The Government of Ghana has made an initial commitment of GHS 9bn ($750 million) to the Financial Stability Fund (FSF), which is set to be operational soon and act as a buffer against any unintended shocks to the financial sector.
According to government, the creation of the Financial Stability Fund (FSF) is intended to promote macroeconomic stability and provide solvency and liquidity support to eligible financial sector institutions.
The establishment of the FSF comes at a time when Ghana’s financial sector is facing significant challenges, including the impact of the domestic debt exchange programme (DDEP) on financial institutions.
The DDEP, which was introduced in response to Ghana’s high levels of public debt, has resulted in mark-to-market losses on investments, higher impairments on investment securities and loans, and rising operating costs.
To mitigate the impact of the DDEP on the financial sector, the Ghanaian government took the initiative to put down a number of measures (including the FSF) – which will provide short-term liquidity to eligible financial institutions, and exclusive support for banks by the central bank.
The government has also worked to complete all prior requirements to present Ghana’s programme to the International Monetary Fund (IMF) Executive Board for approval.
The establishment of the FSF has been welcomed by stakeholders in the financial sector, who see it as a much-needed measure to stabilize the sector. However, some have called for increased clarity on the modalities associated with the fund to ensure that it is used effectively.
Re-channeling Of FSF To Strengthening Banks’ Recapitalization
Meanwhile, for the banking sector, it can be recalled that Dr. Richmond Atuahene, a Banking and Corporate Governance Consultant proposed that the GH¢15billion Financial Stability Fund (FSF) – which was set up to provide liquidity support to the banking sector following the DDEP, can instead be channeled to support banks’ recapitalization, especially locally-owned banks.
According to the banking expert, due to excess post-DDEP liquidity and information asymmetry in the banking system, banks may not be as severely constrained as they would otherwise have been; therefore, they may not require significant liquidity support from the FSF.
Citing the example of Jamaica, he said: “… the establishment of a Jamaican Financial Sector Support Fund of US$1.2billion to support banks and other institutions that participated in the Jamaica domestic debt exchange was not utilized to support stability of the financial sector, because, there was no need for a financial stability support fund.”
. In December 2022, the government achieved a staff-level agreement with the IMF, which is expected to provide financing assurances required for the IMF programme.
The government has also made substantial progress on the debt-exchange programme and its engagements with bilateral creditors.
Overall, the establishment of the FSF is a positive development for Ghana’s financial sector. While challenges remain, the government’s commitment to promoting macroeconomic stability and providing support to financial institutions is a step in the right direction.
As Ghana continues to navigate a challenging economic environment, the success of the FSF will be crucial in ensuring the stability of the financial sector and the broader economy.
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