ANALYSTS OPINION: BoGs ACTION IN INCREASING THE CASH RESERVES OF BANKS WILL NEGATIVELY AFFECT THE PRIVATE SECTOR AND HOBBLE GROWTH Yesterday, the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG)increased the cash reserve requirements (CRR) of banks from 9% to 11%. Effectively, banks ability to lend, or funds available for direct lending to the private sector, has decreased by a further 2%. The policy objective, according to the MPC, is to help address the liquidity overhang and improve supply of foreign exchange in the markets. There is a consensus among analysts that the supply constraints are a direct result of the foreign currency rules implemented by the BoG since 5th February, 2014. This the primary cause for the drying up of supply on the market, and the consequent depreciation of the GHc to the US$ (Annualized Depreciation of about 71% as at 1st April, 2014) Holders of foreign currencies have largely kept their foreign currency funds outside the banking system, new potential foreign investors have adopted a wait-and-see attitude, and committed investments have been held back, all in response to the BoGs actions from 5th February. It is our opinion, and consistent with industry analysts views, that improving the supply of foreign currency will require a substantial roll back part of the actions implemented by the BoG. It is good to note that the BoG has given an indication that it will review these rules at the end of April. Of critical moment though is the impact that the increase in the CRR will have on growth. We believe this is another misstep by the BoG which will unduly exacerbate the situation. There is an existing credit crunch to the private sector. The growth rate in private sector credit was at the same level year-on-year: 33%. The MPC also acknowledges that the annual growth rate in private sector credit declined from 20.9% to 16.5%! In their own words The credit conditions survey showed a general tightening of credit for all loan types during the period. It is against this background that we think the policy approach of increasing the CRR is less than optimal, and may be counterproductive. This present action of the BoG is only likely to make access to credit worse, and even where credit is available, it will increase the cost of credit as the banks pass on the increased cost of funds to borrowers. For a private sector already under severe stress due to unreliable electricity power, burdensome and increasing taxation, and overall increases in the cost of doing business, lack of, and increases in the cost of credit will only lead to more businesses collapsing, job losses, and a further slowing down in economic growth/activity. It is our considered opinion that the posture adopted by the BoG, as evidenced in its recent policy choices, may come across as an attempt to squeeze just about every other economic agent, while the Government remains impervious to suggestions that it cuts its size, and expenditure. We call on the BoG, once again, to proceed cautiously with this new action, focus on easing inflation by means of reducing the of public debt/expenditure, instead of adopting measures that will squeeze the already distressed industrial sector out of the credit market. © 2014, Invest With Confidence @ Cambridge Capital Advisors Limited.
Posted on: Thu, 03 Apr 2014 16:46:36 +0000
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