Gov’t borrowing appetite squeezes lending to private sector

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Ken Ofori Atta

Excessive borrowing from government on the domestic front has denied the private sector opportunity to access the needed capital from banks for injecting into their businesses to expand or restructure in order to overcome challenges brought by the pandemic.

The Summary of Economic and Financial data (January 2021) published by the Bank of Ghana has shown that the growth of total advances to the private sector declined to 5.8 percent in December 2020 from 23.6 percent the previous year, a sharp decline of 17.8 percentage points.

Meanwhile, the data further reveals that domestic debt, in nominal terms, increased by GH¢21.9billion within the stated period; recording GH¢147.3billion in December 2020. Again, the rate of borrowing from domestic sources, as expressed by percentage to GDP, was higher in the last two months of the year, as it recorded 37.5 percent and 38.2 percent growth compared with the 36 percent and 36.2 percent recorded for external borrowing.

All that these suggest is that government did a lot of business, in terms of borrowing with the banks, in the last two months of 2020; probably to finance its numerous campaign promises as the country headed to the polls in December.

Commenting on this, banking consultant Dr. Richmond Atuahene said the decline in bank advancements to the private sector could mean banks adopted a risk-averse attitude toward the sector due to the pandemic’s impact on it – which raises questions about businesses’ ability to pay back should loans be granted them; hence their preference of lending to government.

“What it means is that instead of banks advancing loans to businesses to advance the economy, they are shifting those monies to government. It could also be that the businesses were also not going for the loans because of the impact of the pandemic so the banks also thought it wise to go into government papers.

It could also mean the banks were risk averse because of the pandemic, because government’s outstanding loans to contractors have not been paid – so they were not sure about businesses’ ability to pay and they didn’t want to risk it. And so when that happens and government is ready to borrow, the banks will be more inclined to buy government papers than give funds to businesses,” he said in an interview with the B&FT.

He however cautioned that if this development persists it will derail the economic recovery programme, as government has rested its hopes on the private sector to lead the charge.

“It will definitely affect the real sector if government doesn’t change its policy of borrowing from the banks. The real sector will not grow because banks will always choose lending to government over to the private sector. And government must also show commitment to paying contractors all outstanding loans so that banks can expand their books. It is only when banks give money to the private sector that the real sector grows,” he said.

Government has indicated it will seek to revive the economy through the ambitious GH¢100billion Ghana COVID-19 Alleviation and Revitalisation Enterprises Support (Ghana CARES) programme. The three-and-half-year programme, dubbed ‘Obaatan Pa’, is to be rolled out in two phases and aims to raise 70 percent of its financing from the private sector and the remainder from government to assist in stimulating a boom in economic activities.

Hence, banks have a major role to play in achieving this goal if the private sector can live up to the expectation of the Ghana CARES programme, as advancing loans to the sector will aid in expansion and other pursuits by businesses which seek to bounce back from ravages of the pandemic.

Dr Richmond ATUAHENE, Financial Consultant

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