In addition to the upward policy rate adjustment, the Bank of Ghana (BoG) has said it will, effective April 1, 2022, enforce measures in relation to universal banks as part of efforts to deal with the challenges facing the economy.
These measures include, the Cash Reserve Ratio is increased to 12 percent; the Capital Conservation Buffer is reset to the pre-pandemic level of 3 percent, making the Capital Adequacy Ratio a total of 13 percent; and the provisioning rate for loans in the Other Loans Exceptionally Mentioned (OLEM) category is reset to the pre-pandemic level of 10 percent.
The Governor of the BoG, Dr Ernest Addison announced at a Monetary Policy Committee (MPC) press conference in Accra on Monday, March 21 that the Policy rate has been increased marginally to 17%.
This comes at a time the local economy is facing challenges following the impact of the geopolitical tension between Russia and Ukraine as well as other factors.
“The Committee noted that the global economy has entered a period of profound uncertainty and fragility. The Russia-Ukraine war has introduced new uncertainties which have complicated the outlook and aggravated the Covid-related supply bottlenecks, elevated inflation expectations, and triggered higher crude oil prices, compounding the already high global inflationary pressures.
“Global financing conditions have tightened as key central banks raised policy rates to counter rising inflation. The combined effect of these developments could lead to further downgrades in global growth projections, increase investor uncertainty, and lead to capital outflows from emerging and frontier economies with weak fundamentals and could have severe exchange rate implications.
“Domestic growth conditions are fairly strong despite signs of weakening consumer and business sentiments. The steady increase in private sector credit growth has continued with positive growth implications. The banking sector performance remains strong, with sustained growth in total assets, investments and deposits. Key financial soundness indicators such as profitability, liquidity and solvency remain healthy. Asset quality improved slightly, although there are upside risks to the outlook, requiring continued monitoring to address early signs of stress within the sector.
“The Sovereign credit rating downgrades of Ghana by Fitch and Moody’s led to widened yield spreads on both cedi-denominated Government of Ghana bonds and the country’s Eurobonds. These downgrades reflect market and investor concerns about fiscal and debt sustainability. Consequently, the Ghana Cedi has come under severe pressure as offshore investors exited positions in domestic securities at a time when domestic demand for forex has increased, reflecting both real and speculative demand. This has caused the exchange rate to overshoot its
long-term trend. The strengthening of the US dollar, liquidity pressures, uncertainties regarding budget implementation, portfolio reversals by nonresidents and some speculative pressures are key contributory factors.
“At this MPC meeting, the combination of tighter global financing conditions, sharp pressures on the exchange rate, and elevated inflation pose some policy challenges. Headline inflation has risen sharply to 15.7 percent in February 2022, and both headline and core inflation are significantly above the upper limit of medium-term target band.
“The uncertainty surrounding price developments and its impact on economic activity is weighing down business and consumer confidence. The risks in the outlook for inflation are on the upside and include
petroleum price adjustments and transportation costs, and exchange rate depreciation. The Bank’s latest forecast still depicts an elevated inflation profile in the near term, with inflation falling within the medium-term target band within a year.
“Fiscal policy implementation has come under strain, reflecting embedded rigidities in the fiscal framework which will require extensive structural reforms to free fiscal space to restore both fiscal and debt sustainability. Revenue performance has been slow to align with projections, while expenditure remains rigid downwards despite the strong efforts to cut expenditure by 20 percent as announced by the
Government. The above has resulted in financing constraints that would have to be resolved very swiftly to ensure the announced fiscal consolidation path is achieved.
“The MPC is however confident that ongoing discussions will lead to very decisive policy reforms that will address underlying fiscal mismatches and restore some calm in the markets. This, together with the monetary policy decision and additional measures, should help re-anchor inflation expectations.
“Under these circumstances, the Committee has decided to increase the policy rate by 250 basis points to 17 percent,” Dr Addison said.
“In addition to the upward policy rate adjustment, the Bank of Ghana will, effective April 1, 2022, enforce the following measures in relation to universal banks: The Cash Reserve Ratio is increased to 12 percent; The Capital Conservation Buffer is reset to the pre-pandemic level of 3 percent, making the Capital Adequacy Ratio a total of 13 percent; and The provisioning rate for loans in the Other Loans Exceptionally Mentioned (OLEM) category is reset to the pre-pandemic level of 10 percent,” he added.