A fiscal analysis conducted by Banking Consultant, Dr. Richmond Atuahene and Data and Research Analyst Isaac Kofi Agyei presents a bleak outlook for Ghana’s banking industry, largely due to the over-subscription of government bonds.
Entitled ‘Thirsty Banks: Ghana’s 2023 Challenge with High Cash Reserve Ratios,’ the report underscores the prolonged maturity period of government bonds, scheduled until 2031, as a significant concern for numerous banks.
This elongated waiting period poses a risk of depleting banks’ resources, ultimately leading to insufficient liquidity for their day-to-day operations.
According to the report, a substantial portion of commercial banks’ total deposits, totaling GH¢224 billion, has been diverted towards acquiring government bonds following the domestic debt exchange program.
The report suggests that the Bank of Ghana should have taken into account the GH¢50.6 billion of bonds that were restructured before implementing the new, higher Cash Reserve Ratios (CRR).
Ignoring this could lead to double accounting, and many bank boards and management teams are worried that this new directive could quickly drain their resources.
“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 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?”
The central question raised is how the Bank of Ghana established the new Cash Reserve Ratio without considering the restructured bonds held by commercial banks, which are primarily funded by depositors’ money. Additionally, the report questions the heavy reliance on monetary policy to address a problem deeply rooted in fiscal irresponsibility.
Recommendations put forth in the report suggest that the Bank of Ghana should reassess Cash Reserve Ratio reductions and address Non-Performing Loans (NPL) to restore resilience and economic stability within the banking sector.
The proposed measures emphasize a balanced approach, urging the BoG to reconsider CRR reductions, account for restructured bonds, and mitigate NPL risks.
Furthermore, fiscal measures, including significant budget cuts, are deemed critical to alleviate inflationary pressures and redirect credit to the private sector.
This comprehensive strategy aims to bolster banking sector resilience, foster economic stability, and facilitate sustainable growth in Ghana.
“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.”