The response of rich countries and multilateral institutions to the pandemic’s financial impact on poor countries was inadequate and ignored the concerns of governments and the private sector, said Ghana’s finance minister.
Ken Ofori-Atta argued that measures to provide debt relief during the pandemic, such as the debt service suspension initiative, did not take into account the views of developing countries or private sector lenders. He said the DSSI did not reduce the amount of debt owed, while participating countries did not ask for relief from the private sector for fear of losing access to commercial debt markets.
“The west should hang its head in shame,” Ofori-Atta told the Financial Times in an interview. “There was a complete distance between the resources available and what was applied [beyond advanced economies] to a problem that was global. ”
To address the problem, he called for a rethink of the global financial architecture led by the World Bank, the IMF and other institutions set up during and after the second world war. “We need to seriously evaluate whether the rules laid down [then] are the most appropriate going forward, ”he said.
A downturn in economic output and tax revenue caused by the pandemic took a heavy toll on the public finances of many developing countries.
Ghana is one of several countries causing concern over their ability to service their debts as the Federal Reserve prepares to begin raising US interest rates as soon as next month, increasing the cost of borrowing and adding to the strain on budgets of indebted countries.
Bonds issued by Sri Lanka are trading at levels that suggest the country will default this year. Several other countries, including Ghana and El Salvador, could face debt repayment problems by 2024.
This month, Moody’s downgraded Ghana’s credit rating to a level indicating a substantial risk of default, becoming the second of the three big rating agencies to do so and prompting forced selling of Ghana’s bonds by global asset managers. Ghana claimed the downgrade revealed an institutional bias against African economies.
Ofori-Atta questioned the logic of the downgrade, given Accra’s efforts to cut spending and introduce new taxes, including a levy on digital financial transactions he hoped would be approved by parliament by early March.
“Moody’s was in a hurry to downgrade us, which is very, very costly [for borrowing]. Why could they not wait six months to evaluate [the budgetary measures]? ” he asked.
Ghana issued a $ 3bn dollar-denominated eurobond last year but borrowing costs have since increased. Ofori-Atta said it was “good to take a breather [from issuing foreign debt] this year and let everybody settle down to understand that the changes we are making are structural ”.
Investors warn that Ghana will have to regain market access by next year in order to refinance outstanding bonds coming due from 2024.
Kevin Daly, investment director at Aberdeen Standard Investments, said the country’s projected fiscal adjustment this year was “very optimistic” and that current high costs for Ghana to borrow reflected uncertainty on markets that its targets would be met.
“If they are shut out of markets for two years, the choices they will have to make will be very strong,” he said. “At that point they would have to go to the IMF as their external buffers will be eroded to such an extent that lack of market access becomes a concern about solvency.”
Ofori-Atta said the digital transaction tax, known as the e-levy, was one of several measures designed to ensure that more Ghanaians paid taxes. He said just 2.4mn Ghanaians pay any tax at all, out of a potential 11mn-12mn.
Ofori-Atta singled out the DSSI, set up by the G20 group of large economies at the start of the pandemic, as an example where poorer countries and private sector lenders were not sufficiently consulted.
The initiative offered 73 poor countries the chance to postpone repayments on debts owned to official bilateral lenders – governments and other state entities. But the DSSI did not reduce the amount of debt owed, known as its net present value (NPV), so many countries, including Ghana, did not participate.
“The thinking was correct, that in a liquidity crisis you need a moratorium, but it ended up being NPV neutral, which just kicks the can down the street,” said Ofori-Atta.