Borrowing costs

Rising borrowing costs prompt Ghana to scale back lending plan and tap IMF

Ghana has scaled back plans to borrow up to $750m from international banks due to soaring borrowing costs, according to a finance ministry official with knowledge of the matter, and will also draw on the Fund international monetary policy to strengthen its finances.

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(Bloomberg) – Ghana has scaled back plans to borrow up to $750 million from international banks due to soaring borrowing costs, according to a finance ministry official familiar with the matter, and will also appeal to the International Monetary Fund to strengthen its finances.

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The West African nation will borrow $250 million from banks at an interest rate of around 8.4% to finance budgetary needs such as roads, railways, energy and health.

The five-year syndicated loan facility brokered by lead arrangers Standard Bank Group Ltd., Standard Chartered Plc and Rand Merchant Bank Ltd. of FirstRand Ltd. a copy of the terms sent to parliament by the Department of Finance and seen by Bloomberg. The SOFR stood at 1.5% at the close of June 30.

A finance ministry spokeswoman declined to comment immediately when reached by phone.

After failing to find cheaper sources of finance, President Nana Akufo-Addo’s government said on Friday that Africa’s second largest producer of gold and cocoa would seek a bailout from the IMF. The country’s dollar reserves fell to $8.3 billion at the end of April, from $9.7 billion at the end of last year, according to the central bank. The country’s public debt rose to 78% of gross domestic product at the end of March from 76.6% in December.

The rate on the $250 million loan is well below the 23.27% yield on Ghana’s five-year dollar bond, a level that shuts West Africa’s second-largest economy out of the bond market. Eurobonds. Ghana lost access this year due to higher debt and fiscal deficit, partly caused by the impact of the coronavirus pandemic.

The terms of the loan come with a comprehensive insurance coverage of $50 million from the Africa Trade Insurance Agency, which will include all principal as well as interest. This will pay the banks in the event of default.

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As Ghana aims to reduce its budget deficit to 7.4% of GDP this year from around 12.1% of GDP in 2021, it is becoming more difficult after price pressures emanating from Russia’s invasion of Ghana. Ukraine began to weigh on economic activity.

The inflation rate hit an 18-year high of 27.6% in May. The economy, which grew 5.4% last year, grew less than expected in the first three months at 3.3%.

Ghana will now borrow up to $750 million from the African Export-Import Bank to meet its target of $1 billion in foreign loans for the 2022 budget by mid-July, according to plans submitted to parliament . Seven-year loans are slightly cheaper at SOFR plus 6.25% per annum.

(Updates with terms of borrowing from Afreximbank in last paragraph.)