Bankruptcy arises when creditors are reluctant to lend or give credit to you mainly because of the fact that you can not meet your current and future financial obligations and as such, some security structure needs to be invoked.
Getting out of bankruptcy calls for a debtor to restructure her debt so that her revenue less expenses can meet her debt servicing (payment of Principal and interest due)
Remember Ghana going HIPC? – that was bankruptcy!
THE PROBLEM
The energy sector is bankrupt! The BDC sector is bankrupt! The infrastructure sector is bankrupt! (we have inflated cost of roads, value for money considerations ignored, power and fuel cost overruns). Outwardly, the financial services sector is getting bankrupt!
Many State Owned Enterprises (SOEs) are fundamentally & technically insolvent! Even the banking sector will show terrible returns if the regulator (BoG) enforces the provisions for defaulting companies or (NPLs) in their books of account (or if Auditors strictly invoke all applicable IFRS stipulations)
THE CULPRIT
The main culprit for the above is governments of the past:
• for not passing on the real cost (and not also being able to fund the resulting subsidy) to end users of public goods (electricity, water, etc);
• for not ensuring efficient pricing by SOEs in the Utility sector;
• for not paying Road Contractors on due dates; and
• for not paying local entities’ interest owed on time, thereby accruing further interest for late payments, (however they do pay accrued interest to the foreign contractors bcos its in their contracts)
A country is approaching bankruptcy, or is technically bankrupt, when it exhibits symptoms of inflation at alarming highs, persistent exchange rate volatilities, spiraling current account deficit, consistent twin-deficits and its internal and external borrowings are in increasingly large quantities locally at high rates and also at astronomical rates abroad with shorter payment terms.
THE WAY FORWARD
• In-country, government can resort to print more money (expansionary monetary stance) – that’s the trick; but it will cause high money supply and eventually scale up inflation.
• Since Govt is borrowing more than it should (mainly to plug the deficit hole) because it’s revenue is not meeting its cost, then interest rates go up; also doing this has stifled the private sector as banks will rather fund Govt (deemed risk-free, albeit ‘imprudent’) than the private sector since the risk-adjusted return on private sector lending is less than that on Govt.
• Govt needs to restructure its debt to spread the maturities to long term borrowing to reduce the annual debt service and relook at borrowing long term to meet self-financing capital expenditure that pays at least the interest within the loan contractual period.
• Govt needs to slow down on expenditure while it improves revenue i.e. Bridge the fiscal deficit gap- its simple but very difficult to do especially when one needs to fulfill electoral promises (free-shs, 1-district 1-factory, restore allowances for teacher and nursing trainees, tax cuts, reduce utility tariffs as well as fuel prices, 1-village 1- dam, etc) – but, does one need to do so especially in a year one or two!
• Govt needs to improve efficiencies in pricing of essential goods – especially in the SOE domain – utilities, fuel and transport; the interplay of market forces will take care of the rest.
• Govt may seek debt forgiveness from creditors that wish to continue supporting them going forward (morale suation).
These need a long term strategy and an ability to ride the storm in the first few years while they “tighten their belts” and invoke austerity measures – curb on spending on non-essentials, restrict imports to essential, put high tariff on goods deemed non-essential, drive interest rates down
They need to spend more and support sectors that have a trickle & multilpier effect in the economy.
Running the Govt should take the private sector approach that any new CEO would take when they take over a firm that has the symptoms of a struggling business in a tough sector.
A thorough analysis of the drivers of the business needs to be undertaken and a plan put in place that lays out the strategy and tactical imperatives to execute the plan.
THAT PLAN IS WHAT I CALL THE BUDGET STATEMENT; It must be sharp, it must address issues fundament to the financial health of a 60-year old nation.
God bless our homeland Ghana!
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