The Financial Sector Clean-Up Levy: One of the proceeds of the untactical banking sector reforms

ONE of the things time does in human life is to expose the future consequences of our present decisions. This is what has happened to the NPP government over a policy they took on the financial sector in 2017.

In 2017, the NPP government took a firm decision that was titled "FINANCIAL SECTOR CLEAN UP" and ended up collapsing about 9 different banks, 23 different Savings and Loans companies, 386 different Microfinance companies, and 53 fund management institutions in the country.

With time, it has become clear that was and has been draconian to the Ghanaian economy to a level where a new tax has been introduced to sweep money from the pockets of Ghanaians to settle part of the debt.

According to an article published on the OXFORD BUSINESS GROUP website titled "Ghana's banking sector clean-up has created a more sustainable industry", the Bank of Ghana conducted an asset quality review in 2015 and 2016, and came out with a report that there were severe challenges with solvency, liquidity and asset quality in Ghana's banking industry, with some banks showing significant under-provisioning and capital shortfalls. In response to this, the new administration led by Nana Akufo-Addo decided to salvage the situation by implementing regulations and directives to strengthen the sector and restore public trust in the financial sector.

Several regulations were put in place but the striking was the abnormal increase in reserves: a fraction of the banks' deposits that are to be paid to the Bank of Ghana for the banks to be able to operate. The reserve is taken for safety purposes, after paying the

reserves, the excess deposit, or the surplus deposit is what the banks use to manufacture loans.

The new administration decided to raise the required reserves from GHS 120 million to GHS 400 million and instructed the banks to meet this requirement by 2018. This increased in required reserve led to some banks merging whiles 9 banks were collapsed because they could not meet the requirement at the stipulated deadline.

The financial sector clean-up did not only affect banks, it also affected savings and Loans companies, Microfinance companies fund managers in the country. Between 2017 to the end of 2018, about 23 different savings and Loans companies, 386 Microfinance companies, and 53 fund managers were collapsed, according to the NPP manifesto 2020 (page 14). Even though there are some improvements in respect of asset growth and profit in the sector, there have been negative trends in deposit growth, loan growth, and also cost of borrowing has increased substantially.

The relative comparison of the financial sector before the reforms and after the reforms indicates that there has been an improvement in the financial sector. An excerpt from Page 18 of the 2021 budget statement highlight reads that "The financial sector clean-up and the refund of monies to depositors have restored investor confidence and protected the hard-earned savings of millions of Ghanaians. But this has come at a huge cost of over GHs 21 billion to the Government. We, therefore, propose the introduction of a financial sector cleanup levy of 5 percent on profit-before-tax of banks to help defray outstanding commitments in the sector. The levy will be reviewed in 2024."

From the above, even though the government boast of some improvement, it still admits that the policy has cost the Ghanaian economy abnormally. This matter of cost raises questions on the economic logic of the policy that: WAS IT ECONOMICALLY GOOD FOR SUCH A POLICY TO BE IMPLEMENTED?

From the side of the ruling NPP, they had stated in their 2020 Manifesto that "The alternative would have been millions of depositors losing their savings and over 10,000 individuals losing their jobs". By using the word "ALTERNATIVE" instead of "ALTERNATIVES", the NPP government implied that they did NOT have many policy alternatives to choose from and that ONLY ONE policy alternative existed contrary to what they implemented or?

One of the key things a good policy should achieve when implemented is that it ought to produce a net benefit to the economy. All things being equal, it becomes a bad decision when the social and economic cost of a policy outweighs the social and economic benefit to an economy. Even though the Banking sector had challenges, the impatient decisions and regulations have, with time, been shown to be a draconian policy that has created further mess especially with the levy which compels Ghanaian to pay including those who were negatively affected.

