Gov’t embarks on cheaper sources of funding

The Akufo-Addo administration has reiterated its commitment to reduce the burden of the cost of borrowing on the economy.

As a result, it is embarking on cheaper sources of funding for liability management on the existing debt stock to lower the cost of financing and reduce the risk on the debt portfolio.

According to Finance Minister, Ken Ofori-Atta, government is pursuing a strategy that will save taxpayers’ money, starting from this year.

“Within this context, the Government of Ghana had to structure a financing strategy that would ensure fiscal space on a reduction of interest cost in the medium-term, and this led to the option of a zero-coupon bond offering as part of the 2021 Eurobond programme. We anticipate saving a few billions of Ghana cedis starting from 2021 to reduce the interest cost on the budget and create additional fiscal space” he said.

According to Mr. Ofori-Atta, the 2021-2024 Medium-Term Debt Strategy focuses on an appropriate financing mix to mitigate the cost and risk that could adversely affect the debt portfolio.

He noted that the new strategy seeks to continue Government’s ongoing liability management program to reduce refinancing and interest rate risk in the portfolio.

The Minister added that the optimal strategy is in line with Government’s objective of lengthening the maturity profile of the domestic stock to reduce refinancing risk. Other objectives of the strategy include the extension of tenor, introduction of new instruments, and effective communication with the markets.

High debt servicing

Meanwhile, a review of the existing debt stock shows a composition of 51.0 percent for domestic debt and 49.0 percent for external debt for 2020.

However, the implication for interest payments in the original budget is about 79 percent and 21 percent for domestic and external interest payments, respectively.

Therefore, it is clear that interest servicing on domestic borrowing far outweighs its composition in the total debt stock.

As such, the Minister noted that the financing strategy for domestic debt seeks to build benchmark bonds by issuing or reopening medium-to-long-term bonds to improve liquidity and secondary market trading. According to him, the improvement in liquidity is expected to help bridge the gap between revenue collection and short-term expenditure commitments.

On the external front, he pointed out that government would issue sovereign bonds on the International Capital Market if market conditions are favorable to finance the 2021 budget and carry out liability management operations on the public debt portfolio.

“Re-profiling and reduction in cost of the domestic debt portfolio would be pursued as part of the liability management programme. The strategy further considers cost-effective management of contingent liabilities that may crystallise in 2021, especially from the energy sector and financial sector bailouts”.

Gains from the implementation of the strategy

Furthermore, Mr. Ofori-Atta revealed that so far, some positive developments are evolving as a result of the implementation of the government’s liability management strategy.

“Interest rates on Government securities, specifically the short to medium-term securities, witnessed significant decline during the first half of 2021. These developments have a positive impact on the cost of borrowing for Government”.

Specifically, he revealed that in H1 2021, interest rates for the three short-term securities comprising the 91-day, 182-day, and 364-day bills have declined by 146, 74 and 66 basis points, respectively. Similarly, the rates for the medium-term instruments comprising of the 2-year, 3-year, 5-year, 6-year, and 7-year bonds have declined by 90, 155 105, 25 and 240 basis points, respectively.