The government has lodged GH¢250 million into a Debt Service Reserve account, a newly created account, to begin the process for retiring the Volta River Authority (VRA) debts owed some banks, the Minister of Finance, Mr Seth Terkper, has said.
Mr Terkper told the Daily Graphic in an interview that the next step is to complete negotiations with another group of domestic and international banks for an additional facility to retire the remaining debt owed to some suppliers, mainly for crude.
He said the upfront payment, sourced from the energy levies, was to mark the beginning of the debt retirement running into about GH¢2.2 billion.
The levies will augment the receivables that the VRA is currently using to service these debts but which are deemed insufficient by the banking sector.
“Banks would start receiving the funds as soon as newly-agreed repayment process plan has been signed.
“We have made the GH¢250 million upfront payment for VRA’s Debt Restructuring into Debt Service Reserve account to be distributed to the banks when the agreement is signed soon, to kick-start the newly-agreed repayment process,” the Minister said.
Debt mangement strategy
Mr Terkper reiterated the point made in the Mid-Year Review that the exercise was part of the government’s overall fiscal prudence strategy, which was aimed at meeting the financing needs at the lowest possible cost, with a prudent degree of risk, while developing domestic markets.
The highlights of the strategy are a set of proactive efforts to refinance external and domestic debt to extend tenors (debt maturity periods) and reduce debt service costs; deepening the domestic markets by opening up the two-year bonds market to non-residents investors and reinvigorating primary dealer process; and using short-term instruments, such as Treasury Bills, for liquidity management only.
Mr Terkper explained that the first major strategy of the government was to “refinance” the short-term “bullet” debt with longer-tenor loans, including all or portions of the Sovereign Bonds issued between 2013 to date, to allow time to start paying both interest and principal amounts to avoid exacerbating the rising public debt situation.
At the moment, government pays only interest on these instruments–and even longer-dated bonds–and “rolls-over” the principal amount. The vehicle for achieving this goal is the newly-established Sinking Fund.
Hence, the second strategy is the establishment of the Sinking Fund, after placing a cap on the Stabilization Funds under the Petroleum Revenue Management Act, to start the repayment of both the principal and interest.
Mr Terkper said a primary feature of Ghana’s debt was its short-term and bullet nature, where a substantial portion of the debt was made up of 91-day Treasury Bills and Government Bonds of one or two-year tenor or duration only.
“Until now, no government appears to have developed a plan to deal purposely with this problem that posed a major “roll-over” risk, and a primary reason for the World Bank Guarantee that was used to back last year’s Sovereign Bond issue, which was designed to refinance these bills and bonds and extend their repayment profiles to 15 years.
Sinking fund
“Even the long-dated domestic bonds were of only three or five-year tenor or duration. Furthermore, the Bank of Ghana (BoG) often extended credit or overdraft to government and these were also rolled-over and not paid,” he said.
Mr Terkper was emphatic on the very disturbing feature of these instruments: “the “bullet” structure meant that government paid only interest and undertook to pay the principal at maturity or when the 90 days or one through the five years ended.
“In essence, the “roll-over” risk posed a major problem for our debt management: the situation where borrowing costs or interest rates increase and were at risk of defaulting on the payment of the mounting principal amount.
“Besides the domestic bills and bonds, the biggest of these risks was the impending roll-over of the 2007 Sovereign Bond that was due for repayment or refinancing in 2017 with a face value of US$750 million. In fact, by 2013 when the new debt policy was rolled out, it was fast becoming a shorter-dated instrument,” Mr Terkper added.
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