B&FT Editorial: Credit crunch affecting private sector

Fresh data from the Bank of Ghana (BoG) shows banks still favour investments in government securities over and above extending credit to the private sector, meaning that businesses have access to less purchasing power in real terms.

Governor Ernest Addison, in a press briefing for the 117th Monetary Policy Committee (MPC) meetings, revealed that compared to February 2023, credit extended to businesses and individuals has plummeted from 29.5 to 5.1 percent in February 2024.

This translates to a significant decrease in the availability of funds for businesses to invest, expand and create jobs.

It is further supported by the data which reveals a surge in bank investments in short-term Treasury and BoG instruments.

For instance, year-on-year growth in these investments reached 67.6 percent in February 2024 – with a value of GH¢53.6billion – compared to a much lower 36.9 increase the previous year.

“Credit to the private sector by banks continued to remain weak”, the BoG Governor indicated.

Analysts remain concerned about the potential ramifications of this credit crunch stating that limited access to credit can act as a handbrake on economic growth as businesses struggle to expand, invest and create jobs.

Indeed, banks might be exhibiting risk aversion due to economic uncertainty and rising non-performing loans ratio – which reached 24.6 percent in February 2024. That said, the high-interest rate regime remains a cause for concern.

Nonetheless, the central bank said its surveys indicate moderate improvements in business sentiments.

“While the consumer confidence index remained broadly unchanged from the January survey, business confidence sentiments improved further as firms indicated meeting their short-term targets and expressed optimism about company and industry prospects.

Results from the confidence surveys were broadly aligned with the observed trend in Ghana’s PMI, which also signaled an improvement in business conditions. The PMI rose marginally above the 50.0 benchmark to 50.2 in February 2024, and from 48.4 in January,” Dr. Addison stated.

Decrease in lending hinders business expansion, investment, and economic development. It can also limit job creation and hinder the growth potential of small and medium-sized enterprises. Steps thus have to be taken to reverse this worrying trend.