 33.7% per annum exceeding long-term rates on Government bonds’ coupon rate of 9.1% or 8.51% per annum. The inverted yield curve has been viewed as an indicator of a pending economic recession in the country.

When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor and that the yields offered by long-term fixed income will continue to fall.

The existing bond market was considered a major prerequisite to sustainable debt dynamics as well as improved growth prospects by the financial sector and the wider public. However, the DDEP has not managed to lower signal rates during the post-DDEP era, as the market interest rates on short-term government bills have risen to historically high levels and thus created an inverted yield curve and remained unstable.

Re-entering the bond market after a default or restructuring period would require the government rebuilding investor confidence and establishing a credible path forward. This typically includes demonstrating a commitment to servicing debt including principal and interest payments, implementing fiscal reforms, and potentially offering incentives to attract investors.

The specific steps and timeline will vary depending on the severity of the default, the country’s economic situation, and the nature of the restructuring agreement. After a default, it’s crucial for the Ghana government to show a clear commitment to repaying debts and meeting future obligations.

This can involve implementing robust fiscal reforms, improving debt management practices, and establishing a transparent and reliable system for handling debt payments. Investor confidence have been severely damaged after the country’s default in 2022.

Rebuilding trust often involves the government communicating the restructuring plan clearly, providing assurances about the future, and demonstrating progress in addressing the underlying causes of the default.

The government must demonstrate prudent fiscal prudence by Implementing fiscal reforms, such as reducing government spending or increasing revenue, which could demonstrate the issuer’s commitment to long-term fiscal stability and attract investors. Re-entry strategies may need to be tailored to the specific circumstances.

For example, a country might prioritize attracting local investors initially while gradually expanding to international investors as confidence grows. Re-entering the bond market is often a gradual process. Issuers may begin with smaller bond issuances and gradually increase the size and complexity of their offerings as investor confidence builds.

Critics argued that the Ghana’s the yield curve remains inverted, with coupons on long-term bonds around 9.1 percent while short-term T-bills above 18.83- 33 percent thus making it very difficult for Government to return to Domestic Bond Market.

For markets to develop and mature, there has to be a framework of predictability, depth and trust. Government should look to establish a longer-term yield curve. The yield curve, a fundamental benchmark for determining borrowing costs, is currently skewed toward short-term instruments in Ghana.

The reality is that the post-DDEP had left domestic investors with limited alternative investment opportunities, making T-bills an attractive option with higher yields in the period between 2023 – 2024 but the yields declined significant with new government assumed office in 2025. Proponents argued that it is sustainable for government to rely solely on treasury bills to finance its operations which been the main argument against for Ghana return to the domestic bond market.

The term “politics of the re-entry of domestic bond market” refers to the debates and controversies surrounding its implementation of the re-entry into domestic bond market, and the different perspectives on its benefits and drawbacks.  It also touches on the political motivations of those who advocate for or oppose the re-entry of domestic bond market, and the power dynamics involved in shaping domestic bond market policy.

The re-entry of developing economies into the bond market after a default is a reality, but it’s not a simple process. It involves navigating complex political, economic, and social considerations. While some countries might aim for a faster re-entry, it often takes time and depends on various factors, including fiscal framework, investor confidence, and market conditions.

The re-entry will depend on political and economic factors like low inflation, stable exchange rate and low fiscal deficits. Re-entering the bond market after a default requires addressing the political implications of the default, including restoring investor confidence and demonstrating a commitment to debt sustainability. This often involves implementing fiscal reforms and demonstrating a willingness to cooperate with international creditors.

Rebuilding Investor confidence after people wealth and saving had destroyed. Re-entry could be heavily reliant on restoring investor confidence, which can be challenging after a default. This may involve demonstrating improved economic fundamentals, credible debt restructuring plans, and a clear commitment to fiscal discipline. The timing of re-entry is also influenced by domestic and international market conditions, as well as the specific characteristics of the domestic bond market.

For example, a country’s fixed-income market needs a yield curve that accurately reflects market conditions for a successful re-entry. The government must design robust fiscal framework before the re-entry into the bond market. A sound and robust fiscal framework is crucial for a successful re-entry. This includes having a well-defined budget process, transparent debt management policies, and a clear commitment to fiscal discipline.  Restructuring existing debt and demonstrating a commitment to debt sustainability are key to re-entering the market. This involves addressing the underlying causes of the default, such as unsustainable debt levels or economic shocks.

Ultimately, the “politics of the re-entry of domestic bond market” highlights the tension between debt unsustainability, debt overhang and the desire for government to make re-entry into the domestic bond market.  Re-entering the domestic bond market after a major default is a politically sensitive process involving rebuilding investor confidence and managing the risk of further financial instability.

Governments must demonstrate a commitment to debt repayment and fiscal sustainability to attract investors and ensure the market’s stability. The government must demonstrate commitment to debt repayment of the maturing obligations and future repayment. Re-entering the bond market requires demonstrating a firm commitment to servicing existing debt obligations and repaying new bonds. Government must show how it is going generate needed revenue to fund both existing maturing obligations as well as intended new bonds .

This information must be made available to the domestic, international investors as well as the general public.  Re-entering the domestic bond market after a default is a politically complex process that requires governments to demonstrate commitment, rebuild investor confidence, and manage fiscal sustainability effectively. Public support, academia, political opposition, financial institutions, Trade unions, Association of Ghana industries, CSOs and international pressure must all play role in shaping the success of this process of the re-entry of the domestic bond market

Literature Review

Sovereign governments borrow not only from international investors but also from domestic residents. Most of these domestic investors are financial institutions that actively manage their public bond holdings based on their idiosyncratic needs.

