A recent research paper by banking consultant Dr Richmond Atuahene and data analyst Isaac Kofi Agyei highlights the persistent pressure on private sector credit due to the Bank of Ghana's elevated Credit Reserve Ratios (CRR).

Titled 'Thirsty Banks: Ghana’s Dilemma with High Cash Reserve Ratios,' the report delves into the repercussions of the Bank of Ghana's revised cash reserve ratios for commercial banks.

According to the findings, the stringent CRR policies imposed by the Bank of Ghana are limiting credit availability to the private sector, as banks are compelled to allocate a substantial portion of their deposits to reserves instead of extending loans.

Under the new regulations, banks with varying loan-to-deposit ratios face CRR requirements ranging from 15% to 25%, based on their lending activities.

Read more: New Cash Reserve Ratio could impact negatively on loans, banking – Report

The report warns that these elevated CRR levels could hamper economic growth, particularly in sectors reliant on bank financing for investment and expansion.

While the CRR is a crucial monetary policy tool aimed at stabilising the financial system and controlling inflation by curbing lending liquidity, excessively high ratios can impede economic activity by reducing funds available for investment and consumption.

The constraints imposed by high CRR could lead to diminished investment, slower economic expansion, and limited opportunities for individuals and businesses to access credit for essential needs like education, housing, and entrepreneurship.

The paper also highlights the government's dependence on treasury bills due to limited access to domestic and international bond markets, resulting in elevated interest rates to attract commercial banks and private investors.

To tackle this challenge, policymakers may need to reassess the CRR levels and their impact on private-sector credit, striking a balance between financial stability and economic growth.

Gradually reducing the CRR while monitoring its effects on inflation and financial system stability could help unlock more funds for lending without jeopardising overall stability.

Moreover, alternative monetary policy tools such as open market operations and targeted lending programs could supplement efforts to support private sector credit.

Collaborative efforts between the central bank, government, and financial institutions are crucial in devising and implementing policies that foster sustainable economic growth while safeguarding the financial system.

Below are some recommendations from the Report

While it can be beneficial for central banks to implement higher Cash/Primary Reserve ratios to control inflation and stabilize the local currency’s value, excessive ratios can lead commercial banks to hold more cash with the central bank, thereby limiting their ability to lend.

Conversely, lower cash reserve ratios allow banks to maintain less cash with the central bank, boosting their lending capacity. Bank of Ghana should reconsider reducing the mammoth cash reserve ratios by taking into account the GH¢50.6 billion of customers’ deposits used to purchase restructured government bonds with an extended maturity period until 2031.

Furthermore, the Bank of Ghana and commercial banks need to exert significant effort to reduce the current Non-Performing Loan (NPL) ratio from 24% to around 10% to fortify the banking sector’s resilience. A resilient banking sector encompasses more than just profitability; high NPLs can lead to poor capitalization among banks, liquidity challenges, and even insolvency for some institutions.

The Bank of Ghana’s MPC report in March 2024 affirmed these concerns, indicating a mixed outlook on key financial soundness indicators.

Over the past two years, the private sector has suffered due to the government’s overwhelming presence in the treasury bill market. To revitalise the private sector, authorities must focus on lowering short-term bill rates below 20 per cent to foster competitiveness in the domestic market. Additionally, efforts should be made to curb the increasing diversion of credit from the private sector to the central government.

Addressing Ghana’s economic challenges requires a comprehensive approach that goes beyond relying solely on traditional monetary policy tools like increasing commercial banks’ reserve requirements or adjusting monetary policy rates.

These measures have been excessively utilised in previous years and have become less effective due to the structure of the Ghanaian economy, which has developed a level of resistance to them over time. Bawumia (2010) affirms that the high level of reserve requirements (monetary policy instrument) reflects a legacy of high fiscal deficits.

In addition to monetary policy adjustments, significant fiscal interventions are necessary to navigate the economic difficulties. This includes implementing substantial reductions in government expenditure to alleviate the current economic strain.

To combat inflationary pressures effectively, authorities must proactively reduce central government spending by an additional 30%, with a particular focus on trimming down flagship programs that have failed to deliver significant economic benefits since their inception.

In summary, the government should refrain from burdening the banks and instead concentrate on making drastic cuts to its excessively large budget. Commercial banks have incurred considerable losses as a result of the DDEP and are still in the process of recuperating; they should be allowed to fully recover without further burdens!