Liquidity growth slowed down in the first half of the year, growing by 20.1 per cent year on year, compared to a 22.1 per cent growth for the same period in 2019.
This was as a result of a slowdown in economic activities caused by the COVID 19 pandemic.
In its recent Monetary Policy Committee press release, the Bank of Ghana reported that the moderation in the growth of total liquidity was driven by a significant decline in Net Foreign Assets (NFA) which declined from 22.5 per cent in the first half of 2019 to 6.2 per cent in the first half of 2020.
This is largely blamed on the western hemisphere – which almost fell to zero at the height of monetary easing in response to the economic slowdown brought about by the outbreak of the coronavirus pandemic – as well as the slowdown in cedi depreciation against the United States dollar from 8.3 per cent for the first seven months of 2019 to just 2.5 per cent for the corresponding period of this year.
Aside the increase of Ghana’s gross international reserves from US$8.4 billion (enough for 4.0 months import cover) as at December 2019, to US$9.2 billion (enough to cover 4.3 months of imports) in June 2020, BoG suggests that cedi depreciation will be minimal going forward as well despite this being an election year.
Hence, there has been a change in direction towards domestic asset holdings during the first half of 2020. Net domestic asset growth was 24.7 percent year on year as at June 2020, up from 15.0 percent as at December 2019.
However, the strongest regulator of net domestic asset growth has been growth in currency held outside the banking system, which grew year on year by 36.7 per cent as at June 2020, up from 20.2 per cent as at December 2019. This was due to cash hoarding by the banking populace in response to the economic uncertainties created by COVID 19.
The next strongest driver of net domestic asset growth has been interest earning savings accounts and fixed deposits.
Although the average interest rates offered on savings accounts as well as both three months and six months fixed deposits have remained unchanged during the first half of 2020 at 2.55 per cent, 11.50 per cent and 10.50 per cent respectively, they collectively experienced growth of 13.4 per cent, year on year as at June 2020, up from just 3.4 per cent as at December 2019.
Stronger growth appears to have been caused by falls in treasury instrument yields. During the first half of 2020, the 91-day treasury bill rate fell from 14.69 per cent to 13.97 per cent and the 182-day rate declined from 15.17 per cent to 14.05 per cent, this the result of deliberate monetary easing by the central bank to stave off the negative impacts of COVID 19 on the domestic economy.
Growth in demand deposits also declined from 28.3 per cent, year on year, as at December 2019 to 24.3 per cent by June 2020.
Slower growth in liquidity is helping to keep inflation in check but is reflecting slower economic growth. However, economists expect increased public expenditure and pre-election political spending to increase liquidity growth over the coming months.