In this context, it is well understood that the government can provide liquidity to the domestic financial system by issuing public debt, and affect the investments of banks and macroeconomic outcomes. What is less understood is how is the ability of the government to provide liquidity affected by a sovereign default.  After a default the aggregate supply of public debt has been endogenously low and so was its return; therefore, this bank will now prefer to finance its low-productivity projects.

These projects demand labor, which is now allocated to projects that are, on average, of lower productivity. This in turn, translated into a lower level of aggregate output. The default and subsequent domestic debt restructuring did also triggered a negative balance-sheet effect on banks, which reduced their ability to raise funds, prevented the flow of resources to productive investments and further reduces the level of output.

The presence of these effects gave rise to an internal cost of default that the government takes into account when making repayment decisions. The optimal repayment decision entailed a trade-off. Since the 2008 global financial crisis, there has been a wave of sovereign debt defaults and restructurings in both advanced and emerging market economies. In the seven years after the beginning of the crisis, eleven countries have defaulted and restructured their sovereign debt with private creditors, including Greece, which in 2012 had the largest sovereign debt restructuring in history.

While most of these restructurings occurred after prolonged periods of recession or subdued growth, evidence on the net impact of sovereign debt restructurings on growth performance is ambiguous. The literature has focused on specific channels through which debt restructurings can be beneficial or costly to economic activity. Theory suggests that a default or restructuring can cause reputational damage and trigger sanctions and output losses (Eaton and Gersovitz 1981, Bulow and Rogoff 1989, Cole and Kehoe 1998, Aguiar and Gopinath 2006, Arellano 2008)

On the one hand, a default precipitates an endogenous output cost, a loss of reputation and a temporary exclusion from both domestic and external financial markets. On the other hand, by defaulting, the government saved resources from being paid back to both the domestic and foreign investors. The default also induced internal redistribution from bond holders (bankers) to taxpayers (workers).

The attractiveness of default thus depends on the residence composition of the government’s creditors. Bond holders were exposed to capital losses through inflation and therefore represent a potential anti-inflationary force; we ask whether their influence is apparent both theoretically and empirically. While the direct impact of sovereign default on creditors is the loss of the principal amount loaned to the government and the interest owed on the debt, the economic consequences of sovereign defaults or distress to borrowers are various.

These include, among others, a loss of international financial market access for a certain period, collateral damage to the economy, and spillover effects to the domestic banking sector. Indeed, several empirical and theoretical works on sovereign debt distress and defaults come to a consensus that defaults and distressed restructurings usually lead to the exclusion of countries from the international markets and to tighter conditions under which governments can borrow abroad and at home For instance, the survey by Panizza, Sturzenegger and Zettelmeyer (2009) indicates that defaults increase borrowing costs (risk spreads) markedly.

The main channel by which debt distress or default episodes affect market access and borrowing costs is through credit rating downgrades. Post-default ratings can also remain low for long periods of time and deter institutional investors from buying and holding these poorly rated bonds.

Beyond the consequences of the exclusion from the international capital markets, debt distress episodes also trigger reputational spillover effects that adversely affect the domestic real and financing conditions of the country but also of other countries lumped together in the same analytical groups (for example other emerging market economies or other African economies)—a practise commonly referred to as asset class bunching.

A significant drop in economic growth is usually observed after an episode of debt distress and default (Kuvshinov and Zimmermann, 2016). The fall in growth after a distress episode may be more significant when accompanied by domestic banking crises.

Moreover, empirical results show evidence of a negative correlation between debt defaults and trade, foreign direct investment and domestic firms in the defaulting country (Abbas et al., 2019).

The domestic financial sector is also adversely affected, especially if the domestic financial sector holds large amounts of government debt, which could result in aggregate credit shortage, less investment and possibly a banking crisis and an output decline (Gennaioli, Martin and Rossi, 2014). The Russian default of 1998, for instance, caused large losses to Russian banks because those banks were heavily invested in public bonds. In turn, banks’ losses (together with the devaluation of the ruble) precipitated a financial sector meltdown.

During the same period, public defaults resulted in heavy losses to the banking systems of Ecuador, Pakistan, Ukraine, and Argentina, leading to significant declines in credit (IMF (2002). Starting in 2009, reports of bad news regarding the sustainability of public debt in Greece, Italy, and Portugal undermined the banking sectors in these countries precisely because the banks were exposed to their governments’ bond.

Episodes of sovereign debt distress have become more frequent since the turn of the century with significant direct and indirect costs, even developed countries are not spared as recently witnessed during the recent European debt crisis (Reinhart and Rogoff, 2011). In the African context, two countries have already defaulted on their sovereign debt in the post-COVID-19 era and many more are at the edge of defaulting.

Without the liquidity support from the international community, such as the Debt Service Suspension Initiative (DSSI), many other countries could have defaulted during the COVID crisis. In the short to medium term, Africa’s sovereign debt is expected to remain higher than the pre-pandemic levels and Sub-Saharan African countries are expected to make $21.5 billion in Eurobond repayments. This record amount of external bond repayments comes while 60% of the African countries with available data were either in or at high risk of debt distress (16 in high risk of debt distress and 7 in debt distress), which is up from just eight countries in 2015.

While the direct impact of sovereign default on creditors is the loss of the principal amount loaned to the government and the interest owed on the debt, the economic consequences of sovereign defaults or distress to borrowers are various.

