The government has revealed its commitment to inject a substantial $500 million as initial capital into the Ghana Financial Stability Fund (GFSF), set to commence operations by the conclusion of October 2023.

This announcement is detailed in the Operational Document of the Ghana Financial Stability Fund, which was released by the Finance Ministry on October 9, 2023.

The Finance Ministry further explains that the government will extend financial support to the Fund, aligning with the resources outlined in the Extended Credit Facility (ECF) macro-framework baseline.

These resources will be deployed in a phased approach to address the recapitalization needs of the financial sector.

The initial phase of funding for the Ghana Financial Stability Fund (GFSF) will be sourced as follows: a $250 million concessional loan from the World Bank/IDA and an additional $500 million from the government.

The government's contribution will be a combination of cash and marketable bonds, aimed at bolstering capital reserves within the financial sector. This initiative is in response to the effects of the government debt operation.

The Government of Ghana Bond will also participate in the issuance of one of the longest-dated new benchmark bond series introduced under the Domestic Debt Exchange Programme (DDEP).

Furthermore, the government is anticipated to offer essential fiscal support to ensure the stability of the financial system. In cases of cash flow shortfalls, the Ministry of Finance will collaborate closely with the IMF to address the issue, particularly given the challenging financing conditions within the domestic market.

To ensure effective governance of the Ghana Financial Stability Fund (GFSF), the following measures will be implemented:

a. The Fund will be overseen by a nine-member Investment Committee (IC), consisting of four independent experts nominated by industry associations and subsequently approved by the Ministry of Finance.

b. Development Partners (DPs) may recommend observers to the committee, subject to the Minister for Finance's approval. Other DPs may offer support to either Fund A or B under terms agreed upon with the Government of Ghana (GoG).

c. Fund A2 (Equity and Preference Shares) will be initially funded by GoG with funds or bonds up to $500 million, intended for Banks, Specialized Deposit-Taking Institutions (SDIs), Insurance companies, Fund Managers, Broker Dealers, and other relevant entities. Fund A1 (Debt Only) will be seeded by a $250 million World Bank/IDA loan, designated exclusively for Banks and SDIs. Details regarding this loan will be handled confidentially by the Ministry of Finance.

d. Recapitalization plans, instruments, and criteria for financial institutions will be subject to approval by the Bank of Ghana and other relevant regulatory bodies. Based on these approvals, the Investment Committee (IC) will make investment decisions concerning eligible financial institutions.

e. The Ghana Amalgamated Trust Fund (GAT) will function as the Secretariat for Solvency Fund A2, establishing a dedicated operational framework for managing the Fund.

f. Fund A1 will have a project unit operating within the Ministry of Finance, specifically pertaining to World Bank-funded projects.

As stated by the Finance Ministry, the government is fully committed to taking all necessary measures, within the available resource framework, to uphold the stability of the financial system. The Ministry of Finance (MoF) will collaborate closely with the IMF to tackle any potential cash flow deficits, particularly in light of the challenging financing conditions within the domestic market.

The Ghana Stabilization Fund will provide support to the following institutions:

A. Banks

B. Special Deposit-Taking Institutions (SDIs) and Rural and Community Banks (RCBs)

C. Insurance companies, fund managers, collective investment schemes, and broker-dealers

The Ghana Financial Sector Strengthening Strategy serves as the foundational plan for the establishment of the Ghana Financial Stability Fund (GFSF). The primary objective of this fund is to mitigate the potential adverse impact that the Domestic Debt Exchange Programme (DDEP) might have on financial institutions, including banks, special deposit-taking institutions (SDIs), insurance companies, and the capital market. In parallel, the government is also developing the Insurance Sector Strengthening Strategy (ISSS) with the assistance of AfDB, slated for implementation by 2024.

The allocation of budgetary resources for the establishment of the Ghana Financial Stability Fund (GFSF) is aimed at reducing the adjustment burden on the financial sector, particularly banks and insurance companies, over the medium term. The ultimate goal is to prevent any systemic financial crisis that may arise.

The Ghana Financial Stability Fund (GFSF), established by the Government of Ghana (GoG), serves as an additional safety net provider, specifically designed to help mitigate the potential repercussions of GoG debt operations on the financial sector.

The Operational Framework for the Stability Fund outlines key aspects of the GFSF:

Sources of Funding

Eligibility Criteria for Participating Financial Institutions (PFIs)

Terms and Conditions

Governance Arrangements

Regarding conditions for funding banks and other financial institutions:

Solvency support funding will be structured based on commercial terms, resembling what a private investor would receive. This approach is not intended to be a bailout. In certain cases, concessional commercial rates might be considered, contingent upon improved governance structures.

The GFSF will offer solvency support to eligible financial institutions (FIs), designed to avoid moral hazard and encourage orderly unwinding and market-based solutions in the long term.

Funding for solvency support will be structured commercially and not as bailouts. In some instances, concessional commercial rates may be applied, subject to improved governance structures.

Generally, the sources of recapitalization for banks and other FIs over the next three years will follow this prioritized order:

a. Recapitalization by existing shareholders in accordance with the capital regulations established by the respective regulators.

b. Infusion of new equity capital by new investors, accepted by existing shareholders, and certified as fit and proper by the respective regulators.

c. Support from the government for eligible FIs that meet specific criteria defined for accessing solvency support from the GFSF.