Cedi fall could trigger non-performing loans

The sliding cedi raises the risk of banks incurring higher non-performing loans due to the potential for default among borrowers exposed to exchange rate volatilities, says Simon Dornoo, Managing Director of GCB Bank and president of the Ghana Association of Bankers (GAB).

The local currency is down 27 percent against the dollar this year, and its slide has largely defied the extraordinary efforts of the Bank of Ghana (BoG) to stem the decline. The cedi now trades at an official average rate of 3.03 to the dollar compared to 2.16 in December.


Its fall has stoked inflation, which reached 15 percent in June -- the highest for four and a half years.


“[The fall] has the potential to increase non-performing assets,” Mr. Dornoo said in Accra when bank bosses briefed the media after the GAB’s annual general meeting. “People who borrowed in foreign currency have to find more cedis to pay their dollar loans due to the depreciation,” he explained.


In February the BoG asked banks to stop granting foreign-currency loans to persons and institutions that do not earn their income in foreign currencies. It did this in a bid to curb the use of dollars in domestic transactions, which has partly been blamed for the weak cedi.


The central bank however said that foreign-currency loans that had been fully withdrawn prior to its February directive should be allowed to run until expiry.


In its recent Monetary Policy Committee (MPC) report, the BoG said non-performing loans in the banking industry reduced from 13.4 percent of all credit advanced in May 2013 to 12.8 percent in May this year.

Despite the decline, the ratio of non-performing loans is seen as high and remains above lower levels of 7-8 percent between 2007-- 09.


Bank chiefs also said depreciation boosts the cost of holding regulatory reserves on their foreign currency deposits.


According to new rules, banks must keep 11 percent of all foreign currency deposits in reserves. But the currency of the reserves must be cedis; thus with every slide in the currency banks are forced to hold more cedis for the same level of foreign currency deposits.


This situation is putting a liquidity strain on the industry, the Managing Directors said. So what is the way out, in the short-term, to stabilise the cedi? Mr. Dornoo said the cause of depreciation is the shortage of dollars in the banking system, and bringing in more dollars will improve the situation.


“There is not enough dollars in the system, and we have strong demand for foreign currency. In the short-term, we can borrow in foreign currency to supply the market -- but this has its own implications. It’s a combination of factors that has led to this -- the major issue being the economic imbalances.”


Analysts say two consecutive years of double-digit budget and current-account deficits have brought Ghana to a point where it would probably require financial assistance from the International Monetary Fund (IMF) to stabilise the cedi.

The government has been adamant in refusing to seek a bail-out from the IMF, insisting that its “home-grown” fiscal consolidation programme will deliver a strong recovery by 2016.


This point was reiterated this week by Seth Terkper, the Finance Minister, when he presented his mid-year fiscal review and supplementary budget to Parliament in Accra.


Mr. Terkper requested approval from lawmakers to borrow an extra GH¢1.2billion, which will take the expected 2014 budget deficit to 8.8 percent of GDP from an earlier target of 8.5 percent.


The Finance Minister said the rapid fall of the cedi has been a serious setback for the economy, and pledged to continue implementing appropriate responses in conjunction with the Bank of Ghana.


He said government will boost crude oil and gas production to curtail imports of fuel for power generation. Consumption of locally-manufactured products will also be encouraged, he said, while the central bank will use swaps to manage its foreign exchange reserves to improve its interventions in the currency market.