These include, among others, a loss of international financial market access for a certain period, collateral damage to the economy, and spillover effects to the domestic banking sector. Indeed, several empirical and theoretical works on sovereign debt distress and defaults come to a consensus that defaults and distressed restructurings usually lead to the exclusion of countries from the international markets and to tighter conditions under which governments can borrow abroad and at home. For instance, the survey by Panizza, Sturzenegger and Zettelmeyer (2009) indicates that defaults increase borrowing costs (risk spreads) markedly.

The main channel by which debt distress or default episodes affect market access and borrowing costs is through credit rating downgrades. Post-default ratings can also remain low for long periods of time and deter institutional investors from buying and holding these poorly rated bonds Beyond the consequences of the exclusion from the international capital markets, debt distress episodes also trigger reputational spillover effects that adversely affect the domestic real and financing conditions of the country but also of other countries lumped together in the same analytical groups (for example other emerging market economies or other African economies)—a practise commonly referred to as asset class bunching. A significant drop in economic growth is usually observed after an episode of debt distress and default (Kuvshinov and Zimmermann, 2016).

The domestic financial sector is also adversely affected, especially if the domestic financial sector holds large amounts of government debt, which could result in aggregate credit shortage, less investment and possibly a banking crisis and an output decline (Gennaioli, Martin and Rossi, 2014).

Overview of Ghana’s Default and subsequent restructuring domestic bonds and its implications on the economy

Domestic debt restructuring, while potentially leading to a quicker path to debt sustainability and economic recovery, and also had consequences like reduced access to credit, increased risk for bondholders and pensioners, and potential economic slowdown. One negative effect of domestic debt restructuring is that it has caused investors to lose confidence in the country’s ability to repay its debt on time. This has led to a decrease in domestic investment and an increase in the cost of borrowing for the government and local businesses.

Domestic debt exchange  had led to a “credit crunch” as banks deleverage, cutting off credit to the non-financial sector. This had made harder for businesses especially SMEs and individuals to access loans, thus hindered investment and economic activity. Debt restructuring had necessitated austerity measures, such as cuts in public spending and social welfare benefits, had led to a decrease in living standards, increased poverty, and unemployment.

Restructuring negatively affected financial institutions, which led to impairment losses, liquidity constraints, and solvency risks, especially for smaller, less-capitalized banks. High debt servicing burdens had reduced the government’s ability to invest in crucial areas like infrastructure, education, and healthcare, hindering long-term economic development and stability.

Domestic debt restructuring had led to a decrease in confidence in the government’s ability to meet its obligations, potentially impacting future borrowing costs and investor sentiment. Restructuring have had implications for pension funds, potentially affecting their liquidity and sustainability, especially if principal payments are deferred. Bondholders face reduced returns on their investments and increased risk associated with the new debt instrument.

However, debt restructuring has provided a quicker path to debt sustainability, allowing for a reset of negative dynamics and creating conditions conducive to economic growth. The government default in December 2022 had been costly because they destroyed the balance sheets of domestic banks. After a default the Ghana government lost reputation and with it, its inability to provide liquidity domestically by issuing public debt. A scarcer domestic supply of public debt makes banks substitute away from the use of government securities to investments in their less productive projects.

The government’s inability to provide liquidity was undermined after a default. By defaulting, Ghana government lost its reputation and is able to credibly issue less debt without increasing subsequent default risk. This induced a shortage of public debt which is detrimental for economic activity. Domestic holdings of government debt had weakened investors’ balance sheets and induced a contraction of credit and output upon default.

However, debt restructuring seemed not be providing a quicker path to debt sustainability. Restructuring could have provided a quicker path to debt sustainability, allowing for a reset of negative dynamics and creating conditions conducive to economic growth but in face of debt overhang of SOEs like ECG, GRIDCO and Cocoa Board would thwart the debt sustainability program.

Restructuring have not led to any significant reduction in interest rates and inflation, which could have stimulated economic activity. Restructuring has not allowed for the costs of debt reduction to be targeted progressively to those sectors of the economy that are most equipped to bear the burden. By addressing unsustainable debt levels, one would have expected that restructuring could paved the way for long-term economic growth and development.

This medium to   long-term economic growth seemed to be a mirage in the face of limited fiscal space and restructuring had not allowed for the costs of debt reduction to be targeted progressively to those sectors of the economy like agriculture and its value chain. Notwithstanding progress toward fiscal consolidation, the government’s financing needs will remain elevated 2025 with the resumption of debt service payments to bondholders and the need to continue to clear the large stock of arrears (including the energy sector legacy debt). Rising public expenditures in the context of persistently weak revenue performance has undermined Ghana’s fiscal and debt sustainability in recent year.

The authorities intend to gradually resume domestic bond issuances in 2025 with a first issuance of a 2-year bond planned in the second quarter (IMF Country Report No. 24/334/2024). Any new domestic bonds issue on the re-entry on the domestic market could be considered as part of the Debt Sustainability Analyses.

According to IMF (11/2024) debt sustainability analysis (DSA) was prepared by the staffs of the International Monetary Fund and the International Development Association, in consultation with Ghanaian authorities in November 2024 posited that Ghana is at high risk of debt distress due to near-term breaches of the DSA thresholds, but is expected to reach moderate risk of debt distress in the medium term as all DSA sustainability targets will be met by 2028.

In particular, the PV of total debt-to-GDP and external debt service-to-revenue ratios will reach 55 and 18 percent, respectively, by 2028 so why the new government want to add more debt before 2028. The International Monetary Fund-supported program is expected to restore debt sustainability and bring the debt risk rating to “moderate” in the medium term.

