Ghana is borrowing its way out of a banking crisis.
The government of West Africa’s second-biggest economy—its budget already stretched by interest costs that consume about a third of its revenue—is piling on debt to cover the liabilities of failed lenders and settle arrears dating back 20 years. It was left with little choice but to issue bonds to save an industry the International Monetary Fund sees as a financial-stability threat.
“If you don’t intervene then you breed systemic risk,” George Bodo, a Nairobi-based banking analyst at Ecobank Capital Ltd., said by phone. “These banks hold deposits. The central bank and the government have to do whatever it takes to protect the public.”
The country’s central bank is seeking to bolster the sector by revoking the licenses of poorly governed companies and implementing stricter guidelines on capital buffers. It comes as President Nana Akufo-Addo’s administration hopes to reverse a slump in lending and keep alive a target for 6.8 per cent economic growth this year, among the fastest in Africa.
Ghana, in the final year of an IMF bailout totaling almost $1 billion, has issued GHC 13.2 billion ($2.8 billion) of bonds over the past 10 months that will go toward the sector, with the Washington-based lender’s blessing. Part of that issuance included about GHC 5.3 billion of payments on behalf of energy companies that had accumulated GHC 10 billion of debt over a two-decade period.
Those payments have done little to ease a surge in souring loans as lenders race to meet a year-end deadline of raising their capital levels more than threefold to GHC 400 million. Non-performing loans surged by almost 21 per cent to a record GHC 8.63 billion in April compared with a year earlier, according to central bank data. That pushed the industry’s NPL ratio to 23.5 per cent from 19.8 per cent in April 2017.
The new capital adequacy requirements have spurred a series of mergers and acquisitions among the 31 remaining registered banks in the sector, while also contributing to the failure of others.
The central bank earlier this month announced that five small, insolvent lenders will be combined into one new entity that will be given a fresh capital injection and have its debt cleared. It withdrew the licenses of two other banks last year, transferring some of the assets to GCB Bank Ltd. and providing the state-owned lender a GHC 2.2 billion bond.
The costs of dealing just with the collapsed banks could increase Ghana’s debt as a per centage of gross domestic product to 72.4 per cent by the end of 2018, Moody’s Investors Service said this month, from 69.1 per cent last year. Ghana’s cedi has weakened 2.8 per cent against the dollar this year.
“It’s a huge debt burden,” said Courage Boti, an economist at Accra-based Databank Group. “It’s crisis management required to put the banking industry on a sound footing.”