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The last administration of President Mahama borrowed heavily from banks to sustain inefficient state-owned energy companies at the expense of the private sector.

The private sector has long been ignored by banks in favour of safer government debt and treasury bills. At the same time, in an effort to curb inflation, interest rates are among the highest in sub-Saharan Africa. “The cost of credit in Ghana is staggeringly high, at around 30%,” says Derrick Mensah, senior analyst at African Alliance based in Accra. “A lot of private companies in Ghana can’t really afford this.
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Sionle Yeo, managing director at Société Générale, Ghana, agrees: “Banks want to lend more to the private sector, but it is difficult because interest rates are so high. Some companies come to us with unrealistic business plans that don’t stand up to stress tests because of high interest rates. For now, these projects just aren’t bankable.

Over the last decade, the government in Ghana borrowed heavily from the banks to prop up state-owned enterprises (SOEs) in the energy sector. The banks obliged. Four SOEs were the heaviest borrowers – the Volta River Authority (VRA), Ghana’s main electricity supplier; the Tema Oil Refinery (TOR); the Electricity Company of Ghana; and transmission utility GridCo. The VRA and TOR depend on imported crude oil to function. Ghana’s bulk distribution companies (BDCs), private companies licensed by the government since 2006 to buy and sell petroleum products, also borrowed heavily from the banks on the premise that the government would pay any foreign exchange shortfalls involved. Banks also supported the BDCs by providing letters of credit. The BDCs were supposed to be a tool to control capital flight in the oil and gas sector – an industry that has long been dominated by international companies that repatriated profits offshore.

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But problems started to arise in 2009 when the government’s own oil distribution company and oil storage and transportation company began to compete directly with the BDCs. “BDC’s were forced to cut prices in return so that they didn’t lose customers, and debts mounted,” says the head of business development at an infrastructure investment company in Ghana. Mismanagement in the energy sector was supposedly rife. “Some of the SOEs are led by government officials that don’t really understand the sector,” says one local energy developer. “Very little was invested in capital expenditure and they were largely inefficient.”

Much of the debt was restructured to reduce interest payments and foreign currency pressures. Akufo-Addo’s government has expressed its intention to keep the act in place. In the case of VRA, a total of C2.2 billion, around half of the debt it owed, was restructured. For TOR, it was C0.9 billion. The new administration is looking to see if ESLA can also help repay some of the debt owed to the BDCs.

So far, ESLA seems to be working. All the banks that Euromoney spoke to had received payments on time and in full. When financial data for 2016 for the banking sector becomes available, analysts and bankers alike predict that NPL ratios will show falls and banks will be in a much better position to lend. Confidence in the new administration has also had some positive side effects on Ghana’s economy. “Inflation has come down and Eurobond yields have tightened slightly,” says Amanfu. Treasury bill interest rates in Ghana have also fallen on the back of declining inflation. In December alone, 91-day and 182-day interest-rate equivalents dropped by 604 and 620 basis points respectively. In mid March, 91-day T-bill rates were 16.4%. The hope is that this will have a positive effect on interest rates in the banking sector and will encourage new businesses to borrow. But so far, the fall in treasury bill rates has not had the desired effect. “It’s not going to be straightforward,” says George Bodo, head of banking research at Ecobank. “Firstly, we are seeing a sustained negative divergence between treasury bills and overnight interbank rates, which represent banks’ liquidity and hence the funding environment. Usually these two pricing benchmarks need to align to ensure transmission efficacy. Moreover, the significant economic issues around the electricity crisis and low commodity [price] environment are still taking its toll on the economy. I predict inflation rates will still remain quite high throughout 2017.”


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