This includes in particular reducing the PV of total debt-to-GDP and external debt service-to-revenue ratios to 55 and 18 percent, respectively, by 2028, which entails a revenue-based fiscal consolidation with higher spending efficiency and stronger social safety nets, as well as structural reforms to support greater exchange rate flexibility, a more diversified economy and stronger growth. From the IMF debt sustainability analysis Ghana has breached all the DSA thresholds why would the government add any more debt without considering the PV of total debt-to-GDP and external debt service-to-revenue ratios will reach 55 and 18 percent, that is expected to be achieved in 2028.

According to Finance Ministry the country over the next four years, Ghana is expected to pay about GH¢150.3 billion, representing 11.6% of GDP in domestic debt service obligation alone, of which 73.3% is due in 2027 (GH¢57.6 billion) and 2028 (GH¢52.5 billion). The country’s debt service obligations for 2027 and 2028 appear as major humps.

These humps are cancerous and pose a significant risk to the economy. Again, 55% of the total external debt service of US$8.7 billion is due to be serviced in 2027 (US$2.5 billion) and 2028 (US$2.4 billion). It seems the debt restructuring undertaken by the previous administration was designed to be 2027/2028-heavy.

Ghana faces significant external debt servicing obligations over the next four years totaling US$8.7 billion, representing 10.9%, with a heavy concentration in 2027 and 2028. The energy sector is a major source of fiscal risk in Ghana. At end-December 2023, the sector had an estimated stock of arrears (“legacy debt”) of US$2.1 billion or 2.8 percent of GDP (included in the debt perimeter of the DSA) to IPPs and private fuel suppliers.

In addition to the outstanding arrears, every year the sector is unable to generate enough resources to cover the cost of generating and distributing energy, thus incurring a deficit (“the energy sector shortfall”). This situation has originated from a confluence of factors—including weak governance, significant system and revenue collection losses, high fixed costs, and tariffs significantly below cost recovery. In Ghana’s 2025 budget, the cocoa sector faces a significant debt burden, with COCOBOD’s outstanding debt reaching GH¢32 billion, including GH¢11.92 billion due for payment in 2025, and cocoa road contracts reaching GH¢21 billion in 2024.

The 2025 budget aligns with the strategies proposed in the Cocobod Turnaround Strategy, focusing on financial oversight, producer pricing, industry cost reduction, infrastructure, and debt restructuring to improve the financial sustainability of the cocoa sector.  The need for higher support to the energy sector and Cocobod, and larger-than-expected financial sector support due to the domestic debt exchange program could also adversely affect debt dynamics.

At the end of December 2024, total central government arrears/payables amounted to GH¢67.5 billion, representing 5.2% of GDP with the road sector alone accounting for GH¢21 billion. The negative effect of severe currency depreciation, hyperinflation, high food inflation, principal and interest haircuts, soaring interest rates, among others had all affected both savings and investment over the past three years which dampened the confidence of local investors.

According to the Minister for Finance, these obligations, totaling about GH¢111.1 billion, require rollover on a weekly basis, placing additional pressure on cash flow and liquidity requirements, but beyond domestic maturities, also Ghana faces significant external debt service obligations over the next four years totaling US$8.7 billion, representing 10.9% of GDP., with a heavy concentration in 2027 and 2028.

“Our debt service obligation for this financial year is equally burdensome with significant humps in February (GH¢9.9 billion), July (GH¢6.2 billion) and August (GH¢10.1 billion), the fiscal challenges are further compounded by the significant short-term Treasury bill maturities that new government have inherited.  Despite all these upcoming domestic and external debt service obligations, no buffers were built to cushion these unprecedented debt service burdens.

Government’s plan to re-enter the domestic bond market in 2025 carries significant risks if not properly aligned with maturing debt obligations, particularly the looming 2028–2029 maturities, and huge legacy debt of the SOEs could be disastrous for the country’s debt sustainability.

In 2025 government budget statement noted that it will take steps to re-open the domestic bond market to extend the maturity profile. The reopening will be executed cautiously to establish large-sized benchmarks bonds that will enhance market liquidity. To further reduce risk on the debt portfolio, government will build sufficient cash buffers to support effective implementation of the liability management strategies, however the presentation how the cash buffers will be funded, as there was no line item on the funding of cash buffers for restructured domestic bonds.

One major concern was that the Government fiscal policy objectives of government which included: i rationalizing government expenditure and eliminating wasteful expenditure; ii optimizing domestic revenue mobilization through the broadening of the tax base, increased non-tax revenue collection, adopting enhanced tax compliance measures, and modernization of tax administration through digital technology, alone may not be able to reduce public debt to sustainable levels and also not adopting prudent debt management practices to support debt sustainability

In Ghana’s 2025 budget, the government projects a total revenue of GH?224.9 billion, including grants, which is an increase of over 20.5% compared to the 2024 total revenue of GH?186.5 billion may not be enough to build the cash buffers to support the existing liability management and as well as the new domestic bonds to be issued at latter part of 2025.

The huge debt overhang from the road sector, Cocoa Board, Electricity Company and other loss making SOEs could it impossible and meaningful for cash buffers for the country’s liability management. The country could be teetering on the brink of another default as mounting debt burdens, and declining revenue strain on national budget. Ghana could also struggling to meet their existing and new debt obligations thus leading to concerns about another potential defaults and economic instability.

