Banking sector reforms:(2) …Fiscal and macroeconomic costs

Part 1 of this article drew attention to the Section of the 2019 Budget that provided a non-comprehensive yet high bailout or public debt of the financial sector restructuring. It noted that the continuing incidence of this debt and associated spending, loss of incomes, and levies such as ESLA falls on taxpayers, investors, depositors as well as employees and their families.

Part 2 continues with some non-exclusive limits imposed on the economy, namely, limits to spending and economic activity. Secondly, the full extent of MOF contingent liability for current bailout costs as well as potential losses and risks will be unclear in the short-term. Hence, while we note the potential benefits of BOG’s “bold” measures in strengthening the banking sector, the full costs for the economy and stakeholders will take time to assess, as the losses, risks and guarantees crystallize.

Cost to overall economy

The banking sector measures appear to contribute to the slowdown in overall performance of the economy through the dampening effect of financial services. However, as Table … and Figures … show, despite signs of a global recovery from 2017, Ghana’s non-oil GDP growth was flat between FY2016 and 2017. In contrast, overall GDP was positive due to (a) rising oil prices; (b) tripling of crude/gas output from prior-year investments; and (c) improved power supply due to emergency plants and repairs to the West Africa Gas Pipeline Line (WAGPL)..

Table … Overall, non-oil and sectoral GDP Growth

  Base Yr Revised/Provisional Projection
  2014 2015 2016 2017 2018 2019 2020 2021 2022
AGRICULTURE 0.9 2.3 2.9 6.1 6.8 7.3 7.0 7.0 7.1
INDUSTRY 1.1 1.1 4.3 15.7 5.9 9.7 7.2 3.5 7.2
  o/w Oil 6.8 2.0 -15.0 80.3 3.8 24.9 5.6 1.4 14.6
SERVICES 5.4 3.0 2.8 3.3 4.9 6.1 7.1 7.7 8.6
  o/w Fin. Svc 21.4 12.9 8.0 -17.7 -12.5 -11.2 -9.7 -5.3 1.3
GDP (Real) 2.9 2.2 3.4 8.4 5.7 7.8 7.1 5.9 7.7
Non-Oil GDP 2.7 2.2 4.6 4.6 5.8 6.2 7.1 6.3 6.9
Source: FY2019 Budget

We do not attribute the decline in overall GDP growth rates to the services sector only. However, in contrast with the oil sector, the services sector, which is the largest with 49-to-51 percent of of GDP, has underperformed. Figure … demonstrates that, graphical data from the 2019 Budget buttresses the point that this adverse trend will persist and keep the financial services sector in recession through FY2021.Figure … Overall & non-Oil GDP w/Financial Services.

Add section and data on BOG “baby bailouts” #s on deposits, loans and advances

Can the banking sector grow in isolation?

Since the accepted norm appears to be periodic BOG edicts on capital increases, we ask if the banking sector can grow in isolation to support the “cash-calls”. The following factors should make us caution in making such assumption.

  1. Global financial crisis: The current restructuring program is sobering against the background of adverse impact of a decade-long global financial crisis on advanced, emerging and developing economies. In recent months, the IMF, US Federal Reserve, and other agencies have predicted a slowdown of the recovery that began in 2017. This latter position is on account of US-China trade wars and uncertainty over UK’s Brexit.


  1. Emerging and SSA meltdowns: For many years, the bright spot against the effects of global crisis was non-convergence or lack of the traditional contagion with the fast-growing BRIC (i.e., Brazil, Russia, India and China) and larger Emerging Market or EM (i.e., South Africa, Middle East, Asia and Latin America) economies. However, the EM/BRIC phenomenon fizzled from end-2014, due to the sharp fall crude prices and corresponding fall in global demand and other commodity prices.
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2. Weak domestic buffers: Our suggest that Ghana is affected by the impact of volatility in global demand and, consequently, decline in commodity prices. Typically, we lose foreign exchange reserves and tax revenue on account of the slowdown in economic activity. This implies it will be difficult for the banking sector to depend on growth of the economy to meet BOG’s recapitalization calls. Hence, the policy will likely continue to favour banks with external owners to augment these periodic BOG cash injections.

  1. Austerity or easing: The positive outcomes of Ghana’s 2014 IMF ECF Program, with focus on corrective measures, have suffered reversals with the fall in crude and other commodity prices in 2015 and 2016. There were simultaneous falls in crude, cocoa and gold prices; disruption in gas supply and effect on power supply (“dumsor”); failure of the single-spine wage rationalization program; excessive subsidies; and banking sector NPLs.

