Banks to commit 30 per cent of domestic debt to bonds

The Banks have offered government a 30 per cent relief in its bid to reduce domestic debt, which currently stands at nine trillion cedis.

The restructuring process, which also involves the non-bank financial institutions, covers three trillion cedis intended to transform the domestic debt into medium and long-term bonds.

"These would be in the form of one-to- three year bonds," Dr Jean Aka, Managing Director of Ecobank, who spoke on behalf of the banks said at a press briefing on the final day of the National Economic Dialogue.

He explained that the restructuring did not mean, "the banks are writing off the debt government owes."

Mr Aka said proposals sent to government needed to address earnings from the banks' secondary reserve holding which constitute a big portion of their liquidity flow, adding that a conversion criterion ought to be fashioned in order not to disturb their portfolios.

"Consequently, the Ghana Association of Bankers propose that only maturing bills must be converted and this should be spread in a manner that would allow banks to convert part of their maturing bills and not just all their maturing bills," he said. "Our proposition is that banks should be left with a float of 70 per cent of maturing bills to ensure liquidity."

He said the remaining 30 per cent could then be invested in 10 per cent sequences of one, two and three year bonds.

Such a mechanism would ensure that banks would be in a position to fulfill their obligation to customers who may want their deposits before the tenure of the bond.

Dr Aka said given the present mismatch of earnings between long-term and short-term securities, the Association proposes that a floating pricing system should be preferred to the mandatory fixed price proposed in the debt management document.

"A floating price system would enable the banks manage liquidity more dynamically and provide the needed resources to meet private sector requests."

The floating price could be at a rate of 1.5 and 3.5 per cent above the 91-day Treasury bill rate, making it attractive for all holders.

Dr Aka proposed a reasonable time frame for education, publicity and training on the implementation of the proposed instrument.

He noted that since the bond holdings would deprive the banks of 30 per cent of liquidity, "we propose the downward revision of the central bank's primary reserve requirement from its present level of nine to six per cent so as to free resources to boost the capacity of the banks."

He proposed that the banks be allowed to maintain reserves on foreign currency deposits in foreign currency and requested that foreign currency deposit reserve requirement on secondary reserves basis must be abolished.

"In this regard, the Association submits that Banks should be required to make full provision for foreign currency deposits at nine or 10 per cent for primary reserves."

Dr Aka said market-to market valuation of the bond and the consequent capital gain or losses needs to be taken into account for tax purposes.