By estimation, the government of Ghana needed about GHS 10 billion to maintain these financial institutions. However, the government opted for a policy that collapsed these 471 different financial institutions and borrowed GHS 21 billion to pay the customers of these financial institutions. A simple mathematical deduction of GHS 10 billion from GHS 21 billion gives a difference of GHS 13 billion. It means the country preferred an additional cost of GHS 13 billion, an amount that could have supported the free SHS policy for about 12 good years. This amount will be paid by all Ghanaians including those who lost their jobs.

On the issue of employment, millions of Ghanaians have their jobs and employment affected by the same financial sector clean-up. Have you ever sat down to analyze the people who lost their jobs? Think of it from this perspective: one bank had many branches across the country and at each branch, there were cleaners, security personnel, tellers and the lists go on to the top management level. Kindly multiply the number of these workers by the number of branches and see the total employment for one bank, then imagine employment the 9 banks offered to Ghanaians. If this analysis is extended to the 23 savings and loans companies, the 386 microfinance companies, and the 53 fund management institutions, one would realize indeed millions of people lost their jobs.

Not only did the policy affect the direct workers in these financial institutions, but also the many informal sector businesses and their respective owners. In one interview, one Abbosey Okai spares part dealer revealed that they were unable to secure credit facilities or loans from the commercial banks and that the microfinance companies and the savings and loans companies were their sources of funds to boost their businesses, so the collapse of those institutions had greatly affected their business to the extent that some people had exited from the market.

Meanwhile, speaking at the opening ceremony of the sixth Ghana Economic Forum organized by the Business and Financial Times held in the year 2017, the senior minister Yaw Osafo Marfo had said that the public sector was choked in terms of employment. Despite this knowledge on the unemployment pressure, was it a good move by the government to implement the financial sector clean-up policy that led to the loss of private jobs?

Even the depositors in these financial institutions had their share of the negativity of the policy. The payment was delayed drastically and the amounts were not adjusted to meet the inflation level. The value of people's money had reduced as a resulted of the price increased between the time the money was deposited and the payment period. Many people's businesses suffered from the policy with even some collapsing, people became impotent in performing their duties in their families, others died out of it. The aged especially the pensioners had their tough times surviving the hardship.

Psychological and emotional trauma cannot be underestimated. The series of demonstrations coupled with the formation of associations and numerous press conferences indicated how the financial sector clean-up had affected the lives of the customers. After about 2 years of cries and numerous actions in which the government took a de minimis action, the government finally settled the customers.

Another economic implication of the policy is that it has reduced the number of Ghanaian-owned banks. This issue appears to be light but it has economic weight on the future of the country. If a Ghanaian invest in the country and obtains profit, the Ghanaian reinvest in the same country, create more employment and help reduce the pressure on the government. However, if a foreigner makes a profit, the possibility that the profit will be taken to his country is very high and the Ghanaian will not benefit a lot in the long run. Look at the investment done by some owners of these institutions and the jobs they created, has it ever been done by the foreign banks?

Despite the death of some depositors, the suffering of other depositors, those who lost their jobs, and the businesses that collapsed, the country Ghana directly incurred a cost of GHS 21 billion and now, a tax ought to be introduced in these hard times to raise revenue to clear the outstanding debt. However, a well-thought policy such as a private-public partnership with active participation among other alternatives could have saved the lives of the depositors that died, it could have free the pensioners from suffering, businesses would not have collapsed, the cleaners and security personnel would not have lost their jobs and the Ghanaians owned banks would have been maintained.

It is therefore clear that the financial sector clean-up was a further mess on the economy of Ghana considering the consequences it has posed to the country's economy with the INTRODUCTION OF THE FINANCIAL SECTOR CLEAN UP LEVY which can even affect people's taste of depositing their money at the banks. Is it good for a party that believes in capitalism to kill jobs and businesses instead of saving jobs and businesses? Is that not lost in the ideological track and essence of the party's existence? Hmmmmmmmmmmmm.

KWEKU MENSAH AMPONSAH,

BA ECONOMICS WITH PHILOSOPHY,

UNIVERSITY OF GHANA, LEGON.

(0504965462)