Earlier this week, the Governor of the Bank of Ghana, Dr Ernest Addison, again called for what he has described as “a recalibration of the financing mix towards more domestic financing by domestic investors to reduce the burden on exchange rate, reserve accumulation and monetary policy.” In plain English he is calling for local institutional investors to take on a bigger proportion of government’s cedi denominated domestic debt, which is increasingly being held by foreign investors who have tended to buy up most of the debt securities of two years tenor or longer, which they are allowed to invest in.
While in the past both government and its central bank have welcomed foreign investment in is medium to long term debt securities because foreign investors are more willing to invest long term, at lower yields and with foreign currency inflows to boot, recent experience has shown a dire downside. With dollar denominated investment yields now on the rise, investors are moving out of cedi denominated investments into dollar denominated options leaving Ghana with demands for its already inadequate foreign exchange reserves and a financing gap which have led to the cedi’s depreciation and dwindling gross foreign reserves and import cover in the face of resultant balance of payments deficit.
To get around, this government is offering rising yields on its medium to long term debt securities, but this is also translating into rising debt servicing costs, the avoidance of which was a key reason for allowing foreign investors in, with their lower yield demands, in the first place.
Meanwhile, while all this is happening a sharply growing number of institutional investors, which now include private pension funds and collective investment schemes in addition to the traditional ones such as SSNIT and the insurance companies, are sitting on a growing cache of investible long-term funds. Importantly, such investors – particularly the pension funds – are necessarily required to hold conservative, low risk investment portfolios which prioritize protection of capital. This is exactly what government debt securities offer.
Why then is government persuading such private pension funds to invest in the equity of selected banks under the Ghana Amalgamated Trust initiative, some of which offer much lower returns on equity and more importantly, much higher risks than the medium to long term government debt securities that the BoG Governor is correctly suggesting should be invested in by domestic institutional investors? Surely, apart from the macro-economic gains he has listed, such investments would guarantee the protection of pension contributions and would offer higher returns on investment to those contributors even if the government securities yields were significantly lowered to save the country a substantial part of its currently rising debt servicing costs on its medium to long term portion of its public debt.
This is what government’s fiscal policy should aim at and so should the investment policies of the various domestic institutional investors, particularly those that should have conservative, risk adverse investment portfolios such as private pension funds.