Banking sector under strain due to high Gov’t bond investments; extended maturity period poses liquidity risk – Report

A recent fiscal report co-authored by Banking Consultant Dr. Richmond Atuahene and Data and Research Analyst Isaac Kofi Agyei has spotlighted growing concerns over Ghana’s banking sector, attributing its woes to an overwhelming reliance on government bonds.

Titled ‘Thirsty Banks: Ghana’s 2023 Challenge with High Cash Reserve Ratios,’ the report rings alarm bells over the extended maturity period of government bonds, slated for 2031. This elongated timeline, the authors argue, poses a substantial risk of draining bank resources, leaving them grappling with inadequate liquidity for day-to-day operations.

Per the report, a staggering GH¢224 billion which is a significant chunk of commercial banks’ total deposits, has been funneled into government bonds following a domestic debt exchange programme. Such hefty investments tie up crucial capital, potentially hampering banks’ ability to meet short-term financial obligations.

“The Bank of Ghana should have considered the GH¢50.6 billion of bonds that were restructured before implementing the new, higher Cash Reserve Ratios; otherwise, it amounts to double accounting. The government bonds have a final maturity period in 2031, and many bank boards and management teams are concerned that this new directive could lead to a depletion of their resources soon as many banks may not be liquid enough to operate,” it said.

Moreover, the report casts doubt on the Bank of Ghana’s recent decision to hike Cash Reserve Ratios (CRR) without factoring in previously restructured bonds held by commercial banks. This oversight, the authors contend, could exacerbate liquidity pressures, leaving many banks ill-equipped to navigate the evolving financial landscape.

“The central question remains: How did the Bank of Ghana establish the new Cash Reserve Ratio without factoring in the restructured bonds held by commercial banks, primarily funded by depositors’ money? Besides Bawumia (2010) argued that the high level of reserve requirements was a legacy of high fiscal deficits so why the heavy dependence on monetary policy to solve a problem deeply rooted in fiscal recklessness?”, added the report.

Recommending a recalibration of CRR reductions, a prudent consideration of restructured bonds, and concerted efforts to mitigate Non-Performing Loans (NPL), the report advocates for a holistic strategy in restoring resilience and economic stability in the banking sector.

“Recommendations emphasize a balanced approach, urging BoG to reconsider CRR reductions, factor in restructured bonds, and mitigate NPL risks. Fiscal measures, including substantial budget cuts, are critical to easing inflationary pressures and redirecting credit to the private sector.

“This holistic strategy aims to restore banking sector resilience, promote economic stability, and foster sustainable growth in Ghana,” it stated.

Source:norvanreports