It appears a highly emotive (some might say, political) subject to broach but discuss, we must, if we are not to behave like ostriches; burying our heads in the sand while the foxes devour our precious chicks!
Wondering what is up the sleeves of this rural farmer who would not concentrate on tending his crops being scorched by the harmattan and the exposure to bush fires at this time of the year? Why worry about confidence building among disappointed investors in a financial sector that could be severely bruised without recapitalization and potentially weak confidence?
We must be bold to analyze the unintended consequences of the DDEP and the rather knee jerk dictatorial tactics in pushing the terms down the unwilling throats of individuals, pension firms, banks and other local investors.
As part of managing their respective portfolios, these investors placed funds in government bonds and never envisaged this unprecedented measure, nor were they given the latitude (respect?) to negotiate “appropriate terms”, even if we agree that this was a necessary measure to salvage imminent default on principal and interest.
Some aggrieved investor might say, (perhaps justifiably), that they never participated in any imprudent fiscal measures by this and previous governments that have necessitated the imposition of these draconian measures on innocent persons, natural and artificial.
It is not too difficult to appreciate why Ghana is finding it tough in negotiating terms with external creditors over our debt obligations. We must never choose to mismanage our economy in the hope of being rescued by the global financial system through loans, and even gloating over excess-subscriptions of same, in the name of external confidence or perceived credit worthiness.
The financial system has no room for eternal love or goodwill and can be cruel to perpetual borrowers. Our present predicament with our 17th borrowing from the IMF should make everyone love history and learn from mistakes of the past, instead of manufacturing endless excuses.
Some commentator calls the USD.3 billion loan a bridge finance, which I disagree. Bridge financing is primarily designed to cure temporary problems, not structural rigidities. The moment bridge financing hardens like concrete and require more borrowing, we must acknowledge fundamental operational difficulties requiring paradigm shifts.
How a whole nation could be made to sit on tenterhooks waiting for a paltry US. 3 billion loan to be disbursed in three tranches should jolt us to find real meaning to the proverbial Ghana Beyond Aid mantra.
Gold, cocoa, salt and inward remittances, if properly targeted, could rake in several multiples of this USD. 3 billion loan that is going to cost us arms and legs later.
One wonders what our next excuse would be if, in the next five years of accepting these strangulating IMF conditionalities, we find ourselves approaching the Bretton Woods institutions again.
The reality we face now with these debt re-scheduling initiatives is that they are markedly different from the HIPC initiatives of the past. While HIPC was basically debt forgiveness or cancellation, the present arrangements merely push the debt settlement obligations forward; we shall be forced to pay, even if the economy is not resilient enough for such outflows on the rescheduled dates.
The resultant effect will be more belt tightening to be felt even strongly by marginal income earners in the ensuing years. This, we must boldly, even if reluctantly embrace. Current falling inflation rates alone should not delude us into expecting automatic economic recovery.
This is not conclusive evidence of a buoyant macro-economic environment. We cannot celebrate too soon when unemployment is escalating (around 13 %) and all the poverty indices per the Ghana Statistical Services are actually deteriorating. There needs to be fundamental changes to the basic agrarian, raw material oriented export structure.
We must resolve to overhaul our bloated government machinery and related public finance. We cannot simply continue doing the same things like purchasing expensive state vehicles for use in long convoys and expect different and positive results.
Collectively, we must critically determine when and where we must give primacy to the advice of technocrats than politicians who will promise eggs from the throats of ravenous lions!
Curiously, this writer’s anxiety is heightened anytime people ask me whether to invest in treasury bills, bonds or simply purchase forex to hold as a store of value and future risk mitigation.
Unfortunately, the handling of bondholders (some of whom are highly learned and futuristic) of Cocoa bills and other long- term instruments appear to be less than optimal, in my humble view.
We cannot also ignore the debilitating impact of hair- cuts on the banks’ holdings of marketable assets which traditionally serve as liquidity buffers and profitability stabilizers.
Pensions and Mutual Fund managers suddenly drawn into making excuses to their clients do not inspire confidence in an emerging market.
With a unilateral extension of bond durations by the issuer, including even interest payment dates, bank asset and liability management becomes an arduous task. Banks cannot simultaneously recall loans and advances made prior to the re-scheduling of the redemption dates of much of their liquidity buffers.
How do we invigorate confidence in the financial system to assure other would- be investors of the safety of their investments, given the unending grievances of past bond holders?
By the sheer nature of public financing, every government will borrow but limits must be respected and the proceeds utilized efficiently. Not even the American government can stop borrowing to finance pending expenditures because the rate at which revenues stream in can hardly synchronize with state responsibilities, even ignoring unforeseen disasters.
Borrowing and lending will therefore, continue unabated. This calls for the need for stability and fluid but unwritten assurances that the system will not collapse to the point of a continual default or perpetual, one-sided fiats over what is to be paid, when and at what rate of interest.
Options for economic resurgence
Fiscal responsibility cannot be toyed with, going forward, elections or no elections. As for the IMF, we have heard enough of their assurances even as they strangle us to pay them back.
There must be a way to increase government revenue, not necessarily by taxing every imaginable product or service. We still have plausible options to;
(a), re-examine our tax exemptions regime,
(b) reduce the size of the government machinery by collapsing institutions with overlapping mandates,
© encouraging second cycle educational institutions and the prisons to feed themselves,
(d) dealing with perennial infractions reported in the annual Auditor -General’s reports.
(e) streamlining revenue generation at the ports by re-examining the discretionary powers of Customs officials which breed endemic corruption. ( This writer sadly recalls the late President Mills almost shedding tears on his visit to the ports on hearing about gargantuan leakages in revenue collection!)
