The Chief Executive Officer of Dalex Finance and Leasing Company Limited, Kenneth Thompson, has said the Domestic Debt Exchange Programme is capable of leaving Specialised Deposit-taking Institutions (SDIs) stranded – leaving them with no funds to lend.
He explained that due to the DDEP, many citizens have lost trust in the financial sector and even in savings; and the ripple-effect is that many will start keeping their monies at home or convert them into dollars – a situation that will create additional pressure on the exchange rate.
“The DDEP will result in reduced savings as people lose ‘trust’ in the finance sector. Those with excess funds will either keep them at home or convert them to US dollars. This will create additional pressure on the exchange rate. The consequence is that SDIs will not have funds to lend, and this will exacerbate the economic slowdown,” he told the B&FT in an interview.
He emphasised that SDIs have a significant impact on the economy by lending to more SMEs, which in turn support job creation and economic growth. This is a significant setback for the business community.
This comes as recent estimates show that SMEs contribute about 60 percent to the country’s Gross Domestic Product (GDP) and account for 90 percent of all businesses, and form around 80 percent of the total employment. “The exposure of SDIs to Government Bonds is small. However, the sovereign debt distress will spread to SDIs and other parts of the domestic economy,” Mr. Thompson said.
Already, a study – Analysis of the Impact of Ghana’s Debt Exchange on the financial sector and real sectors of the economy – has concluded that local bondholders will lose about GH¢117.4billion due to the DDEP, and that the banking sector will suffer the most losses.
“With overall Net Present Value (NPV) estimated losses of 58 percent, banking sector losses amounted to GH¢67.88billion; a major factor for determining the capital needs of banks,” it said.
To this end, Mr. Thompson said the potential impact on the financial sector and wider economy is reason for more prudent fiscal activities. “Ghana should not receive balance of payments support. As a country, we should learn to ‘live within our means’; we can source the US$3bn domestically.
“The 2023 budget projects a deficit of approximately GHȼ61.5bn. Total budgeted expenditure from the 2022 budget has also risen by 47 percent. This is not the behaviour of a country unable to pay its debts. Support from the IMF is not necessary. If the IMF Board decides to support Ghana, the IMF funds must be spread over a period of five years at the minimum. Fiscal consolidation must be front-loaded,” he said.
“To avoid compromising the domestic financial system’s viability, government will be required to support some financial institutions and replenish pension savings,” he added.
Currently, the Domestic Debt Exchange Programme has again been extended, to Tuesday, January 31, 2023 – and it is unclear how many institutions or individuals have signed onto the programme, which has been rejected by several groups.