Excessive subscription of government bonds may pose risks to banking sector – Report

Ghana’s banking sector is likely to experience significant challenges due to excessive subscription of government bonds.

This is according to a fiscal report authored by Banking Consultant, Dr Richmond Atuahene and Data and Research Analyst, Isaac Kofi Agyei.

The report, titled ‘Thirsty Banks: Ghana’s 2023 Challenge with High Cash Reserve Ratios,’ paints a worrying picture of the banking sector which recently underwent a domestic debt exchange programme (DDEP).

The fiscal report also points that a significant portion of commercial banks’ total deposits made up of GH¢224 billion has been allocated towards the acquisition of government bonds following the DDEP.

It further highlights the prolonged maturity period of government bonds set for 2031 as a significant concern for many commercial banks in the country, while adding that, the period could pose risks of dwindling resources of banks which will therefore impact on liquidity for day-to-day operations.

“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,” the report suggested.

“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,?” it questioned.

Touching on the Cash Reserve Ratios (CRR) and Non-Performing Loans (NPL) of banks, the report urged the Central Bank to consider making some cuts and mitigation in order to restore stability and resilience 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,” the report noted.

Meanwhile, Ghana is yet to reach an agreement with external creditors for a debt swap which will likely also impact the banking sector.

MA/SA

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