IMF urges Ghana to strengthen financial safety nets, monitor liquidity to avert crisis
The International Monetary Fund (IMF) has put forward a comprehensive set of policies aimed at mitigating potential systemic financial instability in the country. With a particular focus on the banking sector and Non-Bank Financial Institutions (NBFIs), these policies are designed to enhance risk assessment, ensure stability, and bolster the resilience of Ghana’s financial system.
Ghana, like many other nations, faces significant risks when weak banks and NBFIs encounter substantial fluctuations in real interest rates, risk premia, and asset prices. These fluctuations are often observed during economic slowdowns and policy changes, which can trigger insolvencies and have far-reaching consequences. The IMF warns that such disruptions can cause market dislocations and unfavorable cross-border spillovers, necessitating proactive measures to safeguard the financial sector.
The first policy recommended by the IMF revolves around strengthening financial safety nets and closely monitoring the liquidity and asset quality of banks and NBFIs. By fortifying safety nets and establishing vigilant oversight, authorities can swiftly identify and address any vulnerabilities in the system. This includes ensuring that banks and NBFIs maintain adequate liquidity levels and that their asset portfolios are of high quality.
The second policy focuses on designing an appropriate strategy to recapitalize banks and NBFIs. The IMF recognizes the importance of injecting additional capital into these institutions to fortify their financial positions and enhance their ability to withstand economic shocks. A well-designed recapitalization plan can bolster the resilience of banks and NBFIs, ensuring they can continue lending and supporting economic activity during challenging times.
Additionally, the IMF encourages acquisitions and mergers as a means of addressing necessary consolidation in the financial sector. This policy seeks to promote a more efficient and robust financial system by facilitating the combination of weaker institutions with stronger ones. By encouraging acquisitions and mergers, Ghana can create stronger and more resilient financial entities that are better equipped to navigate turbulent market conditions.
However, the IMF cautions that the potential impact of these policies on Ghana’s financial sector could be significant. The recent Domestic Debt Exchange Programme (DDEP) in the country has had a profound effect on the health of the financial sector. Financial institutions, including commercial banks, pension funds, asset management companies, and insurance companies, had substantial investments in government bonds. But with reduced interest rates and extended repayment periods, the value of these bonds has declined, posing considerable challenges for financial institutions.
To address the repercussions of the DDEP, the Ghanaian government has announced plans to establish the Ghana Financial Stability Fund (GFSF), supervised by the Bank of Ghana. The GFSF, with a projected size of GH¢15 billion ($1.5 billion), aims to provide liquidity to banks that participated in the DDEP. To support this initiative, the World Bank has pledged $250 million, with the remainder expected to be funded by the government.
The IMF report emphasizes that government solvency support should be carefully designed to minimize costs and moral hazard, while also incentivizing private capital injections and fostering structural reforms. In the case of state-owned banks, the government intends to frontload necessary recapitalizations, ensuring their future viability and creating a level playing field with private banks.
Ghana’s financial sector has already undergone significant turmoil in recent years, including a major banking sector clean-up in 2017 that reduced the number of operating banks from 34 to 23. In addition, numerous micro-finance institutions, savings and loans companies, and finance houses had their licenses revoked, resulting in a fiscal cost of approximately GH¢25 billion. These challenges have contributed to an increase in the government deficit and debt, further underscoring the urgency of implementing sound financial stability measures.
As the September 2023 deadline approaches for banks to submit their recapitalization plans to the Bank of Ghana, the financial landscape of Ghana is poised for crucial changes. The successful implementation of the IMF’s recommended policies, along with the establishment of the Ghana Financial Stability Fund, will be critical in ensuring the stability and resilience of Ghana’s financial sector in the face of potential systemic risks.