Professor Lord Mensah, an economist and lecturer at the University of Ghana Business School, has advised government to stress-test the banking and non-banking sectors before implementing the Domestic Debt Exchange Programme (DDEP).
The economist believes that the bank and non-banking sectors are the main financial anchors of the economy as they play a key role in ensuring stability of the Ghanaian economy and should therefore be given attention.
Prof. Mensah, who is also an Honorary Fellow at Solidaire Ghana, explained that, the stress test promises to provide information on how to design the needed support for the sector.
The financial stability support fund provided in the first and the revised DDEP is not sufficient, Prof. Lord Mensah stated; some of the institutions may need recapitalization, liquidity support, and in large regulatory measures, he added.
“The government’s posture in the Domestic Debt Exchange Program (DDEP) exercise seems not to be serious. The entire exercise can pose a unique challenge, dragging the IMF Board approval and external debt restructuring in the last quarter of 2023 to the first quarter of 2024.”
Prof. Mensah
Professor Lord Mensah, made this remark while indicating his expectations for the year, 2023.
“There seems to be no appreciation of the consequence of the entire DDEP on the domestic financial sector”, he emphasized.
Consequently, he provided tutelage on the effect between the DDEP and the financial sector.
Effect Between The DDEP and The Financial Sector
Professor Mensah expects the government to take into account that majority of its domestic debt acquired is held by Banks and the Non-Bank sector (pensions, rural banks and insurance companies). These sectors hold more than 84% of the domestic debt, Prof. Mensah noted
As a result, if the government is not careful in implementing the DDEP, it could lead to financial instability and negative impacts on economic activity by causing debt distress to spread throughout the economy.
“The structure of the DDEP will play a major role in achieving the necessary fiscal space whiles minimizing the risk to the domestic financial system and the broader economy.
“The government must sacrifice and cast its net wide to ensure borrower-creditor participation in the DDEP by lowering the relief it is seeking from the creditors.”
Prof. Lord Mensah
According to the economist, as a result of the fall in global oil prices and other policies, there may be stability in macroeconomic indicators such as the exchange rate (Cedi to the Dollar) and inflation when compared to the previous year.
“The fall in global oil prices, the suspension of external debt payments by the government, and the possible IMF extended credit facility will have the potential to control the exchange rate. The control of the exchange rate will build up into a reduction in inflation since the greater part of the Ghanaian inflation is imported.”
Prof. Mensah
For this reason, Prof. Lord Mensah appealed with the managers of the economy to revise the modalities of the entire exercise of the Domestic Debt Exchange Program (DDEP).
