THE government must pay up its indebtedness to contractors to help inject credit into the banking sector and stimulate growth in the non-extractive sector of the economy, fiscal policy think tank, the Institute for Fiscal Studies (IFS), has said.
It said the government’s direct and indirect indebtedness to banks and contractors had contributed significantly to weakening credit flow in the economy between 2017 and the first quarter of this year.
The result, it said, was the bearish growth rates that the non-extractive economy, comprising the services and the agricultural sectors, the manufacturing, construction and electricity subsectors, had endured within the period.
“The services sector receives more than half of credit in the country and so in a situation where credit growth is weak, and indeed credit growth has been weak in the last two years, the services sector, which is more exposed to banking system credit, has suffered more,” an Economist and a Research Fellow at the institute, Mr Leslie Dwight Mensah, told the Graphic Business on July 23.
“It is the weakness, particularly in the services sector, that is influencing the weakness in the non-extractive economy,” he said.
When the situation was further interrogated, he said, it turned out that “a major reason is the high rate of non-performing loans (NPLs) and that problem was partly traced to the government’s direct indebtedness to the banks as well as the government’s indirect connection with some of the NPLs through contractors, supplies and the energy sector debt.”
Mr Mensah spoke to the paper on the sidelines of the institute’s press conference on July 22 to review the economy ahead of the Mid-Year Review (MYR) next week.
At the event, which Mr Mensah addressed, he said the non-extractive sector had been most negatively affected by the financial sector crisis – the Bank of Ghana (BoG) reforms that saw nine banks and more than 386 microfinance and microcredit companies resolved.
To turn the situation around, he said “a robust financial sector recovery is needed.
“This implies, crucially, that the government must pay its outstanding bills to private sector contractors and service providers quickly to resolve the arrears overhang that has contributed to the high rate of nonperforming loans in the banking sector and limited lending.
“The government needs also to step up the fiscal revenue effort to protect growth-inducing investment spending from being slashed further in a bid to attain deficit targets,” he added.
The issue of contractors’ debt is a thorny one for the government.
On July 10 this year, contractors that had executed various government projects but were yet to be paid massed up at the Ministry of Roads and Highways to demand their payments.
It followed serious of agitations by the Association of Road Contractors, which said none of its members had been paid, since 2016.
In May this year, the sector Minister, Mr Kwasi Amoako-Attah, said the government would soon release about $1 billion to be used to pay the contractors, a pledge that is yet to be fulfilled.
Although the govenment is yet to comment on the extent of its indebtedness to the firms, a Parliamentary report released in December last year put the debt at GH¢3.7 billion.
Mr Mensah said in spite of these arrears, the government was squeezing spending in that sector.
“Also, if you look at what the government has spent to clear arrears in 2017 and 2018, you will see that it is far short of the validated arrears of GH¢5.4 billion or so that they declared around 2017,” he said.
The 2019 Budget estimates that arrears clearance will cost the government GH¢800 million.
“There is also the energy sector arrears and so we think that these arrears have contributed to the weakness in credit growth,” he said.
Credit growth and NPLs
The annual growth of private sector credit contracted in the first part of 2018 was negative but picked up steadily throughout the rest of that year into the first.
It peaked at 11.4 per cent March this year before declining to 7.1 per cent in June.
Between 2017 and June this year, the NPL ratio, which is the proportion of loans whose repayment dates have passed, peaked at 22.9 per cent in November 2017 before easing to 21 per cent in January 2018.
It strengthened again to 22.6 per cent in June 2018 before resuming a downward trend from October last year to February this year.
The rate was 18.1 per cent last June.