Domestic Debt Exchange Programme: Central Bank  cushions banks

Domestic Debt Exchange Programme: Central Bank cushions banks

Banks that fully sign up for­­ government’s ongoing bond swap will benefit from the Central banks’ liquidity arrangement instead of government’s stability fund, Governor Ernest Addison has stated.

The government on December 7, 2022 announced the establishment of the Ghana Financial Stability Fund with a target size of GH¢15 billion.

The fund to be provided by the Government of Ghana and its development partners is expected to provide liquidity to financial institutions that participate fully in the Debt Exchange Programme.

“All financial institutions (banks, SDIs, pension schemes, collective investment schemes, fund managers, broker/dealers, insurance firms) that fully participate in the Debt Exchange can access the GFSF for augmented liquidity support, with effect from the date of completion of the Debt Exchange”, a statement from the Ministry of Finance disclosed.

But addressing the media at the MPC press conference, the Governor , Dr Addison, said “Bank of Ghana has its own liquidity arrangement already for the banks and therefore we do not plan to be part of this financial stabilisation fund which is mainly financed by external development banks”.

He said the central bank did a stress test on the impact of the debt exchange programme on the liquidity and capital of banks and on the basis of the test, it came out with some regulatory reliefs which would bhelp the banks deal with the impact on liquidity and capital.

“We agreed to reduce the cash reserve ratio from 14 to 12 per cent for domestic currency deposits and reduced it from 13 to 12 per cent for foreign currency deposits.

“These measures give liquidity back to the banks and addresses the liquidity issue.

“We also dealt with the impact on capital by reducing the capital adequacy ratio from 13 to 10 per cent and some of the technicalities surrounding the debt exchange programme, we agreed to have them restore its impact on capital over a four-year period,” he stated.

Banks well capitalised

Despite the growing concern of banks’ exposure to government bonds and how the DDEP will negatively impact their liquidity and capital, Dr Addison said the banks were fairly well capitalised.

The banking sector is the most dominant investor in Government of Ghana (GoG) debt instruments, a phenomenon induced by both regulatory and market economics.

In 2017, only GH¢10 billion worth of GoG-issued debt securities was held by the banks. As of 2021, banks held over GH¢55 billion in GoG debt securities, representing almost 30 per cent of total banking industry assets.

Of this amount, about 80 per cent were in bonds. Data available indicate that interest income largely dominated by interest payment on government securities is the primary source of revenue for banks in the country.

In 2021, about 65 per cent of the interest revenues of banks were generated from investments in securities.

The DDEP is, therefore, expected to have a huge impact on the liquidity and capitalisation of banks.

Dr Addison, however, gave an assurance that the banks were strong enough to withstand these shocks.

He said the banks that would have their capital impaired by the exercise would be given enough time to recapitalise.

“This will not compromise integrity in the sector in anyway because the Bank of Ghana will be there to protect them,” he stated.

Banks profitability

Dr Addison also pointed out that profitability levels in the banking sector had declined, driven by the mark-to-market losses on investments, higher impairments on loans and rising operating costs.

Profit-after-tax was GH¢3.9 billion at the end of December 2022, representing 18.9 per cent contraction year-on-year, compared to 12.3 per cent annual growth recorded in 2021.

Net interest income grew by 23 per cent to GH¢15.8 billion, higher than the growth of 14.5 per cent in 2021. Net fees and commissions went up by 27.4 per cent to GH¢3.7 billion, from the growth of 24.8 per cent recorded in 2021.

Accordingly, operating income increased by 30.9 per cent, compared with 14.6 per cent recorded a year earlier.

The strong outturn in operating income was however moderated by increased operating expenses and provisioning during the year. Operating expenses rose by 32.2 per cent in December 2022, compared with 14.2 per cent growth in 2021.

IMF agreement in first quarter

Dr Addison was confident that the country would reach an agreement with the IMF in the first quarter of the year.

“We gone very far with the staff level agreement and hopefully, we should be seeing the end of the DDEP. We are also making progress on the external side, the necessary committees have all been formed and are confident that by end of first quarter, we should be able to get the IMF deal to help shore up on forex reserves,” he noted.

Ghana’s debt crises is currently well over 90 per cent of its GDP, a situation that has led the country to seek a US$3 billion bailout from the IMF.

The IMF bailout is however conditioned on a number of policy actions, one of which is the DDEP.

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