Expert proposes mineral-backed debt-swap to settle energy sector arrears

A power systems economist, Dr. Elikplim Kwabla Apetorgbor, has proposed a bold new strategy for the country to explore in tackling its mounting energy sector debts by leveraging natural mineral resources for debt-swaps.

The proposal aims to address over US$2.3billion of arrears owed to Independent Power Producers (IPPs) and reduce government’s annual idle capacity payments, which exceed US$500million.

“The mineral-backed debt-swap offers a sustainable solution to stabilise the energy sector and reduce the financial burden on government,” Dr. Apetorgbor said. “By using future mineral revenues to settle debts, Ghana can improve liquidity without adding to public debt.”

At the moment, Ghana’s installed electricity capacity stands at about 5,400 MW – far exceeding peak demand of 3,000 MW and forcing government to make ‘idle capacity’ payments for unused power under long-term Power Purchase Agreements (PPAs) with IPPs.

The strain from these payments, coupled with the country’s foreign currency-denominated contracts, has left the sector vulnerable to exchange rate fluctuations and financial instability, according to Dr. Apetorgbor.

The proposed swap would use revenues from natural resources – including gold, bauxite, manganese and lithium – to clear energy sector arrears and cover IPP payments. This approach mirrors strategies adopted by other resource-rich countries such as Angola, which used oil as collateral to secure loans; and Zambia, which explored mineral-backed loans to ease fiscal pressures.

“With rising global demand for critical minerals like lithium, Ghana is well-positioned to harness its mineral wealth to stabilise both the energy and public finance sectors,” Dr. Apetorgbor noted.

By using mineral resources as collateral, this approach will reduce the state’s immediate fiscal burden and improve the financial position of IPPs – ensuring that they receive timely payments without exacerbating the country’s debt levels.

Meanwhile, he also maintains that by pegging future mineral revenues (denominated in U.S. dollars) to these payments, Ghana can significantly reduce its exposure to exchange rate fluctuations – thereby stabilising energy sector finances.

“Mineral-backed financial instruments can also serve as a platform to attract international investment into both the energy and mining sectors. Foreign investors may be more willing to provide concessional financing for infrastructure projects, knowing that their returns are secured by Ghana’s mineral wealth,” he stated.

This could additionally create opportunities to invest in renewable energy projects, grid expansion and improved transmission infrastructure, which are crucial for long-term energy sector sustainability.

However, he noted that while the concept of using natural resources for debt-swaps presents a viable solution, it must be approached with caution. Several critical factors must be considered to ensure successful implementation.

For instance, he said, the success of a mineral-backed debt-swap hinges on transparency in both the mineral and energy sectors’ management.

“Government must ensure that mineral revenues are well-accounted for; and that agreements with IPGs and creditors are transparent and mutually beneficial. Strengthening institutions such as the Minerals Commission and Ghana’s Sovereign Wealth Fund (the Ghana Infrastructure Investment Fund) could help in effectively managing these resources.”

Also, he contended that the country will need a robust legal and regulatory framework that governs mineral-backed transactions, ensuring these arrangements do not exacerbate future debt risks.

“Proper valuation of mineral assets and careful negotiation with creditors will be critical to avoiding resource misallocation or loss of sovereign control over key assets.”

Essentially, he further recommended that International financial institutions – such as the World Bank and the International Monetary Fund (IMF) – be engaged to provide technical assistance and advisory support in structuring mineral-backed financial instruments. Their involvement, he noted, can help bolster investor confidence and ensure the arrangement aligns with Ghana’s broader economic and fiscal reform agenda.

Furthermore, Ghana’s energy sector reform must take into account lessons from countries that have restructured their energy debt through innovative financial instruments.

“Nigeria, for example, successfully restructured its power sector debts through power bonds backed by future electricity tariffs, easing financial strain on the sector while maintaining investor confidence.”

Leveraging the country’s natural mineral resources through a strategic debt-swap represents a viable, innovative solution to the country’s energy sector arrears and ‘idle capacity’ payments.

By deploying this mechanism, he concluded that government can reduce its immediate fiscal burden, stabilise the energy sector’s financial position and create a platform for long-term energy sustainability.