The Bank of Ghana (BoG) has expressed worry about continued sluggishness in new lending by banks in the country as it may undermine the growth momentum of the economy. The BoG highlighted in its press release to climax its 101st Monetary Policy Committee (MPC) meetings on Monday, July 26, 2021 that the economy is still on its track of a rebound after it has been hit heavily by the coronavirus pandemic.
“The growth rebound which began in the last quarter of 2020 has continued into the first half of 2021. However, the Committee was concerned about the continued sluggishness in new lending by banks which could undermine the growth momentum”.
Meanwhile, the BoG attributed the slow growth in lending to increased credit risks on account of uncertainties in the business environment due to the impact of COVID-19 pandemic on the real sector. Another factor cited by the Bank of Ghana is the very high yields offered on Government securities due to increased Government borrowing. This continues to crowd-out private sector investment needed to keep the growth momentum of the economy.
“This crowding-out effect continues to keep the credit to GDP gap below the long-term trend and is likely to delay recovery of the economy and discourage banks from strengthening their credit underwriting processes to manage credit risks from lending to underserved sectors of the economy”.
Growth in gross Advances
According to the BoG, gross advances recorded sluggish annual growth of 5.7 percent, relative to 15.7 percent growth in the same period of 2020. Similarly, private sector credit growth has remained sluggish over the past year, broadly reflecting the heightened credit risks associated with the COVID-19 pandemic.
Moreover, annual nominal growth in private sector credit slowed to 6.8 percent in June 2021 compared with 14.2 percent in the corresponding period of 2020. In real terms, private sector credit contracted marginally by 1.0 percent compared to 2.8 percent growth a year earlier.
Overall, the BoG noted that the banking sector performance reflected sustained growth in customer deposits, investments, total assets, and profits and key financial soundness indicators remain healthy in relation to liquidity and solvency.
Against the backdrop of its macro-prudential risk assessments, the Committee expects the banking sector to withstand mild to moderate credit risk shocks. But warned that “a new wave of the pandemic in Ghana could further elevate credit risks and would require close monitoring of banks’ capital and liquidity buffers”.
Inflation eased sharply
Furthermore, the BoG indicated that headline inflation has eased sharply and reverted within the medium-term target band, driven mainly by the tight monetary policy stance and some base drift effects. Consequently, the Bank expressed optimism that inflation will continue its downwards trend in the second half of the year.
This is because two readings since the last MPC meeting showed significant decline in headline inflation from 10.3 percent in March 2021 to 7.5 percent in May 2021, before ticking up to 7.8 percent in June 2021.
“The latest forecast remains broadly unchanged with inflation projected to remain within band and around the central path in the forecast horizon barring any upside risks from fiscal pressures”.
Policy rate maintained
Upon a review of the recent development in the economy, the MPC of the Bank of Ghana decided to maintain the policy rate at 13.5% after it surprised economic agents and experts in its last meetings in May with a cut in the policy rate by 100 basis points to 13.5%.
“On the whole, the Committee assessed that the risks to inflation and growth were broadly balanced and decided to keep the policy rate at 13.5 percent”.
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