The World Wide lender, International Monetary Fund (IMF), has proposed three strategies, including acquisitions and mergers of banks and non-banks to limit the possibility of systematic financial instability in Ghana.
These policies, which are summarized in the Risk Assessment Matrix in the most current IMF country report on Ghana, aim to manage risks and ensure the stability of banks and non-bank financial institutions (NBFIs).
The first policy recommended by the IMF revolves around strengthening financial safety nets and closely monitoring the liquidity and asset quality of banks and NBFIs.
According to IMF, by fortifying safety nets and establishing vigilant oversight, authorities can swiftly identify and address any vulnerabilities in the system. This includes ensuring that banks and NBFIs maintain adequate liquidity levels and that their asset portfolios are of high quality.
The second policy, as disclosed by IMF, focuses on designing an appropriate strategy to recapitalize banks and NBFIs. The IMF recognized the importance of injecting additional capital into these institutions to fortify their financial positions and enhance their ability to withstand economic shocks.
A well-designed recapitalization plan, it said, can bolster the resilience of banks and NBFIs, ensuring they can continue lending and supporting economic activity during challenging times.
In accordance with IMF’s report, countries with weak banks and non-bank financial institutions are at risk of insolvency when there are considerable swings in real interest rates, risk premia, and asset values.
These oscillations, it stated, are frequently noticed during economic downturns and policy changes.
The IMF stressed that such bankruptcies can have far-reaching ramifications, including market disruptions and negative effects that extend beyond national borders
“Sharp swings in real interest rates, risk premia, and assets repricing amid economic slowdowns and policy shifts trigger insolvencies in countries with weak banks or non-bank financial institutions, causing markets dislocations and adverse cross-border spillovers.”International Monetary Fund
IMF Set To Provide Governmental Support To Minimize Cost, Moral Hazard
Though the likelihood of this happening is rated as MEDIUM, the International Monetary Fund stated that global variables have exacerbated the effects of significant reductions in domestic debt on banks’ capital adequacy.
These haircuts, according to IMF, have a direct impact on banks’ holdings of sovereign claims, reducing their ability to lend. As a result, credit availability for the private sector is hampered, ultimately dampening economic activity – the potential impact on Ghana’s financial industry is HIGH.
The IMF also reported that Ghana’s recent Domestic Debt Exchange Programme (DDEP), which replaced old sovereign bonds for new ones, has harmed the country’s financial system.
“Domestic bonds were widely distributed across the financial sector in Ghana, representing the most important asset class held by commercial banks, pension funds, asset management companies, and insurance companies. Banks held 30 to 50 per cent of their total assets in government securities before the DDEP—with especially high exposures in the state-owned banks—and relied significantly on income from these securities.International Monetary Fund
In announcing the success of the DDEP, government indicated it was putting plans in place to establish a GH¢15 billion ($1.5 billion) Ghana Financial Stability Fund (GFSF) which will be supervised by the Bank of Ghana. The GFSF was to provide liquidity to banks that participated in the DDEP.
According to the IMF report, “government solvency support will be designed to minimize costs and moral hazard, incentivize private capital injections, foster structural reforms improving operational efficiency, and allow for an orderly, early government exit.”
“When acting in its capacity as shareholder, i.e., for state-owned banks, the government will frontload any necessary recapitalizations of state-owned banks, which will be underpinned by credible plans to ensure the future viability and a level playing field with private banks.”International Monetary Fund
Ghana’s financial system has already been shaken by the 2017 banking sector clean-up, which saw the number of banks operating in Ghana reduced from 34 to 23, as well as the revocation of licenses for 347 micro-credit institutions, 15 savings and loans, and eight finance houses.
This initiative cost the government approximately GH25 billion and plays a critical role in Ghana’s sustainable debt portfolio.
The IMF country report on Ghana disclosed that “the fiscal cost of the financial sector recapitalization (estimated to have reached 7.1 per cent of GDP over 2017-21) has led to an increase in the government deficit and debt. Additional recapitalization costs are expected in the coming years resulting from the domestic debt restructuring envisaged in 2023—some 2.6 per cent of GDP are included in the DSA’s baseline.”