After spending GH¢2.2 billion to smoothly absorb two failed banks into the GCB Bank last year, the government has secured the blessing of the International Monetary Fund (IMF) to undertake a one-off clean-up of the entire financial sector at the cost of GH¢2.4 billion.
This should bring to GH¢4.6 billion, the total amount that will be used from the public purse to clean the financial sector – comprising banks and non-bank financial institutions (NBFIs) – and make it more resilient.Follow @Graphicgh
Together with the cost incurred in the August 2017 Purchase and Assumption (P&A) agreement between the Bank of Ghana (BoG) and the GCB Bank, the amount needed to prosecute the clean-up exercise in the entire financial sector is equivalent to 1.9 per cent of total economic output, measured by gross domestic product (GDP).
It is also 11.5 per cent of this year’s tax revenue, estimated at GH¢39.9 billion.
In a statement after its fifth and sixth reviews of the economy under Extended Credit Facility (ECF) with the country, the IMF said the planned “clean-up should proceed,” as “public sector resources have been set aside” for the exercise.
Like the GH¢2.2 billion bond issued to the GCB Bank, the GRAPHIC BUSINESS understands that the government plans to issue bonds to the tune of GH¢2.4 billion for financial institutions whose bad debts will be written off under the exercise.
If successful, the IMF anticipates that the cost of the exercise will push the 2018 fiscal deficit from the current target of 4.5 per cent of GDP as announced in the budget to 6.4 per cent of GDP.
The planned historic clean-up, similar to the one undertaken in the 1980s under the Financial Sector Adjustment Programme (FINSAP) of the Economic Recovery Programme (ERP), is to convert the swelling non-performing assets in the financial sector into performing assets and by that re-inject some new life into the operations of the various players.
Despite pushing the 2018 deficit up by 190 per cent basis points, the planned clean-up is expected to reinvigorate the financial sector and get it to contribute meaningfully to national economic growth.
A Professor of Economics at the University Ghana, Legon, Prof. Peter Quartey told the paper that current challenges facing the sector made it “prudent” for the planned clean-up.
“May be what we are going to see is an asset recovery trust part two that will try to revive the banking sector.
“For me, doing nothing at all will lead to a total collapse and that will have severe repercussions on the entire economy. So, it is prudent that the government is trying to intervene in this situation,” he said.
But unlike the 1988 clean-up, Prof. Quartey said the country does not require a new institution to undertake the current clean-up but could rely on existing ones such as the Economic and Organised Crimes Office (EOCO) to trail and recoup all bad debts that will be written.
Since February 2017, the Non-Performing Loan (NPL) ratio of the banking sector has remained above 20 per cent of total deposits.
After starting February last year at 17.7 per cent, the ratio of bad loans over total advances peaked at 22.9 per cent in November last year before easing to 21.6 per cent in February this year.
This means that of the GH¢35.8 billion that was given out as loans and advances as of February this year, some GH¢7.7 billion was delinquent.
The situation is almost worse in the non-bank financial subsector where some 272 Rural and Community Banks (RCBs) and microfinance institutions were either in distress or had folded up as of March this year.
According to the BoG, some 705,396 depositors were at risk of losing a total of GH¢740.5 million.
Given that financial stability remained a key priority to foster sustainable economic growth and financial inclusion, the IMF noted in its report that tangible actions were needed to “expeditiously tackle the NPL overhang.”
“The clean-up of the microfinance sector should proceed and public sector resources have been set aside,” it said.
It further noted that the recent decision by the BoG to appoint an official administrator for the uniBank Ghana Limited was “testament to its commitment to promote a resilient financial sector.”
In a statement accompanying the reviews, the fund said, “banks’ have been instructed to write off fully-provisioned loss-categorised NPLs.”
Loan from IMF
Although the IMF report did not give the details of the exercise, a source familiar with the process told the GRAPHIC BUSINESS in confidence that it will be undertaken by the supervision department of the BoG in close collaboration with the Ministry of Finance.
“And it will affect all institutions supervised by the BoG,” the source added.
A retired Deputy Governor of the BoG, Mr Emmanuel Asiedu-Mante, said a similar exercise undertaken in 1988, which he participated was “neatly executed,” resulting in resilience in the financial sector at the time.
On how that exercise was financed, Mr Asiedu-Mante said, “it was funded by a loan taken from the IMF but ultimately, the taxpayer paid for it.”
He also called on the central bank and the IMF to properly define the planned clean-up exercise to help make it clear to the public. –GB