What is the domestic debt exchange?
The domestic debt exchange is a programme launched by the government of Ghana in December 2022, which invites holders of domestic notes and bonds issued by the Republic, including E.S.L.A. and Daakye bonds, to voluntarily exchange them for a package of new bonds with longer maturities and lower interest rates. The programme aims to reduce the government’s debt servicing costs and improve its debt sustainability. The exchange excludes treasury bills and notes and bonds held by individuals.
How does it affect rural and community banks?
Rural and community banks (RCBs) are financial institutions that provide banking services to rural and peri-urban areas in Ghana. They are regulated by the ARB Apex Bank, which acts as a mini-central bank for them. RCBs play a vital role in promoting financial inclusion and supporting local economic development.
However, RCBs are also facing some challenges from the domestic debt exchange programme. According to Dr Toni Aubynn, the chairman of the board of directors of ARB Apex Bank, RCBs held significant funds in government-related bonds that have been exchanged for new holdings under the programme. This has resulted in a loss of income and liquidity for RCBs, as they receive lower interest payments and have less access to cash. Moreover, RCBs are already suffering from the effects of funds that have been locked up in some financial institutions regulated by the Securities and Exchange Commission.
Dr Aubynn stated that the domestic debt exchange programme has compounded the already fragile situation of many RCBs in the country. He said that the ARB Apex Bank would continue to engage with the government and the regulators to help salvage the situation and ensure improvement and sustainability in the rural banking industry.
What are the mitigating measures?
To help manage the potential impacts of the domestic debt exchange on the financial sector, the financial sector regulators have deployed some regulatory and supervisory tools to mitigate risks to financial stability. These include:
- Regulatory forbearance on liquidity and solvency: Financial sector regulators have temporarily reduced regulatory capital and liquidity requirements for regulated firms and schemes that voluntarily participate in the debt operation. They have also suspended or delayed any new rules that would have an adverse impact on liquidity or solvency.
- Ghana Financial Stability Fund (GFSF): The GFSF is being established with a target size of GHC 15 billion to be provided by the government of Ghana and its development partners. The fund will provide liquidity support to financial institutions that fully participate in the debt exchange. All financial institutions, including RCBs, can access the GFSF for augmented liquidity support, with effect from the date of completion of the debt exchange. The fund will be managed by the Bank of Ghana under unique operational guidelines being developed by the Financial Stability Council.
Dr Aubynn assured shareholders that the ARB Apex Bank would pay dividends to them as soon as the restrictions on debt exchange programme were relaxed. He also announced that the much-awaited Financial Sector Development Project (FSDP), under which the anchor mobile agency and internet banking solutions were to be delivered, was gaining momentum. He said that the internet banking application would be ready by April 2024, which would bring delight and convenient banking to customers and a major turnaround in the fortunes of RCBs.
