Prompt contractors’ payments could significantly reduce NPLs – BoG

To sustain the gains made in the recent financial sector reforms, debts owed contractors by any institution – especially central government must be paid on time so that contractors can also settle their indebtedness to banks on time, Ms. Elsie Awadzi, Deputy Governor of the Central Bank, has said.

She noted that if contractors are paid on time and they in turn pay-off their debt with banks, the worries of banks seeing growth in their Non-Performing Loans (NPLs) would become a thing of the past and the financial sector clean-up – which has so far cost the taxpayer in excess of GH¢13billion and could balloon to GH¢20billion – will not be repeated.

“As regulators, going forward we are going to encourage and expect that all debtors pay their debts on time, because that is really critical to sustaining gains from the [financial sector] reforms.


“If you take a loan from a bank it is important that you pay your banker, and if contractors take loans from the banks they are expected to pay; and so if they are expecting payment from elsewhere to pay the banks, we hope that those also pay on time,” she said.

Mrs. Awadzi was speaking as part of a panel comprising financial industry experts that discussed the topic ‘The Critical Role of Stakeholders in Sustaining Financial Stability: Post Financial Sector Clean-up Issues’, at the 2019 edition of the Ghana Economic Forum (GEF) that came off in Accra last week.

To her, paying debts on time has become very crucial and important because of how the central bank, which regulates all deposit-taking institutions including banks, is assessing banks’ capital these days in the face of Basel II & III, Fit and Proper, corporate governance guidelines, and several other newly-introduced directives.

“They are very stringent, so we must assure that banks have buffers of capital; it is really critical that debts are paid on time, so we encourage that in the chain all bottle-necks which affect the banks are dealt with,” she added.

According to the latest September 2019 Bank of Ghana Banking Sector Report, the industry’s asset quality improved significantly during the period under review. The industry’s stock of Non-Performing Loans (NPLs) contracted by 4.2 percent to GH¢6.91billion in August 2019, from GH¢7.21billion in August 2018.

The decline in the stock of NPLs coupled with a recovery in credit growth translated into a lower NPL ratio of 17.8 percent in August 2019 from 21.3 percent in August 2018 – with the private sector accounting for 97.6 percent of the industry’s NPLs in August 2019, up from the 94.4 percent recorded in August 2018.

Despite the improvement in NPLs, government still owes contractors close to GH¢2billion – with some of the debt as old as five years; and this has led to various contractor associations calling on government to quickly defray those debts so they can also pay the banks.

Alhassan Andani, President of the Association of Bankers, touching on the same topic explained that contractors cannot be owed by government for 18 months without being paid, since that will result in high non-performing loans – which could incur the central bank’s wrath.

“What we have found in the past six years is that the average life of any certificate that you discount is 18 months. Now, 18 months for a certificate accruing interest on discount is quite tough. So, I think we have to, as a whole, improve that payment system.

“Typically, if there is a contract for say GH¢5million, your first advance may be GH¢1million; but the contractor may bring job back certified as say GH¢1.8 million, and you will discount that and give the money back to the contractor. But if you hold that certificate for 18 months accruing interest, then that is a problem. It is all about the fiscal tightness and for us to have a payment regime that keeps the wheel rolling,” he added.

Charles Adu Boahen, Deputy Finance Minister, explained that the reason government still owes some contractors is because, in the last four to five years ago, the majority of contracts were given under the sole source basis – and most of those contracts were granted at prices that were two to three times the contract’s value, which means there was no value for money.

“When you start from that premise, you already have a situation where you have gone to borrow money from somewhere to do some work – where the value of that work will never be equivalent to those monies you borrowed. A portion of that valuation was premised on the assumption government was not going to pay on time. So, because government is not going to pay on time, the contractors build that into pricing the cost of time – which is 18 months and so forth, and so it becomes a vicious cycle,” he added.

What the current government is doing differently, he noted, is that it is trying to be more disciplined, stay within the resource envelope, and award only contracts government can afford to pay.

“If you cannot afford to pay you create arrears and delays, and the ripple-effect is felt across the financial sector and the whole economy. You have to recognise that there are political pressures, but those have to be managed as well. Now we are making sure that contracts are awarded on competitive bidding; value for money is reviewed and it is a tender process, not sole source contract, so that we get value for money,” he added.