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Implications of the 2021 budget statement on rural and community banks

Ken Ofori Atta13224311 Finance Minister, Ken Ofori-Atta

Fri, 7 May 2021 Source: Prince Yebb

The 2021 budget statement was presented in accordance with Article 179 of the 1992 Constitution and Section 21 (3) of the Public Financial Management Act 2016 (Act 921).

The President through the Minister for Parliamentary Affairs, Hon Osei Kyei Mensah Bonsu presented the 2021 budget statement and economic policies before the Parliament on Friday, 12th March, 2021.

By convention it is required of the Minister of Finance and Economic Planning to lay before Parliament the budget statement for a given year. For the first time in the history of Ghana, we had the Minister for Parliamentary Affairs presenting the budget on behalf of the President as a result of other engagements of the substantive minister, Ken Ofori Atta.

It is important to note that, in an election year, the constitution requires the ruling government to prepare a provisional budget to cover only the first quarter of the ensuing year. This should enable the new government to run the affairs of the country before the full year budget is prepared within the first three month after elections. .

Basically, the budget statement highlighted the projection of government’s revenue and expenditure as well as policy measures that might stimulate growth of the economy.

This article seeks to explore certain key issues in the budget statement and their implications on the financial sector, with emphasis on the rural and community banks.

Payment Of Locked-Up Funds

According to the budget statement, the government sought for an approval to raise an amount of GHS 5.5 billion in 2021 for the payment of locked-up funds with collapsed asset management companies, including Gold Coast Fund Management. Gold Coast Fund Management on record holds huge amount of deposit of RCBs.

The implication is that when the locked-up funds are paid, it will improve the liquidity position of RCBs. It will also help several RCBs to channel those funds into lending and other investments which might translate into enhanced profitability. The government must therefore fast-track the process of paying out investors including some RCBs.

Economic Growth

Per the budget statement, the overall real GDP is projected to grow at 5% in 2021. This implies that the economy will have positive response as compared to 2020 with reported actual growth rate of 1.1% according to the World Bank report.

Rural Banks should strategize well and take advantage of the positive economic growth to enhance their deposit mobilisation drive thereby spurring balance sheet growth.

Introduction of New Taxes

In order to deliver critical government services and support the transformation of the economy, the government in the budget statement introduced new taxes to improve revenue mobilization.

Notable among the taxes are Energy Sector Recovery Levy, Sanitation and Pollution Levy and Covid-19 Health Levy. The Sanitation and Pollution Levy requires that 10 pesewas is imposed on price per litre of petrol/diesel while the Energy Sector Levy imposed 20 pesewas on a litre of petrol/diesel. It is worth mentioning that fuel cost constitute a major component of operational cost of RCBs.

Therefore, the increments are likely to increase the operational cost of RCBs and by extension, cost to income ratio. With the current fluctuation in the electricity supply coupled with continual increase in fuel prices, cost of operations is going to increase to some level.

Furthermore, increase in these taxes is going to reduce the savings power of the people since large portion of their income will go into consumption.

COVID-19 Support

In a bid to support businesses that have been disproportionately affected by Covid-19 pandemic, the government in the budget statement has introduced tax rebate. For example, there is suspension of quarterly income tax installment payments for the second, third, and fourth quarter of 2021 for small businesses using the income tax stamp system. The same support has been extended to trotros and taxis when it comes to vehicle income tax.

What is the implication? Small business operators will be able to improve their cash flow. RCBs should take advantage to mobilize more deposits from this segment of the population.

Five percent tax on financial sector

According to the government, the payment of some locked up funds have restored investor confidence and protected the hard-earned savings of millions of Ghanaians. But this has come at a huge cost of over GH¢ 21 billion to Government. The government therefore imposed 5% tax on profit before tax on the financial sector to clear out the clean-up losses. The implication of this tax is that, it is going to reduce the profit margins of the banks and their ability to pay dividends. It could also create short term liquidity challenge

Conclusion

The rural and community banks must brace themselves up for challenging period ahead as taxes introduced are fully implemented effective 1st May, 2021. The economic indicators do not give too much hope particularly with the return of dumsor and the general hardship across the country as a result of Covid 19 pandemic. These are likely going to have negative impact on the banks operations. The rural banks must therefore use every legitimate means to cut down avoidable cost to position their banks well in these turbulent times.

Columnist: Prince Yebb
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