Once the new Cash Reserve Requirement (CRR) policy becomes effective, it is expected to see approximately GH¢16.2billion – US$1.2 billion flow from banks to the Bank of Ghana (BoG).
CRR is a rule set by central banks requiring commercial banks to keep a portion of their deposits – local and foreign currency – as cash reserves with the central bank.
Hence, this would result in a tightening of cedi liquidity and a potential appreciation of the cedi in the short-term.
Central bank Governor, Dr. Ernest Addison, disclosed this during the 117th Monetary Policy Committee (MPC) meetings’ press briefing where he observed a sharp decline in credit extended to businesses and individuals, dropping from 29.5 to 5.1 percent between February 2023 and February 2024.
The decrease represents a marked reduction in funds available for businesses to invest, expand and create employment opportunities. This trend is due to banks’ inclination toward investing in government securities, supported by data revealing a surge in bank investments in short-term Treasury and BoG instruments.
Year-on-year growth in these investments soared to 67.6 percent in February 2024, amounting to GH¢53.6billion, compared to a 36.9 percent increase the previous year.
GCB Capital, commenting on the new CRR directive, described it as the end of an era of ‘free money’, anticipating a decline in banks’ reliance on Treasury bills in favour of increased credit creation.
“We expect a drastic decline in banks’ appetite for T-bills in favour of credit creation to avoid the higher brackets of the new CRR directive,” GCB Capital stated.
Indeed, GCB Capital anticipates a shift in the central bank’s stance toward a more aggressive approach to credit, which could impact the government’s deficit financing operations and the real sector.
Analysts believe that heightened competition for quality credit could potentially lower lending rates and stimulate growth through increased investments. However, they caution that the reduction in demand for Treasury bills could lead to higher interest costs for the Treasury’s funding operations.
BoG’s decision follows challenges faced by banks due to the domestic debt exchange program (DDEP), resulting from their excessive exposure to government debt.
The new policy, effective April 1, mandates banks with loan to deposit ratios (LDR) exceeding 55 percent to maintain 15 percent of their deposits as reserves (CRR), while those with ratios below 40 percent must hold at least 25 percent of deposits in reserves.
