The banking sector holds 50% of domestic government debt

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Analyst laments crowding out effect on private sector

The country’s banking sector holds half of the country’s domestic debt, meaning the financial sector has become more comfortable investing in government instruments than lending to the private sector, a situation which one analyst says financial, poses a threat to the recovery plan.

According to the Bank of Ghana Statistical Bulletin (May) report, out of total domestic debt of GH ¢ 171.7 billion in May 2021, the banking sector – which includes the Bank of Ghana and commercial banks – holds 86, GH ¢ 5 billion representing 50 percent of the debt, and represents an increase of GH ¢ 20 billion compared to May 2020.

When broken down further, of the GH ¢ 86.5 billion, the Bank of Ghana holds GH ¢ 34.6 billion while commercial banks hold GH ¢ 51.8 billion, indicating that commercial banks are very active in the bond and treasury bill market.

In fact, their participation in domestic debt exceeds the GH ¢ 51.5 billion held by non-bank institutions which include SSNIT, insurance companies, rural banks, pension funds and other institutions, and individuals. The remainder of the debt, GH ¢ 33.6 billion representing 20%, is held by non-residents.

The structure of domestic debt further reveals that GH ¢ 104.8 billion is made up of investments in medium-term government bills, such as two-year Treasury bills and 10-year bonds. Then GH ¢ 22.6 billion is also made up of short-term bills such as 91-day treasury bills to one-year treasury bills. The remaining GH ¢ 44.2 billion was also invested in long-term bonds such as bonds 15 years and older.

Commenting on this in an interview with B&FT, Professor of Finance and Dean of the University of Cape Coast School of Business, John Gatsi, expressed concern about the impact of such development on the private sector, claiming that businesses lack financial support when they need it most.

“This means that the domestic debt market largely serves the interest of the government and not really the interest of the private sector. The crowding out effect is in the structure of the domestic debt market in which commercial banks, including the Bank of Ghana and non-bank financial institutions – including insurance companies and pension funds – are more geared towards donating their money to the government through the purchase of government issued bonds.

“And this is clearly not a good development for private sector access to credit – especially at a time when credit is more important for the private sector to restructure its businesses and stay focused,” he said. .

He further added that if the practice continues for an extended period of time, the pandemic stimulus package – which is anchored in the private sector – will be delayed as companies will continue to be deprived of necessary capital.

“The economic recovery plan is based on access to credit for businesses to restructure their activities. And so, if part of the domestic debt market funds are provided to the government, then access to credit is limited and access to capital to do the restructuring to remain very robust as a business is limited; and this is something that needs to be addressed.

“This is the time when more attention needs to be paid to ensuring an environment capable of providing capital or accessing capital for the private sector in a more informed manner,” said Prof Gatsi.

Most recently, the Bank of Ghana’s Monetary Policy Committee (MPC) also expressed similar dissatisfaction with the decline in the growth of banks’ private sector lending – which is mainly due to their preference for lending to the government, claiming that it will affect the plans. to revive the economy if it becomes a trend.

While the Committee accepts that the increased credit risk associated with the pandemic could be a factor in prompting banks to be cautious in lending to the private sector, it further noted that banks are profiting from excessive government borrowing over the period. internal market – a development that he fears will have negative consequences on the economy, especially at a time when companies need financial injections to boost their operations.

“The rebound in growth that began in the last quarter of 2020 continued into the first half of 2021. However, the Committee is concerned about the persistent sluggishness of new bank loans which could undermine the growth momentum.

“This slow growth in loans reflects increased credit risks due to uncertainties in the business environment due to the impact of the COVID-19 pandemic on the real sector, coupled with the very high yields offered on government securities due to the increase in public borrowing.

“This crowding-out effect continues to keep the credit-to-GDP gap below the long-term trend, and is likely to delay the recovery of the economy and discourage banks from strengthening their credit underwriting processes to manage credit risks associated with lending to underserved sectors of the economy, ”the MPC report said.

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