GAT poses fiscal threat to economy — IMF

The International Monetary Fund (IMF) has questioned government’s strategy of raising money to finance some five local banks – said to be solvent but unable to meet the new minimum capital requirement of GH¢400million, as it poses fiscal risk upon maturity of the bonds if the beneficiary institutions are unable to pay back.

Government, through the Ghana Amalgamated Trust (GAT), wants to raise some GH¢2billion through a bond structured for five years and given to the banks as zero-coupon bonds. This means that the banks will not pay the interest (21 percent) on the bond yearly, but will do so after end of the fifth year with the principal. The GAT will also take equities in the banks and exit after the stipulated five years.

The bond is also fully guaranteed by government: meaning that in the event of default by any of the banks, government will have to pay up from its revenue envelope. It is against such guarantee that the IMF is cautioning that different strategies must be put in place to avoid GAT adding to the country’s debt stock – which now stands at GH¢173billion, representing 58 percent of GDP.

“While implementation of the scheme is still in train, the envisaged use of government guarantees may pose fiscal risks upon maturity of the bonds. GAT’s effectiveness will hinge on its ability to successfully transform the supported banks, which may require (among others) a reorientation of their business strategies and further investments in their risk management capabilities,” said the last review report of Ghana’s ECF with the IMF.

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The GAT arrangement has been met with many misgivings from financial analysts and industry players, with some saying the 21 percent interest rate as too high for banks that are already in distress.

In an interview with the B&FT, professor of economics at the University of Ghana, Prof. Peter Quartey, said even though he thinks the GAT is a fine arrangement, the 21 percent interest on it is exorbitant and may result in high cost of credit to the private sector; hence, there is need for a rethink and reconsideration of the interest.

“I think the GAT is a good arrangement, but the problem I have with it is the interest rate; it is too high, and that will make lending to some sectors expensive. For example, agriculture is considered a high-risk venture; and if the banks are paying 21 percent interest on the GAT fund, how much will they lend to such a sector? It will definitely be high, and that will not help the sector to grow,” he said.

Despite concerns raised about interest on the money, the Managing Director of the GAT, Eric Nana Otoo, has defended the decision to peg the interest at 21 percent, saying it is reasonable as the risk involved warrants such a rate.

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“The 21 percent is competitive. It may seem too high, but when you look at the market risk it is very reasonable. The six-year Treasury in February was priced at 21 percent. The Treasury is a government bond and that one has lower risk than our five-year bond. And pricing them at the same level, the investors are even asking us to give them more than the 21 percent. So, we believe it is very reasonable,” he said at the Ghana Most Respected CEOs forum in Accra last month.

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