To counteract potential systemic financial instability in Ghana, the International Monetary Fund (IMF) has proposed three strategies, including the purchase and merger of banks and non-bank financial institutions.
The goals of these measures, which are listed in the Risk Assessment Matrix in the most recent IMF country report on Ghana, are to reduce risks and guarantee the stability of the banking system and Non-Bank Financial Institutions (NBFIs).
The first recommendation is for improving financial safety netts and close observation of banks’ and NBFIs’ asset quality and liquidity.
The second policy entails developing a suitable plan for recapitalizing banks and NBFIs. The IMF also supports mergers and acquisitions as a way to solve any required financial sector consolidation.
- Strengthen financial safety nets and closely monitor bank and NBFIs liquidity as well as asset quality.
2. Design an adequate bank and NBFIs recapitalization strategy
3. Encourage acquisition, mergers if needed.
The IMF contends that when real interest rates, risk premiums, and asset values experience considerable swings, countries with weak banks and non-bank financial institutions are at risk of going bankrupt. When the economy slows down or when policies are changed, these oscillations are frequently seen.
The IMF stresses that these insolvencies can have broad repercussions, disrupting markets and having adverse effects that go beyond national boundaries.
“Sharp swings in real interest rates, risk premia, and assets repricing amid economic slowdowns and policy shifts trigger insolvencies in countries with weak banks or non-bank financial institutions, causing markets dislocations and adverse cross-border spillovers” It stressed.
The likelihood of this happening is listed as MEDIUM, however the Fund noted that external variables have exacerbated the effects of significant decreases in domestic debt on banks’ capital adequacy.
These haircuts have a negative impact on the banks’ ability to lend by directly affecting their holdings of sovereign claims. This limits the private sector’s capacity to access credit, which eventually slows down economic activity. As a result, there may be a HIGHLY negative impact on Ghana’s financial industry.
The IMF further highlighted that Ghana’s recent Domestic Debt Exchange Programme (DDEP), which replaced existing sovereign bonds with new ones, had an impact on the financial sector of the nation.
Banks and other financial organizations had made substantial investments in government bonds; but, as of late, the government has lowered interest rates and lengthened the time period for repayment. As a result, these bonds’ value has fallen, posing a huge financial problem for financial institutions.
“Domestic bonds were widely distributed across the financial sector in Ghana, representing the most important asset class held by commercial banks, pension funds, asset management companies, and insurance companies. Banks held 30 to 50 per cent of their total assets in government securities before the DDEP—with especially high exposures in the state-owned banks—and relied significantly on income from these securities.
The coupon reductions and maturity extensions in the recently completed DDE mean that the value of these assets will decline to about 70 per cent of the par value. This revaluation represents a significant shock to the balance sheets of these financial institutions” the report indicated.
The Ghana Financial Stability Fund (GFSF), which will be overseen by the Bank of Ghana, will be established with a budget of GH15 billion ($1.5 billion) after the government announced the success of the DDEP. Banks that took part in the DDEP are to be given liquidity by the GFSF. The World Bank has pledged $250 million to support the racialization plan, with the expectation that government funding will cover the remaining sum.
According to the IMF report, “government solvency support will be designed to minimize costs and moral hazard, incentivize private capital injections, foster structural reforms improving operational efficiency, and allow for an orderly, early government exit.
“When acting in its capacity as shareholder, i.e., for state-owned banks, the government will frontload any necessary recapitalizations of state-owned banks, which will be underpinned by credible plans to ensure the future viability and a level playing field with private banks.”
During the 2017 banking sector clean-up, which saw a drop in the number of banks operating in Ghana from 34 to 23, 347 microfinance firms, 15 savings and loans, and 8 finance houses had their licenses revoked, the financial sector in Ghana experienced a lot of instability. This project, which cost the government roughly GHC 25 billion, is crucial to Ghana’s sustainable debt portfolio.
According to the IMF country report for Ghana, “the fiscal cost of the financial sector recapitalization has increased the government deficit and debt and is expected to have reached 7.1% of GDP during 2017–21. In the years to come, additional recapitalization expenses are anticipated as a result of the domestic debt restructuring anticipated in 2023; the DSA’s baseline includes about 2.6% of GDP.
The Bank of Ghana must receive the appropriate recapitalization plans from all Ghanaian banks by September 2023.
