The market is still highly liquid despite the recent change in the Cash Reserve Ratio (CRR) policy in November 2023, which has led the Bank of Ghana (BoG) to announce additional efforts to absorb excess liquidity.
In a press conference held after the 116th MPC meeting, Dr. Ernest Addison, the governor of the Bank of Ghana, acknowledged the current liquidity situation while highlighting the difficulties banks face in locating appropriate investment opportunities.
“It appears there’s still quite an amount of liquidity in the market. This is one of the issues we extensively discussed last week. The auctions are oversubscribed and the banks have mobilised a lot of deposits, making them very liquid. However, there aren’t many avenues for investing their resources so they are putting it back into the auction. The economic conditions haven’t improved enough to reduce the risk associated with lending, prompting them to invest in short-term government bills instead,” Dr. Addison stated.
In a bid to tackle surplus liquidity and contribute to the ongoing battle against inflation, the central bank opted for a unified and increased Cash Reserve Ratio (CRR) at 15 percent, covering both local and foreign currency accounts. However, concerns are surfacing about potential spikes in government borrowing costs within the domestic Treasury market due to this reserve hike.
When questioned about the impact of the CRR change, Dr. Addison humorously quipped, “The CRR policy change likely had an impact, but there’s still a significant amount of liquidity.”
The new CRR directive, effective since November 30, 2023, aimed to extract around GH¢11 billion in cedi liquidity from the interbank market while injecting approximately US$750 million. This strategic move was designed to bolster liquidity conditions in the FX market, potentially dampening the depreciation pace during the festive season.
In 2023, base money growth witnessed a significant slowdown, registering at 29.2 percent by December, compared to the lofty 57.5 percent in December 2022. This deceleration was attributed to robust sterilization efforts by the Bank of Ghana (BoG) and effective liquidity management operations.
Likewise, interest rates in the money market embarked on a downward journey, with the 91-day and 182-day Treasury bill rates descending to 29.49 percent and 31.70 percent, respectively, in December 2023. The 364-day instrument’s rate also took a dip to 32.97 percent during the same period.
During its November 2023 Monetary Policy Committee (MPC) meeting, the central bank underscored the slowdown in monetary aggregates’ growth, revealing a year-on-year contraction of 2.6 percent in reserve money during October 2023. The move to unify the CRR for both cedi and foreign currency deposits was a strategic maneuver to navigate excess structural liquidity conditions and bolster the disinflation process.
Shifting the spotlight to the banking sector’s performance, end-of-year data showcased a ballet of stability, liquidity, and profitability. Recovering from the setbacks of 2022, the sector demonstrated increased net interest income and fees & commissions.
Despite facing challenges from the Domestic Debt Restructuring and macroeconomic headwinds in 2022, the banking sector exhibited resilience. Capital adequacy levels remained comfortably above the minimum regulatory requirement, and most banks maintained excess liquidity. However, the industry grappled with a rise in the Non-Performing Loan (NPL) ratio, reaching 18.3 percent in October 2023, reflecting elevated credit risk associated with the lingering effects of the 2022 macroeconomic crisis.
On the lending front, the private sector witnessed sluggish credit expansion, growing at 10.7 percent in December 2023, a stark contrast to the 31.8 percent seen in December 2022, signaling increased risk aversion among banks. The financial landscape, it seems, is engaging in a complex dance of strategy and adaptation.