(f) reduce ECG and GWC transmission losses forced down consumers’ bleeding throats.
If we cannot substantially and immediately increase public revenues, we have the option of tackling any leakages and reduce public expenditure in transparent ways to elicit public sympathy. We must and can do this, rather than the business as- usual approach we seem to have adopted while we plead and wait on external creditors to be lenient with us.
Lessons from local economic history
Times were when my age group of students began learning economics, the functioning of the financial market and the various tools available in the system at the time.
We learnt about accommodation bills in corporate finance. These were financial instruments issued by successful companies to obtain liquidity from the money market at a time when discount houses could successfully operate in the Ghanaian financial market. It was a delight to watch the paper- based treasury and bond certificates against the predictive prospect of redemption on due dates without fail- a nerve calming exercise for investors.
We learnt also about gilt- edged securities embedded with all the attractions, comfort and respect attached to them until even sovereign defaults began to pop up to rudely awaken finance practitioners and market participants to new concepts in risk management.
Expectedly, this development dimmed the attraction of these instruments, leading to a re-examination of the decades- long held view of risk- free financial instruments.
I recall days when Discount Houses could purchase and hold Interim Payment Certificates issued by the state for public contracts executed and awaiting payment. There were high prospects of redemption. These provided even banks and other financial institutions the luxury of lending against these instruments, albeit, against slim margins.
Of course, I cannot forget other institutions which suffered immensely from concentration risks in these instruments on their balance sheets when the scales suddenly tilted.
In came a prudent central bank governor who began to dishonour government cheques for sheer lack of funds. This was to reinforce his bid to rein in budget deficits that were going overboard and preventing him from pursuing his critical role as a technocrat imbued with a determination and responsibility to maintain macro-economic stability.
Understanding long term loans in Ghana.
Many times, people ask me why Ghanaian banks are reluctant to give long term loans. The simple answer is that banks in Ghana do not have access to sustainable long- term funding. A basic banking risk management concept is that you cannot borrow short and lend long. Borrowing here is seen in the context of the banks accepting deposits with a cardinal contractual obligation to pay back these customers deposits on demand.
With a proclivity for placing funds in the Current and Savings Accounts basket (CASA), Ghanaian banks’ balance sheets typically depict a preponderance of short term deposits liabilities owed to customers. Given this structural rigidity, banks are denied long term funds as one would find if these funds were placed in Fixed deposits for say 3 , 5 or 10 years to position themselves to lend in the same tenor.
Banks are therefore denied the luxury of lending towards long term projects with a gestation period usually beyond three years, unless there are specialized external funding by way of grants, subordinated loans or other concessional funding.
A key function of bank management is the conduct of assets and liability matching. This involves a coordinated effort by an in-house specialist committee to ensure that there is a continuous mechanism for addressing the risk faced by the bank due to a mismatch between its assets and liabilities either due to liquidity (tenor) or changes in interest rates.
This process requires continuous adjustments of the consolidated liabilities to meet various assets/loan demands. The exercise involves assessment of liquidity needs, safety requirements, net interest margin and the bank’s overall risk appetite. The latter criteria recognizes the quantum and structure of the bank’s capital, its core competencies and the risk profile of assets on the balance sheet, which affects its Capital Adequacy ratios.
Assets and liability management therefore, is a structured approach that uses sophisticated concepts including duration matching, variable rate pricing and the use of static and dynamic simulation models.
These explain why even two banks with the same consolidated deposits of say GHS. 50 billion cannot give the same loans or have the same earnings capacity. The composition, structure, tenor and cost of funding ultimately determine which of these two banks will be more, liquid, resilient and profitable than the other.
The bank must ensure that it has adequate liquidity for predictable movements in assets and liabilities, and also derive optimum interest margins to enhance profitability.
Uncertainty is a core principle in bank risk management. This, therefore, carries a price by way of interest rates. Ordinarily, therefore, the longer the term of borrowing, the higher the interest rates should be to amply compensate the investor for parting with their funds over an extended period.
This is however, not always the case in Ghana. Thus the 91-day treasury bill may attract a higher interest rate so close to a 1- year Note. This disparity or disincentive, among other factors, account for the reluctance of depositors to place funds with the banks over a long term, thus denying the commercial banks of long- term funds to engage in long term loans.
A simple way to understand why short- term interest rates in Ghana are sometimes curiously higher than long term rates is the government’s (the biggest borrower’s) penchant for short- term borrowing to finance its ever- increasing recurrent obligations. These include wages and salaries, repayment of prior principal loans and interest, public import requirements for oil and other capital items.
Technically the banks collectively compete with the government in the deposit mobilization drive. Any rational depositor of funds would weigh the price (interest) advantage of lending to the government through treasury bills or investing in the respective banks’ own fixed deposits.
The distinguishing feature of these instruments, often not clearly understood by even the front-line bank officials is that placing funds on a fixed deposit sits as a liability on the individual bank’s balance sheet. Purchasing treasury bills or notes rather constitute lending to the government, with the bank merely acting as an agent of Bank of Ghana which handles government finances.
In terms of redemption before maturity, it is relatively easier to discount fixed deposit investments with the individual commercial bank, than it is with treasury instruments as the commercial bank will weigh existing rates against the unexpired term to maturity before deciding to purchase treasury bill holdings into its internal stock of marketable instruments.
There is often a dilemma faced by front line bank officials in advising prospective depositors about the optimal benefits of depositing their funds with the bank on long term basis (direct lending to the bank) or lending to the government through treasury bill investments.
The writer is a Fellow of the Chartered Institute of Bankers, a former adjunct Lecturer at the National Banking College, a farmer and the author of “Risk Management in Banking” textbook.
Email; [email protected] Tel. 0244 324181
