Economic development amid the pandemic: role of the financial sector in the recovery agenda


The maiden edition of the upcoming B&FT Money Summit which comes off on the 25th May, 2021, at the Kempinski Hotel, Accra dubbed ‘The Role of the Financial Sector in Post-Pandemic Recovery’ is intended to bring together key industry players, bankers, fund & portfolio managers, financial and investment analysts, financial experts, businesses, actors in the insurance industry, economists both from industry and academia on one platform to discuss ways by which the financial sector could play a critical role in the post-pandemic recovery agenda of government.

The rationale for this article is to explore and analysis how the financial sector could be used to drive economic activities and thereby stimulating overall real GDP growth. In fact, the overall real GDP growth rate was 6.3 percent in 2018. This increased to an overall real GDP of 6.5 percent in 2020. It is interesting to note that the incredible growth rate achieved by the economy has been distorted due to the impacts of the pandemic. According to the 2021 budget statement and economic policy, the overall real GDP growth as at September, 2020 stood at 0.2 percent, while non-oil real GDP growth rate was at 0.4 percent with the overall budget deficit of 11.4 percent of GDP. According to the Africa Development Bank, the overall real GDP for the fiscal year, 2020 stood at 1.7 percent.

In an attempt to recovery the economy, government, in the 2020 budget statement and economic policy outline number of initiatives. Critical among them are:

  • Economic revitalization and transformation through implementation of the CARES program while ensuring debt sustainability.
  • Creating fiscal space for the implementation of priority programs/projects.
  • Entrepreneurship and wealth creation.
  • Digitization of the economy.

It is my considered professional view that, the above initiative cannot be achieved without the key participation by the financial sector.

What is a financial sector?

A financial sector basically is that sector of the economy which is made up of firms and institutions that provide financial services to businesses, governments and individuals. The financial sector predominantly comprises banks, investment firms, insurance companies and to a large extent real estate firm etc. It is worth noting that, the health of any economy, more importantly, emerging economies depends on the strength of its financial sector. Indeed, a robust and resilient financial sector has the propensity to drive economic activities, thereby leading to an increased productivity and hence overall economic growth.

Modern growth theory stipulates that the financial sector can affect long -run growth of an economy through its impact on capital accumulation and also through its impact on the rate of technological progress. Savings mobilization, therefore, can have significant impact on growth by increasing investment, productivity and human capital. According to Levine (1997), savings mobilization, risk management, acquiring about investment opportunities, monitoring and exerting corporate control and facilitating the exchange of goods and services are the basic functions of a financial intermediaries.

Developments in the banking sector amid the pandemic

According to Bank of Ghana Monetary Policy Report, March 2021, the banking sector’s performance during the first two months in 2021 remained broadly liquid, profitable, well-capitalized, and resilient. Per the report, the strong policy support and regulatory reliefs implemented to moderate the effects of the pandemic, actually continued to impact positively on the industry’s performance and in turn, its support to the real sector.

The report further indicated that, the financial soundness indicators were broadly positive, underpinned by healthy solvency, liquidity, and profitability indicators. Efficiency indicators also remained strong due to the cost control measures on the bottom line.

However, asset quality risk remains elevated due to loan repayment challenges. Growth in after tax profit slowed to 5.9 percent from 38.8 percent during the prior year. Interest income growth declined to 9.5 percent in February, 2021 from 22.0 percent February 2020 due to the relatively low growth in credits while net fees and commissions increased by 13.7 percent, lower than the 18.4 percent in the previous year.

Total banking sector assets as at end-February, 2021 increased by 18.5 percent year-on year to GHC 152.0 billion, marginally higher than the annual growth of 17.8 percent as at end-February, 2020. Gross loans and advances continued to experience a subdued growth, at 3.6 percent a sharp decline from the 26.0 percent growth in the corresponding period last year. This is mainly attributable to weak credit demand, higher repayments and banks increasing appetite for less risky assets.

