Plan bailouts to reduce cost to economy—Seth Terkper

 A former Finance Minister, Mr. Seth Terkper has called for an enhanced plan bailouts to reduce the high cost to the overall economy and stakeholders.

“Most of the unplanned —and even planned—bailouts initiated by Bank of Ghana and the Ministry of Finance as part of the banking sector reforms are at a high fiscal cost to the overall economy , taxpayers and stakeholders such as domestic investors, depositors, pension fund contributors, employees and families.

The banking sector measures appear to contribute to the slowdown in overall performance of the economy (as epitomised in non-oil GDP growth rates) through the dampening effect of financial and general services sectors” Mr. Terkper told the B&FT in a telephone interview.

He explained that: “We cannot expect our banks to grow in isolation else a ‘big bang’ restructuring will ignore the fact that a healthy financial sector is a function of overall growth.

Hence, it appears that the steep capitalisation in a shallow domestic market and restructuring did not full account of the fact that, globally, advanced, emerging, and SSA economies were slowly coming out of worse financial crisis and economic downturn since the 1930s.  

Further, since deposits and credits fuel an efficient real economy, we expect dramatic reforms to prolong the lag in Ghana’s recovery, despite the its fortune with oil and gas”.

Ghana barely escaped the recession that affected many Sub-Saharan African countries (SSA) between 2014 and 2016, a situation that warrants that the managers of the economy avoid policies that lead to bailouts as they affect investments and aggravate the distortion in use of budget resources.

The key lesson is to avoid parochial monetary and, by analogy, fiscal  policies that result in losses for the general or common good. It is clear that any directive, legislation  or regulation must go beyond core banking to cover other non-bank considerations of financial  sector reforms.”

In January 2019, the Finance Ministry announced a GH¢2 billion plus financing arrangement to help some indigenous banks meet the GH¢400 million minimum capital requirement. The beneficiary banks are:  Agricultural Development Bank (ADB), National Investment Bank (NIB), OmniBank/BSIC, Prudential Bank and Universal Merchant Bank (UMB).

Mr. Terkper notes in 3 related articles, that the inclusion of ADB and NIB suggests that the State, as represented by MOF as shareholder, is also struggling to meet BOG’s new capital requirements—after taking the contingent liability route with getting GCB to come to the rescue of liquidated Capital and UT Banks.

The articles use official data and information to show that the banking sector reforms have so far cost  the taxpayer between GH¢7.2-to-11 billion, after making adjustments to the rate of debt accumulation shown in the 2019 Budget for FY2017 and 2018. It is also a matter of debate whether these costs include the 7 or 10-year ESLA Bond that extends the levy for that duration and relies on the contingent or quasi-fiscal structure enshrined in ESLA plc.

Mr. Terkper drew attention to original and more gradual ESLA approach,  a package  that would have sequenced the ESLA  proceeds better, with a GH¢30 billion potential due to the replacement of the 3-to-5 year “sunset” provision for ESLA with the 7-to-10 year duration of the new Bonds. Its strength is in planning well to underwrite the NPLs  without recourse to excessive borrowing to satisfy the monetary sector edicts.

Mr. Terkper indicated that the financial sector restructuring must take account of a domestic and global economic environment that goes through frequent booms and busts.

“We have started to build fiscal buffers, especially the use of petroleum revenues to set up the Stabilization and Sinking Funds to manage these hiccups and destabilize the economy through unplanned budget deficits as well as accelerated borrowing and public debt.

“Typically, we rely on austerity measures to manage these crisis and, therefore, Ministry of Finance cannot afford to spend significant loan and tax proceeds to underwrite all failed public and private investments.

“Any prolonged banking crisis will adversely affect the economy but its resolution must not ignore the required balance in allocating scarce resources among competing budget needs,” he stated.

He argued that independent Bank of Ghana measures have imposed high public and private costs with severe impact on the economy, budget, businesses, and families.

“Hence, as with fiscal austerities, we must use the lessons learned to evolve a capitalisation-cum-restructuring mechanism that imposes less shock to the economy, businesses, and  other stakeholders.

The measures should be less ad hoc, better packaged to include more public awareness and consultation as well as Parliamentary approval to ensure accountability, particularly in the use of budget resources,” he said.