World Bank to Ghana: initiate prompt resolution processes for unsustainable debt

World Bank President David Malpass has advised Ghana to initiate prompt, early resolution processes for its unsustainable debt. Speaking at the opening press conference of the Spring Meetings in Washington, Mr. Malpass said the resolution process can commence with the formation of a creditor committee for Ghana.

The Creditor Committee will consist of creditors or lenders to the Ghanaian government. With the creation of the committee, it is expected that the government and its creditors will negotiate and restructure debts to reduce the country’s debt burden.

Citing the current default on loans by the government of Sri Lanka as an example, the World Bank President noted that, the longer Ghana and other countries wait to initiate resolution processes, the more it becomes difficult for the resolution processes to be carried out by the country and its lenders.

“It’s vital and we know what the data shows: a huge buildup of debt, especially in the poorest countries. It’s important that the resolution process starts early. If you wait, the resolutions are much more difficult to carry out. Sri Lanka is facing that problem now. It’s important to form the creditor committees early.

“There was a call today for China to form the creditor committee for Zambia, which would help with the implementation of the Common Framework. And so, I’ve mentioned that as interest rates rise, the debt pressures are mounting on developing countries, and we need to move urgently towards solutions,” he stated.

Ghana’s debt to GDP currently stands at an unsustainable level of 80.1%. Answering a question on the country’s decision to either improve revenue mobilisation or rather issue Eurobonds to correct its deficit position, Mr Malpass averred Ghana should put in place strong policies that attract investments from its own citizens and are private sector-led and not government- led.

He added that, proceeds from Eurobonds should be effectively used by the government seeing that it is just a one-time supply of money and not allow it to contribute to the unsustainable debt burden of the country.

“There’s been a tendency to have too much emphasis on government-led investment, which doesn’t end up adding to the competitiveness and the productivity as much as it should, if it were less centralized. I think those steps are important,” he noted.

“As far as euro bonds, the challenge is for governments to use the proceeds very effectively now if they borrow. A giant conflict of interest is that sitting governments are able to borrow, and then future governments and the people of their countries have to pay back the borrowing. Remember, when you borrow principle, you only get to do it once, even if you roll over at zero percent interest rates into the future, which isn’t actually available for developing countries–if you roll over at a low interest rate you still are not able to borrow the principle again.

“It’s only a one-time supply of money, and that has to be used very effectively. And my worry is that hasn’t been the case in certain countries, and they’re left with unsustainable debt. As I mentioned in the opening remarks, it’s important that we have prompt, early resolution processes for unsustainable debt. And we’re working on that with the IMF, collaborating and encouraging the G20 to move quickly in that regard,” he added.

Story Credit: Nova Reports