The ability of financial sector institutions to finance the government’s large fiscal deficit would rely on robust deposit growth, a report by the Institute of International Finance (IIF) has said.

The report, which examined fiscal developments in eight sub-Saharan African countries, said Ghana was among the top three countries where banking institutions had taken on an unprecedented role in financing fiscal deficits.

“While Ghana and Côte d’Ivoire were able to tap the international bond market—the former before the COVID-19 shock and the latter thereafter—domestic financial institutions purchased large amounts of sovereign debt. Relative to GDP, the increase in banks’ claims on government was biggest in Angola, Zambia, Ghana and Kenya. In other countries, first and foremost Ghana, central banks also provided fiscal support and took some pressure off local financial institutions,” the institute, which is a global financial services industry trade body, said.

Across sub-Saharan Africa (SSA), local banks, and in some cases other financial institutions, were of critical importance for providing funding to governments, it added.

Ghana’s domestic debt as at December 2020 stood at GH¢149.83bn, representing 39.1 percent of GDP and an increase of 42 percent from the 2019 position. The proportion of the debt held by the banking sector stood at 52.3 percent, comprising the Bank of Ghana with 22.4 percent and deposit money banks with 29.9 percent.

The public debt-to-GDP ratio increased from 62.4 percent in 2019 to 76.1 percent by the end of December 2020, representing a 13.7-percentage-point increase.

Ghana is still grappling with the effect of the COVID-19 pandemic on government finances, similar to other countries across the world, as cyclical revenue weakness, fiscal stimulus measures, and additional spending related to the public health crisis widened deficits and led to a sharp increase in sovereign debt.

In 2020, government’s revenue and expenditure performance resulted in an overall fiscal deficit of 11.7 percent of GDP (excluding the financial sector clean-up cost) compared to the programmed deficit target of 11.4 percent of GDP. This placed Ghana second-highest in terms of fiscal deficits in SSA, according to the IIF.

“What is more, while growth is expected to bounce back across SSA in 2021, the process of fiscal consolidation will be a multi-year undertaking and, thus, financing needs will remain elevated over the next few years.”

The institute said with deposit growth likely to gain momentum in line with the anticipated output recovery in 2021, banks should be able to expand lending to corporates and households.