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Banks Have Not Learned from Debt Exchange Impact – Prof. Lord Mensah Says

5 months ago
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Banks Have Not Learned from Debt Exchange Impact – Prof. Lord Mensah Says

Professor of Financial Economics at the University of Ghana Business School, Prof. Lord Mensah, has stated that banks in Ghana have not drawn adequate lessons from the adverse impact of the Domestic Debt Exchange Programme (DDEP) on their balance sheets.

He pointed out that despite the significant losses banks incurred from the DDEP, they continue to heavily invest in government securities rather than expanding credit to businesses and individuals, emphasizing that Ghana’s banking sector is highly dependent on investments rather than traditional loan issuance – a situation that exacerbates economic vulnerabilities.

“In the past five years, we have analyzed the balance sheets of several banks, and what we see is that almost all of them rely on short-term investments rather than loans, which should ideally dominate their asset portfolios. The impact of the DDEP was huge on banks, but the banks have not learned lessons from the DDEP,” he remarked.

Speaking during the NorvanReports and Economic Governance Platform (EGP) X Space Discussion on Sunday, February 23, 2025, on the topic, “Ghana’s Economic Recovery: Reality or Debt-Fueled Illusion,” Prof. Lord Mensah urged banks to reassess their strategies and diversify their portfolios to mitigate risks associated with over-reliance on government instruments.

His remark was in reference to the rush by banks to invest in government short-term instruments (T-Bills) which has seen several oversubscriptions in recent times.

A case in point is the over GHS 20 billion in bids submitted by primary dealers – mainly banks – against an auction target of GHS 7.72 billion for the 91, 182, and 364-day bills in last Friday’s auction.

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According to Prof. Mensah, persistent exposure to government debt increases the financial sector’s vulnerability to default risks and also prevents credit from flowing into the real economy.

Speaking further, he noted that the traditional notion of government instruments being risk-free must be reconsidered, given the country’s history of debt restructuring, and explained that a government’s failure to meet coupon and principal payments constitutes a default, despite official classifications describing it as restructuring.

“I always relate this to when we used to say government instruments are risk-free. From where I sit, I think we may have to qualify the risk. Because as far as investment is concerned, we have several risks when it comes to government instruments. It used to be default risk, where we said government instruments are default-free. But recently, we’ve had governments defaulting,” he explained.

Economic Recovery and Banking Sector Stability

Addressing Ghana’s economic recovery efforts, Prof. Mensah noted that the banking sector plays a critical role in stabilizing the economy, given its dominance over financial transactions.

He highlighted that the country’s debt-to-GDP ratio, which currently stands at 75%, requires a strategic shift in financial sector operations to support broader economic growth.

“The impact of debt restructuring on the financial sector is significant because our economy is dominated by banking operations. Whatever affects the banks directly impacts the broader economy,” he noted.

He urged the government to leverage the demand for its instruments by extending the maturity period of T-Bills, which could help alleviate short-term liquidity pressures.

“The government can take advantage of the current high demand for its instruments by repackaging them with medium-term maturity periods of two to three years. This would help spread out debt obligations and ease immediate fiscal pressures,” he suggested.

Prof. Mensah concluded by emphasizing the need for policy reforms that encourage banks to increase private-sector lending rather than relying on government instruments. He stressed that sustainable economic recovery depends on a banking system that prioritizes business growth and financial diversification.

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