Henry Kerali, World Bank Country Director
Some seven Civil Society Organisations (CSOs) have accused the World Bank of breaking its own rules and guaranteeing a high interest private loan to Ghana’s government at 16.25 percent.
The organisations – Integrated Social Development Centre Ghana, Jubilee Debt Campaign UK, SEND Ghana, VAZOBA Ghana, All-Afrikan Networking Community Link for International Development, Kilombo Ghana and Abibimman Foundation Ghana – in a report they jointly authored, described as outrageous the interest on a $1 billion 15-year dollar-denominated bond borrowed by government in October, last year.
The report, titled: “The fall and rise of Ghana’s debt: How a new debt trap has been set,” suggested the interest rate of 10.75 percent was just cosmetic.
The World Bank guaranteed $400 million of the repayments, which means if government missed any principal or interest payments, the World Bank would make them instead up to $400 million.
And this is the World Bank’s first such guarantee for 15 years.
Total interest
Total interest payments over the course of the bond are $1.504 billion, so payments total $2.504 billion between 2015 and 2030.
Meanwhile, the IMF, in its January 2016 review, said that the terms of the bond “were worse than expected under the programme, and adding an interest rate of 10.75 percent with a guarantee by the World Bank did seem exceptionally high.”
“For example, $400 million of the bond effectively has the same risk as lending to the World Bank as it is guaranteed by them. The World Bank can currently borrow in dollars for 10 years at a 2.5 percent interest rate.
Cover up
According to the report: “This means that the $600 million that is not guaranteed by the World Bank effectively pays an interest rate of 16.25 percent.
“The implication of this is that the Ghanaian government would have been charged 16.25 percent interest without the World Bank guarantee.”
It stated that the interest rate on US government 15-year bonds was around 2 percent, so there was a difference of 14.25 percentage points between lending to the US government and lending to the Ghanaian government.
“If the Ghanaian government paid the interest every year until 2024, then defaulted on all other payments from 2025, including all the principal repayments (which only come due from 2028– 2030), the bond speculators would still have made $90 million more than if they’d lent to the US government.
Bad deal for Ghana
The effective expectation of ‘the market’ was that Ghana would on average default in full on the bonds in 2025 and never pay a penny more. The deal facilitated by the World Bank is outrageously bad for Ghana, unless it defaults before 2025.”
The World Bank guarantee was given under the Policy Based Guarantee programme.
Under this programme, guarantees are supposedly only available to countries rated as low or moderate risk of debt distress. In April 2014, Ghana was assessed as at moderate risk of debt distress but “approaching high-risk levels.”
At the next review in March 2015 this changed to being confirmed as at “high risk of debt distress.”
Yet, seven months later in October 2015, the World Bank broke its own rules based on its own assessment by giving a guarantee for (high-cost) bonds for a country rated as at high risk of debt distress.
“Whilst 10.75 percent is the interest rate paid to speculators, the World Bank is also charging Ghana a fee of 0.75 percent on the $400 million guarantee-$3 million a year.
This means the actual annual cost is $110.5 million, and so the actual interest cost to Ghana is 11.05 percent.”
By Samuel Boadi