Professor Samuel. E. Incoom, an Economist at the Kwame Nkrumah University of Science and Technology (KNUST) is pushing for the establishment of a framework for the issue of foreign-exchange-denominated (or ‘forex’) bonds in Ghana.

This he says is critical for the country to generate and mob up foreign currencies in order to cut down on excessive foreign exchange borrowings from abroad.

According to him, the funds will be attracted by proposed offices or departments to be established in the indigenous investing financial intermediaries and listed on the Ghana Stock Exchange.

The proposed offices or departments are financial institutions, which will generate funds from sources other than domestic currency and play a substantial role in the securitisation of foreign debts in Ghana.

Prof. Incoom has been discussing his paper with the Economics Students Association (ESA) of the KNUST at its 4th Annual Week celebration.

He opined that “even though some advanced countries, like Canada, and agencies like the Official Development Assistance (ODA), Official Development Finance (ODF), and US Agency for International Development (USAID) as well as the Overseas Economic Cooperation Fund of Japan occasionally provide Ghana with debt forgiveness and foreign aid, it is the proposed ‘forex’ bonds that will provide Ghana with the true initiative for foreign exchange generation for development.

“The issue of the ‘forex’ bonds is the function of the external account, so that if at any point in time the economy is in serious deficit, ‘forex’ bonds can be issued to ameliorate the situation.

“Obviously, if Ghana can raise foreign capital from its own sources, there is no reason why it cannot drastically cut down on its total foreign debts and thus encourage its citizens to earn dividends and interest. From the pre-debt cancellation period, December 1996–2003, to the post-debt cancellation period, 2006–September 2010, the annual rate of foreign debt increased from $664.45 million to $905.44 million. The difference of $241 million per annum will then represent the critical estimate of the initial issue of the ‘forex’ bonds for the future, assuming all other things remain equal. Generally however, the prerogative and the size of issue are determined by the Government.

“Apparently, the Government of Ghana would hardly cut down on its foreign borrowing because it finds it easier to raise this money that it has refused to look inward for foreign currency. The Government has even proposed to pledge a certain portion of its oil revenue for foreign loans. Already, it pledges cocoa revenues for such loans. Strangely, both the ruling Party and the Opposition see large loans from abroad as a blessing – what do we intend to leave for posterity?”

Prof. Incoom, who is the Banking and Finance Chair of the Ghana Association of Bankers, noted “this is not the first time a Ghanaian company, or Ghana Government, has issued foreign exchange bonds. In 2004, Anglogold Ashanti floated Eurobonds for the first time; and in 2007 the Government of Ghana also, for the first time, successfully issued Eurobonds on the London Stock Exchange to raise US$750 million. Part of this issue was earmarked for infrastructure development, including energy and roads; and part of it for rehabilitation of the railway network.

“The Government of Ghana bonds were hugely over-subscribed to US$3 billion. This has encouraged me to put up this suggestion that ‘forex’ bonds could be issued ‘on tap’ by the investing financial intermediaries and floated on the Ghana Stock Exchange, targeting individual Ghanaian investors and other nationals resident in Ghana.”

The Economics Professor also observed “Ecobank Transnational Incorporated (ETI) has floated a kind of foreign bonds on the Ghana Stock Exchange, but it is not indigenous and Ghana Government does not have the right to borrow from it at will”.

He is rather suggesting the establishment of offices in the investing financial institutions to attract foreign exchange from Ghanaian individuals, firms, and organisations, as well as expatriates resident in Ghana.

According to him, the benefits of ‘forex’ bonds are quite similar to the benefits of financial intermediation.

“Under this arrangement, higher liquidity is achieved when people lend foreign exchange to the investment financial intermediaries, listed on the stock exchange rather than lending directly to the ultimate borrowers.

“Secondly, risk is reduced owing to the pooling of risk, expert knowledge of averting losses, efficient portfolio diversification, deposit protection, dividend guarantee, and avoidance of vocational and seasonal discrepancies.

“Thirdly, marketable securities are created, and this increases the degree of liquidity of financial assets, as secondary market exists in them. The investor is assured of a guaranteed return on her/his/their investments. Finally, lending decision-making is easier as there arises more lending opportunities.
Prof. Incoom added as most Ghanaian contractors lack funds to finance the foreign exchange counterparts of high-cost equipment, plant, and machinery, the proposed ‘forex’ bonds market would enable the borrower to secure long-term foreign exchange loans with ease.

“Secondly, the proposed foreign exchange investment financial intermediaries offer larger amounts to contractors and borrowers than individual lenders can offer. Thus as a result of benefits from specialisation and economies of large scale, investors in foreign exchange financial institutions and borrowers earn more returns than direct lenders. Thirdly, it is quicker to use foreign exchange financial intermediaries than direct lenders. Finally, these attributes enable business people to obtain more foreign currency loans in order to prefinance their activities and to trade with it.”

To the society, the Economist said there is the likelihood that ‘forex’ bonds will lead to an efficient re-allocation of resources as a result of improved evaluation of lending and borrowing opportunities and lead to an increase in the volume of foreign exchange lending and borrowing, with implication for economic growth as well as lead to the availability of more funds to higher-risk ventures.

Later in an interview with Luv Bizness Report, Prof. S.E. Incoom described the proposal as a ‘novel type of investment’ which needs to be fine-tuned with inputs from all stakeholders for implementation.

Story by Kofi Adu Domfeh/Luv FM/Ghana