Banks to lose 60% revenue under Debt Exchange programme – Alex Mould warns

A former Executive Director of Standard Chartered Bank, Mr. Alexander Kofi-Mensah Mould, popularly called Alex Mould, has warned that the Akufo-Addo government’s debt exchange programme will have dire implications on the Ghanaian economy.

According to him, if the debt exchange programme is carried out in its current form, it would result in many banks losing as much as 60% of their revenue since they depend on government treasury bonds.

“To be blunt, most banks will be making losses when you combine this loss of income with the high default rate on loans to SMEs and corporates,” he emphasized

In a Facebook post, he said the main implication of the proposed debt exchange would be a general slowdown of the economy and “we will either not grow as anticipated, and, perhaps, even not exceed 2% GDP growth this year.”

He said government will have no other option than to cut down its discretionary expenditure and other non-productive policy programmes.

“We also expect a reduction in the construction of new roads as well as a slowdown in road maintenance, and a lot of non-essential government workers’ salaries being delayed or not paid at all, etc i.e. more expenditure accruals,” he stated.

Read Alex Mould’s full post below: 

Government seems not to have thought through this debt exchange programme thoroughly; the economic contraction implications are dire!

There will be a general slowdown of the economy and we will either not grow as anticipated, or, perhaps, even not exceed 2% GDP growth this year.

This will be due to less demand, which means that there will be less production, fewer imports, and fewer services being given to the populace.

Now, what does this mean for government revenue?!?

Since the demand for goods and services will go down, it means people will be paying fewer taxes. Additionally, due to reduced demand – a result of fewer discretionary expenses – there be fewer imports and as such there will be fewer duties and other excise taxes collected at the ports.

So, government revenue will plummet and they may fall short of making the projected revenue in the approved budget.

The Debt Exchange, if carried out in its current form, will result in many banks not getting any income from Government Treasury Bonds they hold for almost 1.5 years! In some cases, this forms up to 60% of their revenue and is a huge contributor to their profits! To be blunt most banks will be making losses when you combine this loss of income with the high default rate on loans to SMEs and corporates.

With lower-than-expected revenue, Government will have no other option than to cut down its expenditure.

The first to go will be discretionary expenditure and other non-productive policy programmes.

We also expect a reduction in the construction of new roads as well as a slowdown in road maintenance, a lot of non-essential government workers’ salaries being delayed or not paid at all, etc i.e. more expenditure accruals.

Furthermore, with the statutory payments, like pension contributions, the situation will be worse than it currently is i.e. gov’t backlog of unpaid pension contributions of gov’t workers.

Government needs to revisit this debt exchange program and create policies that will bring back confidence in the economy, as well as attract investment to spur the economy; resulting in more spending and increased savings. CNR