Rates take a dip

The Bank of Ghana has reduced its main interest rate by 100 basis points to 29%, its first rate cut since 2021, as inflation declined for…

The Bank of Ghana has reduced its main interest rate by 100 basis points to 29%, its first rate cut since 2021, as inflation declined for the fifth consecutive month in December 2023. Inflation dropped to 23.2% year-on-year in December from 26.4% in November and 35.2% in October. Governor Ernest Addison anticipates further declines, with inflation projected to reach 13%-17% by year-end and 6%-10% by 2025. The Central Bank aims for 8% inflation with a 2% margin of error. Factors contributing to disinflation include a tight monetary policy, stable crude oil prices, and a steady exchange rate, Addison said.

Ghana’s fiscal policy implementation has closely adhered to the requirements outlined in the IMF ECF-supported programme. The latest provisional data indicates positive progress towards meeting performance criteria targets, including the primary fiscal balance on a commitment basis, non-accumulation of external debt payment arrears, and avoidance of new collateralised debt by the central government and public entities. Despite these achievements, there are notable challenges in the financial sector. A combination of a tight monetary policy stance and increased risk aversion among banks due to rising credit risks has resulted in sluggish private sector credit expansion. In December 2023, the growth in private sector credit slowed to 10.7%, a significant drop from the 31.8% annual growth observed in December 2022. Real terms indicate a contraction of 10.2% in credit to the private sector, compared to a 14.5% contraction in the same period the previous year. The Central Bank reports an improvement in the banking sector’s performance, attributing it to the receding adverse effects of domestic debt restructuring and macroeconomic challenges. As of the end of 2023, the banking sector is described as stable, liquid and profitable. Profitability has rebounded from the 2022 loss position, with increased net interest income, fees and commissions. The sector’s balance sheet is robust, supported by asset growth fueled by deposits. However, a critical analysis of the government’s recapitalisation strategy raises concerns. Despite efforts to assist commercial banks, their participation in the Domestic Debt Exchange Programme has left many on the brink of insolvency. The collapse of Ghana’s bond market amplifies the potential risks, casting doubt on the effectiveness of the central bank’s decision to provide junk bonds to commercial banks to bolster their balance sheets. This could lead to solvency crises for locally-owned banks in the long run. Commercial banks prioritise short-term securities, particularly treasury bills, with rates as high as 30%. This has resulted in crowding within the private sector. The recent reduction in the policy rate of the Bank of Ghana from 30% to 29% may not yield the anticipated positive impact, as commercial banks may be hesitant to lower the cost of borrowing for individuals and firms. Overall, challenges persist despite positive indicators, requiring careful consideration and potentially revised strategies to address the underlying issues in the financial sector.