The existing debt and any additional debt burden could limit investment in crucial sectors such as poor road infrastructure, education and healthcare thus constraining economic growth. While final restructurings supposedly address immediate debt sustainability issues and allow a country to exit default, they are important for growth if they address countries’ debt overhang issues and leave the country with a relative low debt ratio.

The domestic debt reduction has also created a situation known as an inverted yield curve. An inverted yield curve occurred as short-term interest rates on Treasury bills were being quoted between 22% and 33.7% per annum exceeding long-term rates on Government bonds’ coupon rate of 9.1% or 8.51% per annum.

The inverted yield curve has been viewed as an indicator of a pending economic recession in the country. When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor and that the yields offered by long-term fixed income will continue to fall. The existing bond market was considered a major prerequisite to sustainable debt dynamics as well as improved growth prospects by the financial sector and the wider public.

However, the DDEP has not managed to lower signal rates during the post-DDEP era, as the market interest rates on short-term government bills have risen to historically high levels and thus created an inverted yield curve and remained unstable. An inverted yield curve occurs when near-term risks increase.

Investors demand greater compensation from shorter-term treasuries when long-term expectations for the economy sour. In essence, re-entering the bond market after a default requires a multifaceted approach that addresses the underlying financial issues, rebuilds investor confidence, and demonstrates a commitment to sustainable financial management

Arguments for the government re-entry into the domestic bond market in 2025

Proponents argued that to enhance macroeconomic stability, Ghana needs to support macroeconomic policy with structural reforms that strengthen and improve the functioning of these markets and sectors. Ghana’s prudent macroeconomic policies may have to result in low and stable inflation, stabilize the local currency which could contribute to the improve on confidence in the financial services industry. Inflation hurts the poor by lowering growth and by redistributing real incomes and wealth to the detriment of those in society least able to defend their economic interests.

The government must ensure that macroeconomic stability is associated with prudent monetary and fiscal policies, such as low and stable levels of inflation, lower fiscal deficit, reasonable public debt levels, exchange rate volatility (nominal or real), and interest rates, among others, all of which could be quantitatively assessed on the investment climate as well as the economy.

Supporters also argued that in the post-DDEP, domestic investors have had limited alternative investment opportunities, making T-bills an attractive option with higher yields in the period between 2023 – 2024 but the yields declined significant with new government assumed office in 2025.

Proponents argued that it is sustainable for government to rely solely on treasury bills to finance its operations which been the main argument against for Ghana return to the domestic bond market. They also noted that re-issue bonds could not support Ghana’s economic recovery and long-term fiscal stability.

Since the domestic debt restructuring in 2022, Ghana’s domestic bond market has remained dormant and inactive, with no new issuances or re-tapping of existing bonds. With the international capital market still closed to the country and the local bond market dormant after the debt restructuring, T-bills have become the government’s only source of raising money to finance its budget deficit The continuing decline in T-bill rates signaled growing investor confidence in the country’s fiscal management.

Supporters argued that the prudent public debt management measures adopted by the NDC government had led to a record-high drop in the 91-day T-Bill rate in just 50 days, saying it was an emphatic vote of confidence in the Ghanaian economy by the investor community.

The drop in the benchmark rate as a result of less government borrowing from the domestic market could also mean that access to credit by businesses and individuals can now be easier and cheaper. IMF Board meeting on 2/12/2024 with Ghanaian authorities unambiguously dispelled speculations of a possible restructuring of T-bills: In the IMF meeting with the Ministry of Finance during the December 2024 review and at the post-IMF press conference, we sought clarity on the Treasury’s plan on T-bill issuances amidst renewed market speculation about a likely restructuring of the securities.

The authorities were very clear to the country that they do not intend to restructure T-bills as these securities are not part of the Debt Sustainability Analyses conducted for the comprehensive debt restructuring program, which is nearing the end. In view of this reassurances and given our belief that T-bills are sacrosanct for financial stability, we reiterate our view that Ghanaian T-bills remain safe for short-term investment and liquidity management.

The continual dependency on the treasury bills to finance government operations will not affect the country’s debt sustainability analysis. The government financing has continued to rely heavily on T-bills since 2023, the Government through Ministry of Finance may have to depend on the treasury bill market in the absence of the domestic bond market.

The government has been issuing large amounts of T-bills over the last two years, relying on the demand from non-bank investors (individuals, insurance, and investment funds) which had limited alternative investment options. Recent reduction in T-Bills has saved Ghana GH¢1bn – Ato Forson.

The Minister for Finance, Dr Cassiel Ato Forson, has revealed that Ghana has saved approximately GH¢1 billion following a recent reduction in Treasury bill (T-bill) rates and the savings generated from the lower T-bill rates would be redirected towards critical sectors of the economy to enhance development.

Proponents argued that the sharp decline in yields has significantly altered market sentiment, injecting a renewed sense of optimism into Ghana’s money markets. Investors have responded positively to the rate drop lately, viewing it as a strong signal of fiscal responsibility and economic stability under the new government.

This surge in demand of Treasury bills suggests that investor confidence in Ghana’s macroeconomic direction has strengthened considerably following a period of uncertainty. The robust appetite for T-bills, despite the declining yields, suggests that investors are willing to accept lower returns in exchange for the perceived improvement in Ghana’s fiscal outlook and political stability. Liquidity conditions in the financial sector have remained stable, reinforcing the argument that the rate decline has not disrupted market equilibrium.

The government’s debt refinancing operations over the past eight weeks have been largely successful, with GH¢59.5 billion raised to settle maturing obligations while GH¢30 billion in bids were rejected to prevent an unnecessary rise in borrowing costs. This careful rationing of debt issuance signals a shift in fiscal management, as the government seeks to optimize borrowing costs while maintaining investor confidence.