We conclude that the financial secor restructuring must take account of a domestic and global economic environment that goes through frequent booms and busts. We have started to build fiscal buffers, especially the use of petroleum revenues to set up the Stabilization Fund to manage these hiccups. Typically, we rely on austerity measures to manage these crisis and, therefore, MOF cannot affor to spend significant loan and tax proceeds to underwrite failed public and private investments. Any prolonged banking crisis will adversely affect the economy but its resolution must not ignore the required balance in allocating scarce resources among competing needs.

Taxation, loans, and recoveries

The two options that countries use to resolve bank failures are to dissolve or liquidate them; and preempt failure through bailouts or cleanup the mess with fiscal resources. We could be impervious to the alternative of using tax resources if we always assume that MOF will backstop the restructuring for fear of harming the economy, eventually. After three major global economic crises (i.e., 1930s, 1970s, and 2008-to-date), the advanced states have taken a lead in forging a compromise between the two options.

The schemes for resolving bank failures cover shareholder responsibility, bad banks to deal expeditiously with NPLs, and levies on the banking sector for deposit insurance and other expenditures. Another practice is to pay the gains from successful restructuring programs to the Treasury to mitigate the cost to taxpayers—as central banks in the US and UK have done with gains from their quantitative easing programs. The compromises prevents moral hazard from two sources: tendency for financial authorities to take the gains but pass on costs; and failure to protect stakeholders such as taxpayers, depositors, and employees.

The search for an alternative policy stance that is sustainable and measured, in terms of shocks to the economy is consistent with debt management policies that guard against the risk of debt distress and imprudent use its energy resources. In this regard, the use of ESLA to resolve energy-sector NPLs in 2016 is progressive and cautious in taking account of slow GDP growth, deficits, low commodity prices, high inflation, and the loss of value of the cedi.

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Minimizing overall financial sector fiscal costs

We highlight other fiscal cost of financial management that are not normally apparent to the experts and the general public. The following are the three (3) common examples.

  1. Other banks and financial institutions; The recapitalization and restructuring issues we have discussed with Universal (Tier 1) Bank apply to Savings and Loans (Tier II) banks and Microfinance, Rural and other deposit-taking institutions (Tier 3). Other formal financial sector institutions include insurance, capital market, and foreign exchange institutions. As with DKM, all these institutions can become vulnerable on account of NPLs and issues relating to non-core or fraudulent use of depositors funds.

2. Speculative financial ventures: A related transaction tha results in huge losses to depositors relates to offers of high interest rates and other exchanges by firms that are usually established as normal banks or commodity exchanges. However, they end up folding, leaving innocent and speculative patrons expecting to be reimbursed by the government. The well-known examples are Pyram and more recently Mensgold and DKM. When the authorities move in to close these institutions, the outcomes are usually the same cost to depositors, employees, families, and the economy.

3. Forex losses—imports and contracts: In its capacity as Banker to Government, BOG and various commercial banks handle the contractors requiring the use foreign currency—most of which are denominated in US dollars (but also pound sterling, Yen and Euro). The fluctuation in the value of the cedi in relation to these major currencies result in foreign exchange losses to the private and public sectors. Hence, a contract loan may be awarded at US$1=Ghc4.8 but if the cedi falls in value to Ghc5, then state pays the equivalent of Ghc5, not Ghc4.8, and a loss to the budget of US0.02.

We highlight these organizations and transactions to show that, for example, the efficient management of foreign reserves and financial or banking supervision are needed in these instances to avoid the fiscal taking the heat for unplanned expenditures. Secondly, it appears that other non-bank financial institutions may follow the BOG capitalization policy—as recently announced by the Commissioner of Insurance. This means that the recommendations for capitalization and restructuring may be required for the entire financial sector, not just the banks.


We cannot expect our banks to grow in isolation else a “big bang” will ignore the fact that a healthy financial sector is a function of overall growth. Since deposits and credits fuel an efficient economy, we expect drastic reforms to prolong the lag in recovery. The key lesson is to avoid parochial fiscal and monetary policies that result losses for the common good. It is clear that any legislation and regulations must go beyond core banking, to cover other non-bank financial institutions.

Ghana barely escaped the recession that affected many SSA countries, as recently as 2014 to 2016 and we must endeavour to avoid policies that lead to bailouts that affect investments and aggravate the distortion in use of budget resources. A gradual approach could package and sequence ESLA well, with a Ghc30 billion potential, to underwrite the NPLs and without recourse to excessive borrowing to satisfy the monetary sector edicts.

The writer is the immediate, former Minister of Finance

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