Bonds is a necessary monetary policy initiative that create inflows to support the budgetary allocations of governments. In the case of Ghana’s New Year bond, the proceeds will be used in restructuring GOG debt as well as for maturity settlement.
The government of Ghana on 7th January targeted a whopping 500 million cedis in its first bond for the year 2016. The unfortunate outcome, even though not surprising is the failure on the part of government to obtain the expected 500 million cedis, regardless of the fact that the Bank of Ghana; a statutory institution and regulator, mandated to issue such bonds on behalf of government did due diligence and issued the bond on pro rata, at a 24.75% yield. This puts the yield of the latest New Year bond slightly ahead of the three-year October bond which had a yield of 24.5%. Government is expected to receive a whopping 4.75 billion cedis as proceeds from the bond this January representing 15.4% of expected borrowings for the first half of 2016.
The outcome of this New Year bond is a reflection of the economic woes of the country currently. Effective January 1, 2016, the Country witnessed the implementation of the new Income Tax Act, 2015 (Act 896), which mandates banks to withhold tax on investment. This tax having been assented to on 1st September 2015, radically replaces the Internal Revenue Act, 2000, (Act 592) and any other laws to the extent that they are inconsistent with the provisions of the Act. It further sorts to also amend Section 84(3) of the Banking Act, 2004 (Act 673).
The new Income tax law sky rocketed a lot of key monetary indices. Popularly among them were the new regulations of GRA, which require that all banks and financial institutions withhold a 1% tax on interests earned on investment accounts.
Apart from interest earned by individuals on their investments with resident financial institutions, interests earned by individuals on Government of Ghana (GoG) bonds or Mutual Funds are also be taxed.
It is very important to note that, the implementation of the Income Tax Law, coupled with the tight financial system currently witnessing, in my opinion played an important role in the slightly low subscription of the New Year bond.
This trend is expected to affect the expected 30.4 billion cedis the government intends to raise through notes, bonds and treasury bills at the end of the second quarter.
From an investor point of view, the yield of 24.75% is good considering the duration and timing of the bond. Interested investors can trade the listed bond on the Ghana Stock Exchange for secondary market trading both at the floor of the Exchange or do same over the counter.