Fiscal sustainability has been a key beneficiary of the declining T-bill rates, as lower yields translate into reduced government borrowing costs. Given Ghana’s heavy reliance on short-term debt to finance its budget, the ability to refinance maturing obligations at rates nearly 700 basis points lower represents a substantial fiscal relief.

The government’s strategy of limiting net domestic financing suggests that it is prioritizing fiscal discipline over expansionary borrowing, further strengthening market confidence (Essilfie,2025).

Proponents argued that it is unsustainable for the government to rely solely on Treasury bills (T-bills) to finance its operations and therefore suggest that the government’s plan to reopen the domestic bond market, and suggested that the reopening will be executed cautiously to establish large-sized benchmark bonds that will enhance market liquidity.

Also noted that the government re-entry into domestic bonds market will support Ghana’s economic recovery and long-term fiscal stability. Theoretical literature opined that It’s usually takes a country 2 to 4 years to regain access to the bond market after a default, according to the International Monetary Fund (IMF). While 2-4 years is a general timeframe, some countries may be able to re-enter the market sooner if they have strong fiscal policies and a good track record of repayment.

However, this timeframe can vary depending on factors like the extent of the debt restructuring and the country’s overall economic health. Some countries may re-enter the market sooner, while others may take longer. The speed of a country’s economic recovery also plays a role. Improved macroeconomic conditions, such as lower inflation and increased investor confidence, can accelerate the re-entry process.

4.ii Arguments against the government re-entry into domestic bond market in 2025.

Opponents argued that the re-entering the bond market after defaulting on past debt obligations is a complex process requiring careful planning and execution. It involves restoring investor confidence, managing the perception of risk, and effectively addressing previous default issues.

The government is yet to demonstrate its ability to repay the restructured debts both the domestic and international. For the government to rebuilding investor confidence is essential for successful re-entry. The government must demonstrate a solid financial recovery, implementing robust governance practices, and showing a commitment to ethical and responsible debt management.

Critics argued that the broader economic environment and market conditions does not show the success of re-entering the bond market. The current economic conditions do not depict a stable and favorable market environment can make it easier to attract investors. The current high inflation, unstable exchange and high fiscal deficits.

Opponents argued that there is no evidence of transparency and communication on the detailed information about the restructuring plan, financial outlook and future debt management strategy. There is a need for clear and transparent communication with investors is crucial to rebuild trust and demonstrate a commitment to repayment. This includes providing detailed information about the restructuring plan, financial outlook, and future debt management strategy.

Opponents also argued that Ghana’s the yield curve remains inverted, with coupons on long-term bonds around 9.1 percent and short-term T-bills above 18.83- 33 percent it will be very difficult for Government to return to Domestic Bond Market. For markets to develop and mature, there has to be a framework of predictability, depth and trust. Government should look to establish a longer-term yield curve.

The yield curve, a fundamental benchmark for determining borrowing costs, is currently skewed toward short-term instruments in Ghana. If you look at Ghana’s yield curve now, it requires some alignment in terms of the returns on assuming long-term risk to lend to government. Long-dated instruments have coupons under 9.1 percent while Treasury bills are in excess of 18.83-33 percent. As a result, the long-dated instruments are trading at steep discounts to align the yields to pricing at the short end.

This needs attention to ensure a more balanced investment climate commensurate with the investment risk. Government must implement strategies that will improve economic performance, boost the real sector and bring inflation down to create room for further policy rate cuts. It may not be too soon, because the longer-dated bonds extend well into the 2030s. Nonetheless, the short-term rates trending downward may well be a step in the right direction and must be anchored on strategic policies to spur the economy.

Critics also argued that inability on part of the Government to meet some of IMF ECF benchmarks of the inflationary rate of 15% as against actual inflation of 23.8% and the primary surplus of 0.6 % (deficit of 3.1%) at the December 2024 are said to have affected the delay of re-entry of domestic bond market.

Opponents argued that Ghana has still been classified as high risk of debt distress due to near-term breaches of the DSA thresholds have all contributed to the myth of re-entry of domestic bond market in 2025 but is expected to reach moderate risk of debt distress in the medium term as all DSA sustainability targets will be met by 2028. It will be impossible for under IMF ECF program for the government to re-enter the domestic bond market until the country improves on their debt sustainability indicators. In particular, the PV of total debt-to-GDP and external debt service-to-revenue ratios will reach 55 and 18 percent, respectively, by 2028.

The government should not add more debt to already worsen the three debt sustainability indicators. The government must work hard to improve on current weak indicators. IMF has already expressed concerns that the reopening of the domestic bond market could complicate the country’s debt sustainability by categorizing off-shore investment as external debt, it is crucial to strike a balance.

Before a country that defaulted on domestic bonds can re-enter the domestic bond market, it needs to demonstrate a clear path towards fiscal stability and rebuild investor confidence, not to contract new debt, prudent fiscal reforms, and transparent communication. Looking at the country’s debt overhang, the negative impact of DDEP and prevailing macro-economic instabilities the government must tread cautiously before the re-entry of domestic bond market.

During the period between2023-2025, the government has been able issue short debt on the money market and, importantly, after default on it without any further punishment. This has led to an endogenous loss of reputation of the government. The strength of the reputation loss should be hereby linked to the length of the period of exclusion from both domestic and external financial markets. The scholarly literature on sovereign debt crises is substantial, particularly with respect to the economic, legal, and political costs of default.

