BoG intensifies efforts to manage cedi liquidity

The Bank of Ghana (BoG) has announced a series of measures aimed at addressing excess liquidity in the market, in a strategic move to bolster lending to the private sector.

Dr. Ernest Addison, Governor of the Bank of Ghana, disclosing the measures during the 117th MPC meeting’s press briefing in Accra, said effective April 2024, the BoG will implement adjustments to the Cash Reserve Ratio (CRR) for banks, structured to incentivise increased lending to the private sector.

Under the new policy framework, banks with loan to deposit ratios above 55 percent will be mandated to maintain a CRR of 15 percent. Banks with loan to deposit ratios ranging between 40 percent to 55 percent will face a CRR requirement of 20 percent.

Those with loan to deposit ratios below 40 percent will be subject to a higher CRR of 25 percent.

Dr. Addison underscored the necessity for these measures, noting the prevailing trend where many banks prioritise investments in government bills or central bank bills over lending to the private sector.

“The reason being that if you look at the banks’ books, you see that quite a number of banks are not lending. The credit to the private sector is very weak,” he said.

He further elucidated on the intended impact of these measures, stating: “So the banks will now have to make an extra effort to do what banks are supposed to do, which is financial intermediation and really not just investing in high-yielding government or Bank of Ghana securities”.

The move comes in response to persistently weak credit to the private sector, with private sector credit growth at a mere 5.1 percent as of February 2024, compared to the 29.5 percent growth recorded in the same period last year.

In contrast, investments in government and Bank of Ghana instruments by banks saw a substantial increase of 67.6 percent year-on-year.

Additionally, annual growth in monetary aggregates witnessed a considerable decline, reflecting the BoG’s stringent liquidity management efforts. Broad money supply (M2+) grew at a moderated pace of 25.5 percent in February 2024, a significant drop from the 44.9 percent recorded in February 2023.

The governor’s announcement indicates a strategic shift toward creating a more robust lending environment, with a focus on stimulating economic activity through increased credit to the private sector. However, the effectiveness of these measures in reshaping the lending landscape and supporting the stability of the cedi remains to be seen.