As much as GH¢6billion could be drained from the banking system following the Bank of Ghana’s decision to hike the capital reserve requirement (CRR) for banks the second time this year, Senior Economist with Databank, Courage Kingsley Martey, has suggested.
The BoG, at the conclusion of an emergency conclave of its Monetary Policy Committee (MPC), announced a 3 percentage points increase in the requirement – from 12 percent to 15 percent, albeit on an incremental basis of 1 percent per month effective September 1.
This comes after a wholesale 400 basis points (bps) upward adjustment was announced in March, driving the rate above the pre-pandemic level of 10 percent.
Databank had at the time forecasted GH¢5billion would be drained from the system as a result of the action; and now Mr. Martey adds that between GH¢1.5billion and GH¢2 billion could be trimmed as a result of the increase in industry deposits, which accelerated to GH¢131.3billion as at end-June 2022.
“Judging from the growth in industry deposits, we expect additional liquidity drain of between GH¢1.5billion and GH¢2billion on every percentage point increase in the CRR beginning September. In fact, we could start to see banks immediately recalibrating their liquidity needs, and this could bring forward impacts from the CRR hike earlier than the implementation date,” he stated.
Lauding the central bank’s approach, the analyst said the phased implementation will allow banks to steadily adjust their asset allocation over the window in order to minimise a liquidity shock similar to what was exerted in April.
Bold moves
The economist believes that the raft of measures announced by the monetary authority will send a strong signal to the market of its determination to stabilise prices and safeguard the cedi, using all the tools at its disposal.
“We view the decisions as a bold move intended to send a strong signal to the FX market about the central bank’s resolve to defend the local currency against speculative attacks,” he said, stressing that lower liquidity and higher rates will deprive the banks and individuals of funds to engage in speculative FX trades and rent-seeking behaviour.
He believes the announcements also send a strong signal to the fiscal authorities, that they will have to be more serious and committed to the fiscal consolidation plan or face punitive financing costs.
With commercial banks representing the largest customer base for government securities, it is anticipated that reduced liquidity will translate into leaner investments, particularly in the short-term – impacting banks’ ability to subscribe to new government issuances and rollover existing ones, a position Mr. Martey agrees with.
“This will be the case until the situation normalises at the point where the banks have fully determined their new liquidity management rules or framework.”
This, he added, imposes even further responsibility on the fiscal side to get tougher on spending controls and effective public financial management strategies in order to limit the impact on its financing requirements.
Balancing act
With apprehension over the cost of credit to businesses and households reaching new heights following the announcements, Mr. Martey says it is not all gloom as the returns to individuals and businesses holding cedi-denominated debt instruments, at least in nominal terms, will lighten growth and FX concerns.
“Those businesses and individuals which opt to invest in cedi-denominated securities should enjoy even higher nominal yields on their investments. Ultimately, this should increase the appeal of cedi-denominated securities and revive demand for the Ghana cedi. If we see this situation play out, then there should be a sharp slowdown in the pace of cedi-depreciation toward stability with an additional FX buffer to come in 4Q-2022.”