More recent theoretical work has focused on the trend toward increased domestic debt, which is expected to help reduce the probability of a debt crisis. However, domestically issued sovereign debt can lead to other types of risk. While relying on domestic institutional investors in local economies can help smooth cycles of liquidity shortages, over-reliance on those investors (particularly pension funds) can undermine the solvency of domestic banks and pension industry arrangements. After a default the government’s reputation is undermined and with it, its ability to credibly issue debt.

A scarcer supply of public debt makes banks substitute away from government securities to investments in their less productive projects. Opponents argued that there is no evidence debt maturity alignment document. There is no evidence of re-entry plans which has been carefully aligned with existing debt obligations, particularly looming maturities from 2025-2028. This could help to avoid further financial strain and demonstrates a commitment to sustainable debt management

5. Discussions and Findings

Several issues have been raised in the above discussions with market re-entry by government in the domestic bond market. These include addressing the inverted yield curve, the unfavorable macro-economic environment of high inflation, unstable exchange rate and high fiscal deficits, lack of evidence debt maturity alignment document as well as addressing high risk of debt distress due to near-term breaches of the DSA thresholds. The government is yet to design a robust fiscal framework before the re-entry into the bond market.

Government must also demonstrate how it is going generate needed revenue to fund both existing maturing obligations as well as intended new bonds. This information must be made available to the domestic, international investors as well as the general public. Government’s plan to re-enter domestic bond market in 2025 carries significant risks if not aligned properly with maturing debt obligations, particularly the looming 2025 -2029. Ghana would have to address the inverted yield curve where Treasury bill rates are higher than the long-term bond rates. With Ghana’s the yield curve remains inverted, with coupons on long-term bonds around 9.1 percent and short-term T-bills above 18.83 percent it will be very difficult for Government to return to Domestic Bond Market.

For markets to develop and mature, there has to be a framework of predictability, depth and trust. Government should look to establish a longer-term yield curve. The yield curve, a fundamental benchmark for determining borrowing costs, is currently skewed toward short-term instruments in Ghana. If you look at Ghana’s yield curve now, it requires some alignment in terms of the returns on assuming long-term risk to lend to government. Long-dated instruments have coupons under 9.1 percent while Treasury bills are in excess of 18.83 percent. As a result, the long-dated instruments are trading at steep discounts to align the yields to pricing at the short end.

This needs attention to ensure a more balanced investment climate commensurate with the investment risk,” she said. Government must implement strategies that will improve economic performance, boost the real sector and bring inflation down to create room for further policy rate cuts. It may not be too soon, because the longer-dated bonds extend well into the 2030s. Nonetheless, the short-term rates trending downward may well be a step in the right direction and must be anchored on strategic policies to spur the economy.

It is a myth to think that the government cannot re-enter into domestic bond market without addressing the breaches of IMF Debt Sustainability Analysis benchmarks and with the current inflationary rate of 22.4% and deficit of 3.1% against the IMF benchmark against targeted inflationary rate of 15% and the primary surplus 0.6% in the year ending 2024 respectively.

From the arguments for and against on the discussions and findings of the re-entry into domestic bond market, it is clear that there are stronger arguments against the re-entry. For example, the failure on part of the Government to meet some of IMF ECF benchmarks of the inflationary rate of 15% as against actual inflation of 22.4%and the primary surplus of 0.6 % (deficit of 3.1%) at the December 2024 are said to have affected the re-entry of domestic bond market.

Furthermore, Ghana is still classified as high risk of debt distress due to near-term breaches of the DSA thresholds. Before a country that defaulted on domestic bonds with restructured bonds can re-enter the domestic bond market, it needs to demonstrate a clear path towards fiscal stability and rebuild investor confidence, not to contract new debt, prudent fiscal reforms, and transparent communication The Government inability to achieve debt sustainability levels as set up by IMF under the ECF program must a key concern for the government re-entry into the domestic bond market.

The International Monetary Fund-supported program is expected to restore debt sustainability and bring the debt risk rating to “moderate” in the medium term. This includes in particular reducing the PV of total debt-to-GDP and external debt service-to-revenue ratios to 55 and 18 percent, respectively, by 2028, which entails a revenue-based fiscal consolidation.

Ghana is still at high risk of debt distress due to near-term breaches of the DSA thresholds, but is expected to reach moderate risk of debt distress in the medium term as all DSA sustainability targets will be met by 2028. In particular, the PV of total debt-to-GDP and external debt service-to-revenue ratios will reach 55 and 18 percent, respectively, by 2028

1. A major concern for the re-entry of domestic bond market that the government’s short to medium-term debt will be used to bridge an ever-growing gap between recurring revenues and recurring expenditures, reaching levels that compromise government’s ability to deliver basic services. The “snowballing” of short-term debt as governments run chronic operating deficits has been a leading cause of financial emergencies, causing banks and other investors to lose confidence in a government’s ability to run surpluses and repay its short-term debt. Allowed to accumulate too long, short-term debt can reach unsustainable levels, requiring a high proportion of revenues to be devoted to debt service at the expense of public services.

iii. Weak domestic revenue mobilization has become Ghana’s key fiscal challenge and risk, the root cause of fiscal imbalances, and the biggest single threat to the government’s development objectives. Recent work by the IFS (2018) shows that Ghana’s domestic revenue/GDP ratio remains far below the levels of its sub-Saharan African peers, and the revenue gap has increased significantly in the past years. The country’s domestic revenue/GDP ratio averaged 16.7% in recent years, much less than the sub Saharan African countries average of 27% of GDP, suggesting that Ghana’s actual domestic revenue is far short of what the country’s economic potential and institutional development could generate. If Ghana’s domestic revenue had performed like its regional peers, the country could have generated significantly more revenue, which could have been used to pay off its expenditure overruns, with extra funds to pay off some of its debts and the intended new bonds.