The expanded assets size of the industry was largely funded by deposits. Total deposits grew by 25.1 percent, year-on-year to GHC 104.0 billion as at end-February, 2021, compared to 15.6 percent a year earlier. Growth in shareholders’ funds was stronger and is indicative of adequate capital buffers within the banking sector to withstand shocks. Shareholders’ funds grew by 21.2 percent to GHC 22.2 billion as at end-February, 2021, compared with a 14.6 percent growth a year earlier, reinforcing the stability and resilience of the banking sector. Total borrowings at end-February, 2021 contracted by 23.4 percent to GHC 14.3 billion, in sharp contrast to growth of 30.7 percent a year earlier. The decline in borrowings reflected mainly in short-term borrowings.

Critical analysis of the performance of the banking sector clearly shows that the banking sector is actually robust and resilient, and therefore, has the capacity to support SMEs, businesses as well as government projects. The real sectors of the economy must be supported. Most importantly, the industrial sector must be supported. By way of giving them loans at a competitive rate. This is against the back ground that, the industrial sector contracted by 3.6 percent for the fiscal year, 2020.

Role of the financial sector

  • Provision of liquidity: the financial sector plays a critical role of mobilizing excess liquidity from the public for onward lending to businesses. The provision of the liquidity is important since it enables businesses to meet financial obligations as and when it falls due. In fact, access to liquidity allows businesses to deploy their capital in a manner that will ensure productive capacity of the economy. As productive capacity increases, there is the high probability of profitability. An increased profitability will eventually lead to business expansion, thereby leading to employment opportunities and subsequently an increase in government revenue through taxation, both income tax and corporate tax and hence reduction in external borrowing, with its resultant reduction in interest payments.
  • Supporting SMEs: as part of the effort to support the economic recovery of government, banks and other financial institutions can give loans to SMEs at a competitive rate. Such loanable funds will then be used to support the financial gaps the pandemic has created. This is so critical and key due to the significant role that SMEs play in the economy. If SMEs are back to business, more jobs could be created, government revenue will beef up, and eventually an expansion in economic activities leading to real GDP growth.
  • Driving investment: aggressive mobilization of savings is one of the surest ways banks can mobilize excess liquidity from the public for onward lending to businesses, government and individuals. Such funds can be made available to support medium-term investment projects. Banks can equally develop innovative products using technology to induce people to save and invest so as to accumulate the needed capital for entrepreneurs, thereby stimulating economic growth.
  • Facilitating exchange of goods and services: the financial sector facilitates transactions in the economy by way of providing mechanisms to make and receive payments, and also reducing information cost (Levine, 1997). By this function, businesses are better able to import and also export goods to other economies for foreign exchange. Banks can assist and support businesses in international trade by way of issuing letters of credit, trade finance, credit etc. insurance companies must also swiftly provide the necessary insurance cover for businesses in international trade. If this is efficiently done, it will boost economic growth and hence the recovery of the economy.
  • Propelling foreign earning capacity of the country: banks must provide support to Agric-businesses, more importantly, those in the exportation of agricultural produce. Massive exportation drive will enable the country to increase its foreign earning capacity, thereby beefing-up its foreign reserves. The resultant effect is that, it will enhance the performance of the cedi and other macroeconomic fundamentals.


It is the writer’s submission that, if the above roles are effectively performed by the financial sector, Ghana will indeed be on the path of smooth economic recovery. In fact, most of the macroeconomic targets for the fiscal year, 2021 will be achieved.  Just to refresh readers’ memory, the macroeconomic targets for the fiscal year, per 2021 budget are:

  1. Overall Real GDP growth 5.0%
  2. Non-Oil Real GDP growth of 6.7%
  3. End-period inflation of 8.0%
  4. Fiscal deficit of 9.5% of GDP
  5. Primary surplus of 0.9% of GDP

It is my believe that, at the end of the Money Summit, the panelists will give us more insight regarding the role of the financial sector as a propelling machinery to driving the post-pandemic recovery agenda of government.

>>>The writer is a Development Economist and Chartered Business Consultant. Daniel is the Chief Economist at the Policy Initiative for Economic Development.  He is also the Director of Research and Analysis, B&FT. email: [email protected], [email protected]. Tel; 0244 47637 / 0201939350

Leave a Reply