Advocacy for Guarding Financial Institutions: AI Group Proposes Safety Measures
The Ghana Business Association (GBA) is pressing for safeguards to make sure financial institutions don't suffer financial setbacks as a result of participating in the Domestic Debt Swap Program (DDSP).
In a statement, the GBA warns of potential liquidity issues the DDSP could cause for banks and the effect on businesses' ability to access financing. This concerns are particularly relevant given the challenges industrial sectors may face in securing necessary funds to grow their output.
Given the situation, the GBA welcomes the government's intention to set up the Ghana Financial Assistance Fund (GFAF) to provide liquidity support. However, they emphasize the urgent need for the government or the designated government institution to publicly disclose the terms and conditions for accessing the Fund.
Here is the statement issued in Accra on the matter:
The Ghana Business Association (GBA) has been closely monitoring developments related to the DDSP, recognizing the pressing need for this intervention to restore economic stability. We support the IMF program and acknowledge its potential for gradually reducing our debt-to-GDP ratios towards sustainable levels. However, we feel it necessary to address some pressing issues with the DDSP as it currently stands.
We've engaged extensively with our members from the banking and insurance sectors, and understand their cooperation with the DDSP plan. Nevertheless, we'd like to shed light on a few critical areas that require immediate attention for the DDSP to yield its anticipated benefits.
Impacts on Local Industry
The GBA represents businesses in 23 industries, including banks, insurance companies, and manufacturers spanning Ghana. We're deeply concerned about the potential impact the DDSP may have on the liquidity and solvency of financial institutions and their ability to support the Ghanaian economy's productive sector.
Liquidity
We foresee potential liquidity constraints that banks might face as a result of the DDSP and the repercussions on businesses' ability to secure financing. In light of this, we welcome the government's plan to establish the GFAF to provide liquidity support.
In addition, we support the Bank of Ghana's decision to reduce the cash reserve requirement (CRR) from 14% to 12%. However, we urge the bank to further reduce the ratio to 9%, similar to the reduction during the height of the COVID-19 pandemic in 2020 and 2021.
Solvency
The DDSP structure will not only strain the liquidity and profitability of financial institutions but also their solvency due to significant impairment losses on their balance sheets. These economic losses can potentially erode their capital and impact their financial health, which may negatively affect shareholders' and investors' confidence and hinder their ability to engage in foreign transactions.
We, therefore, recommend that the Bank of Ghana devise clear mechanisms to support banks whose capital requirements will be compromised due to this program. The government should also ensure that the GFAF, launched to mitigate the DDSP's consequences, is adequately resourced and effective to prevent further deterioration in business sentiment. Recent data from the GBA's Business Confidence Index already shows a substantial decline—from 87.0 to 74.3 in Q3 2022—which is not an auspicious sign for investors.
Access to Finance
A vibrant industrial sector remains crucial for economic growth, necessitating improvements in local industries to reduce reliance on foreign currency for imports. With the financial sector going through strife, access to funds, especially for productive sectors, may become more difficult. This could exacerbate the longstanding struggles that businesses encounter in securing financing for their operations.
The GBA encourages the government and all relevant stakeholders to perceive these challenges as opportunities to support Ghana's productive sectors to manufacture more essential goods domestically, thus easing the pressure on the local currency. In this regard, the GBA anticipates that the government will implement policies to reduce interest rates, minimizing the cost of credit for the industry. This step should encourage medium- to long-term borrowing by businesses to expand their operations and increase production.
Furthermore, the GBA advocates for considering the potential impact on Small and Medium-sized Enterprises (SMEs). The DDSP should ensure that SMEs have reasonable access to bank loans for their operations. Additionally, the DDSP should take into account the consequences on SMEs whose bonds have been affected by the program.
We urge for special consideration of these SMEs, allowing them more viable access to their funds to sustain their businesses—all the more crucial given the advent of the AfCFTA, which expects Ghanaian industries to produce at scale and competitively to seize opportunities within the single African market.
Government Expenditure
In the current situation, fiscal prudence is crucial to restore investor confidence. Given this, we suggest that the government reevaluates its budget deficit projection, aiming for compliance with the 5% provision in the Fiscal Responsibility Act. Increasing the budget deficit from 7.4% (as of September 2022) to 7.7% of GDP, as outlined in the 2023 budget, does not inspire confidence among the business community.
Given that businesses are already strained by numerous taxes, we propose that the government consider reducing the deficit by significantly cutting expenditure instead of increasing revenue through new taxes. The 2023 National Budget projects a total expenditure of GH¢205.4bn, an increase of 87.75% from the 2022 total expenditure. The government's budget for this year should reflect the current circumstances.
Conclusion
In conclusion, the GBA encourages the government and all relevant stakeholders to view this crisis as a chance to introduce reforms that will foster long-term development in agriculture, industry, and other productive sectors. We hope to see a decrease in government borrowing from banks, which often crowds out the private sector.
We strongly urge that fiscal prudence becomes the standard practice as we work towards reducing the reliance on banks and building a more sustainable economy.
- The Ghana Business Association (GBA) is calling for safeguards to prevent financial institutions from experiencing financial setbacks during their participation in the Domestic Debt Swap Program (DDSP), as the potential liquidity issues could affect businesses' ability to access financing.
- The GBA is deeply concerned about the potential impact of the DDSP on the financial institutions' liquidity and solvency and their ability to support the Ghanaian economy's productive sector.
- The GBA welcomes the government's plan to establish the Ghana Financial Assistance Fund (GFAF) to provide liquidity support, but emphasizes the urgent need for the government to disclose the terms and conditions for accessing the Fund.
- The GBA encourages the government to reduce the cash reserve requirement (CRR) to 9%, similar to the reduction during the COVID-19 pandemic, to alleviate potential liquidity constraints that banks might face due to the DDSP.
- The DDSP structure could negatively impact the financial health of financial institutions, which may affect shareholders' and investors' confidence and hinder their ability to engage in foreign transactions.
- The GBA advocates for policies that will reduce interest rates, minimize the cost of credit for the industry, encourage medium- to long-term borrowing by businesses, and support Small and Medium-sized Enterprises (SMEs) in accessing bank loans for their operations.