1. Furthermore, the DDEP and external debt restructured had raised concerns about Ghana’s future debt sustainability. The government faces increased refinancing risks and potential default due to its heavy debt obligations in the coming years, so for the government to additional debt payment obligation could be disastrous for the country’s debt sustainability. Without robust fiscal reforms, aggressive revenue mobilization through reduction in tax exemptions and concessions as well as diversifying its tax revenue streams and stricter control on government expenditures as well as reduction of corruption in the public sector, and re-entry into domestic bond market could be a economic disaster. Without robust fiscal reforms and strict control over government expenditure, the DDEP and external bond restructured may have simply postpone debt obligations rather than achieve its long-term debt sustainability goal. The link with default risk becomes evident if the government encounters difficulties in refinancing or repaying these concentrated debt obligations. Failure to secure adequate funds could lead to a situation where the government may struggle to meet its financial commitments, potentially resulting in a default on its debt obligations. Presently, due to terms set by the IMF has been cautious of the government intention of re-issuing of medium to long-term bonds in the domestic capital market. If this restriction persists, or if the IMF program outcomes do not enable the government to successfully roll over the restructured bonds, the risk of default increases. Such instances would restrain the government’s capacity to manage its debt, compelling it to seek alternative sources of funds to fulfil its debt obligations
2. Another major concern is that Ghana has a history of chronic macroeconomic instability, evidenced by high rates of inflation, exchange rate depreciation and high fiscal deficits, in particular. This is the result of persistent demand-supply imbalances in the economy. Chronic macroeconomic instability is harmful to the economy to the extent that it stifles savings, investment and growth. Weak fiscal discipline has complicated monetary and exchange rate policies. In some cases the monetization of fiscal deficits has raised inflationary expectations, weakened investor confidence, fueled capital outflows and depreciation of the exchange rate, and slowed investment and economic growth, further deteriorating the fiscal accounts. In other cases the tightening of monetary policy had led to higher interest rates, depreciation of the exchange rate, crowding out of private investment, and negative repercussion on investment and growth, also adversely affecting the fiscal accounts.With the current high inflation, unstable exchange rate, high fiscal debt compounded by huge debt overhang, loss of investors’ confidence after the Domestic Debt Exchange (DDE) with huge SOEs debt, it is imperative for the Government to work hard to address the above myriad problems before consider the re-entry into domestic bond market later in 2025. High inflation and large fiscal deficits, it has been argued, distort economic behaviour in favour of short-term speculative projects and discourage the long-term investment projects conducive to sustainable economic development.

 

2022. Another issues is that the new government has no credible track record of fiscal discipline and debt management to rebuild investor confidence for the intended re-entry into domestic bond market after default in 2022. Government needs one to two years at least to demonstrate a credible track record of fiscal discipline and debt management to rebuild investor confidence. To be credible, governments should design fiscal frameworks that account for and manage fiscal risks. In particular, risk analysis should inform the fiscal targets and the flexibility embedded in frameworks to allow for countercyclical response to crises, budgets should account for expected costs of loan guarantees, and frameworks should cover at least the general government and be complemented by fiscal data for the whole public sector

vii. The country has not developed any definitive and credible clear path to debt sustainability. The country must demonstrate a credible plan to repay its debts and avoid future defaults, including a sound fiscal framework and strong economic growth prospect. Debt is sustainable when a borrower is expected to be able to continue servicing its debts without an unrealistically large correction to its income and expenditure.

Sustainability is related to solvency as well as to liquidity. Sustainability also captures the notion that there are social and political limits to adjustments in spending and revenue that determine a country’s willingness (as opposed to its economic ability) to pay, which may be especially important in a sovereign context.

viii. Loss of Confidence in the government’s medium to long term had been evident since the DDEP. The indirect effects of such a program can also be substantial. There had been loss of confidence among contributors to various investment schemes, including pensioners’ fearing that their retirement savings are at risk. This could lead to reduced participation in any future government bonds thus putting further straining the funds’ financial health

Conclusion.

The recent economic downturn has posed significant challenges for Ghana’s financial sector, including the banking, insurance, and pension sectors.

The DDEP introduced additional pressure to a sector which had not recovered fully from the 2018 financial sector clean-up. The mere announcement of the DDEP caused immediate concern due to the high level of exposure financial institutions had to government debt. The program’s combination of moratoriums, maturity extensions, and reduced coupon rates resulted in impairment losses for these institutions, putting their profitability and solvency at risk. Furthermore, the DDEP raises concerns about Ghana’s future debt sustainability.

The government faces increased refinancing risks and potential default due to its heavy debt obligations in the coming years. Without robust fiscal reforms and strict control over government expenditure, the DDEP may simply postpone debt obligations rather than achieve its long-term debt sustainability goal.

The issues mentioned above including weak domestic revenue mobilization, restoring debt sustainability and bringing the risk-rating to moderate in the medium term of PV of total debt-to GDP and external debt service to revenue ratio of 55% and 18% respectively, Ghana’s long history of chronic macroeconomic instability, evidenced by high rates of inflation, exchange rate depreciation, high fiscal deficit and loss of confidence in the government’s medium to long term had b Read Full Story