Governments borrow. They constantly borrow and people constantly lend to them because governments are not households or businesses – they are expected to last in perpetuity. Because they always have people lending to them, governments issue new debt to settle old debt. Therefore it is important that government keeps the confidence of those who lend to it. And one of the most important metrics for looking at the confidence of government’s creditors is how much interest they demand for lending to government.
The reason why I have spent the opening paragraph of this post explaining government borrowing is because too many times discussions of debt have been poisoned by the comparison of government borrowing with household or business borrowing and the suggestion that borrowing is necessarily bad (for more on that read this). Once we discard the misleading view of public debt we can then discuss the sustainability, effectiveness and necessity of government borrowing.
With this in mind, I have come to the conclusion that Ghana’s flirting with eurobonds has to come to an end. The international capital market is simply too brutal and unforgiving for a developing commodity-dependent country like Ghana with a tendency of high inflation, a fast-depreciating currency and fiscal indiscipline.
A eurobond is an international debt instrument issued in a currency other than the currency of the country issuing it. Since 2007, Ghana has issued $3.75 billion worth of eurobonds at varying coupon (interest) rates as shown below.
Why should we be borrowing in dollars at 10.75% in an era when people are willing to lend to developed nations at negative rates? Why do we not take that as a sign that the capital markets do not want us?
I was a bit relieved when Ghana was able to secure $1 billion at 7.875% in 2013 to commence the retirement of the $750 million we borrowed in 2007 at 8.5%. It was therefore an unpleasant surprise for me to find out during Seth Terpker’s supplementary budget presentation that Ghana still owes $500m of that eurobond.
That bond matures in October 2017 and government’s recent attempt to secure another eurobond after cutting revenue forecasts and in the middle of a pending IMF review was predictably met with demand for yield so high that government had to retreat.
These expensive loans which are impervious to inflation (since they are not in cedis) and rise in cedi terms due to the tendency of the cedi to depreciate should be last options for a country which is soon on its knees when gold, cocoa and oil prices fall. Instead we have developed an unhealthy appetite for this risky form of financing to the point where we borrowed $1 billion in 2015 for the sole purpose of paying domestic creditors. In essence we exchanged debt in a currency we can print with debt in a currency which the cedi struggles against.
Eurobonds can give a temporary boost to the stability of the currency but our fundamental dependence on commodities means that having high-yield foreign currency debts on our books could be explosive in the case of a loss of confidence in our finances. Eurobonds also force the government to adopt short-term disbursement delaying austerity in order to make its books look good to maintain the confidence of the creditors. This shifts the macroeconomic goals from growth and full employment to “fiscal consolidation”.
I hope that any future incursions into eurobond would be for the purpose of retiring the current ones on our books. We have to look for alternative means of funding, such as by developing our capital markets, reducing tax exemptions to foreign companies and even trying the unconventional approach of incorporating self-funding infrastructure projects and paying government employees in shares of such an entity (I explain how that can be done here). Eurobonds are not worth it. Let’s get off them.