BoG halts belt tightening squeeze
Heightening concerns of economic meltdown have caused the Bank of Ghana to halt its continued belt tightening monetary policy in a bid to spur growth.
Advertisement
Economists have raised concerns about the combined tight monetary and government’s fiscal stance, saying it stunts economic growth in favour of price stability.
Data from the Monetary Policy Committee (MPC) of the Bank of Ghana show a slowdown in real growth of credit to the private sector, resulting in the consistent quarterly decline in the GDP growth in 2015.
The MPC on January 25 maintained its main interest rate at 26 per cent, citing balanced growth and inflation risks as fiscal consolidation and improvements in the energy sector provided impetus to rein in inflation pressures.
An Economic analyst at Databank, Mr Courage Kingsley Martey, said the MPC’s decision to hold the policy rate unchanged at 26 per cent despite uncertainty about the second-round effect of the petroleum price hike was an atte
Non-Performing Loans
This tightening compelled banks to reduce their exposure to the private sector due to the deteriorating loan book quality which resulted in higher Non Performing loans (NPLs) ratio from 11.2 per cent in June to 14.1 per cent as at November 2015.
The annual growth rate in total assets of the banking sector also slowed down from 33.4 per cent in June to 21.5 per cent as at November 2015, reflecting the sharp slowdown in loan book expansion from 35.1 per cent in June to 20.9 per cent as at November 2015.
With the slower growth rate in credit expansion, the knock-on effect was always going to be evident in the behaviour of aggregate demand and real GDP growth. Ultimately, growth in the real economy also slowed down consistently from 4.2 per cent in the first quarter of 2015 to 3.6 per cent in the third quarter of 2015.
These dynamics, the Databank analyst say, present a nexus between monetary policy stance and the real sector of the economy provided a stronger case for the MPC to take a pause on monetary tightening despite the unanticipated hike in petroleum prices in January 2016 and its upside risks to inflation.
“The latest decision by the MPC to pause its monetary tightening cycle is a reflection of the authorities’ concerns about Ghana’s growth outlook relative to the government’s 2016 projection of 5.4 per cent”, Mr Martey emphasised.
Foreign currency flow
The Bank of Ghana’s effort to smoothen the flow of foreign currency to reduce seasonality in the depreciation cycle is quite laudable because this has been a major factor in the activities of speculators and market agents.
The Chief Executive Officer of the Institute of Chartered Economists Ghana, Mr Daniel Anim-Prempeh, has called for the establishment of a hybrid of inflation control mechanism where the fiscal policy must synchronise with monetary policies.
He said since the Bank of Ghana had been able to use its policy tool to achieve marginal stability, the fiscal authorities must also focus on driving down cost since inflation in the country is largely cost push.
“The Bank of Ghana as a research and banker to the government need to advise the fiscal authorities on driving down cost by reducing the government’s overbearance in the domestic market,” he said.
That, he said, would make loanable funds available to the private sector and that would ultimately drive down the interest rates and lower the cost of borrowing to the private sector.
The decision not to hike the policy rate despite the upside risk to inflation from the higher petroleum prices will also require that the BoG continues to monitor and regulate the Ghana cedi liquidity on the interbank market through the Repo arrangements to tame the demand pressures.
This is expected to anchor exchange rate and inflationary expectations while also accommodating the growth outlook, barring unanticipated adverse shocks.
In the past, exchange rate expectations have been driven by the market awareness of acute foreign exchange shortage during the first half of the year before inflows are significantly improved in the second half. — GB