The International Monetary Fund (IMF) has forecast credit to the private sector in Ghana to grow by 8.6 percent in 2021 and it’s expected to average 7.9 percent between 2019 and 2022.
According to data from the Bank of Ghana, net credit to the private sector shrank significantly last year, shrinking from 23.8 percent in 2019 to 5.8 percent in December 2020. This means that credit to the private sector, the engine of growth, has been low over the years posing major constraints to business development.
Nevertheless, the IMF credited the current strong and resilient financial sector to the financial sector cleanup but warned that banks’ growing holdings of sovereign debt creates risks as it crowds out private sector credit.
According to the 2020 Annual Public Debt report, as at End-December 2020, the banking sector held 51.0 percent of the total domestic debt stock compared to 44.3 percent recorded in 2019. The Finance Ministry attributed the increase in the sector’s holdings of domestic debt to increases in its stock of both the short and medium-term instruments.
Credit Risks
In March this year, the Bank of Ghana indicated that the industry’s exposure to credit risk has somewhat heightened since the outbreak of the pandemic in March 2020, and its resultant challenging operating environment on the sector.
Accordingly, BoG noted that the non-performing loans (NPL) ratio inched up, reflecting the COVID-19 pandemic-induced slowdown in credit growth and higher loan loss provisions arising from repayment challenges from customers whose businesses and cash-flows had been adversely impacted by the pandemic.
Moreover, the observed slower credit growth in 2020 occasioned by the pandemic continued during the first four months of 2021, reflecting the lingering weak credit demand and supply conditions.
Recent developments in Private sector credit
The stock of gross loans and advances increased to GH¢47.6 billion at End-February 2021, representing a 3.6 percent annual growth, lower than the 26.0 percent growth in February 2020. The BoG attributed the slower growth rate in total credit in February 2021 to declines in the annual growth rates of its components.
Specifically, public sector credit contracted by 23.0 percent, in sharp contrast to the growth of 66.8 percent recorded in February 2020. The share of public sector credit in total credit accordingly declined from 12.3 percent to 9.1 percent over the review period. Private sector credit of GH¢43.2 billion remained the larger share of total credit, but its growth declined from 21.6 percent in February 2020 to 7.4 percent in February 2021.
Credit to the sector declined by 35.29 percent year-on-year in April 2021, from GH¢2.38 billion in April 2020 to GH¢1.54 billion in April 2021. The Bank of Ghana indicated that Loan loss provisions increased by 29.4 percent in April 2021, compared with 7.1 percent a year ago, on account of continued elevated credit risks even though NPL ratio increased marginally from 15.0 percent in April 2020 to 15.5 percent in April 2021.
Boosting credit to the private sector
Low credit to the private sector will not promote the development of vibrant businesses that will create the much-needed jobs in the economy. The Development Bank Ghana, if established, is expected to bridge the credit gap to the private sector.
However, for the credit risk to decline, an overall improvement in economic activity is required to boost both business and consumer confidence. A vibrant economy will ultimately translate into higher incomes, reduced unemployment and improved living standards, making it possible for both businesses and individuals to honor their loan repayment agreements. Also, Banks must reduce their appetite for holding sovereign debt to avoid crowding out private sector credit.
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