Ken Ofori-Atta

Increased liquidity drives private sector credit growth

Increased liquidity in the Ghanaian economy as well as the increasing growth in bank credit to the private sector are fueling an increase in economic activity which is expected to ultimately translate into faster economic growth.

At the end of last year, total liquidity (M2+), a key monetary indicator as measured by the Bank of Ghana, depicted continuous recovery after a significant decline in the first two months of the second half of 2019.

Growth in the key monetary aggregates firmed up in 2019, driven largely by increased accumulation of net foreign assets by the Bank of Ghana. Total liquidity supply (M2+) recorded an annual growth of 21.6 percent by December 2019 compared with 15.4 percent a year earlier.

According to the central bank, the increase was mainly reflected in increased deposits held with commercial banks, signifying depositors flight to quality, as the clean-up process resulted in a return of confidence in the banking sector, even as the extension of the clean up process to other genres of financial intermediation firms, particularly savings and loans firms and micro-finance institutions, led to mass liquidations and a consequent fall in the proportion of total deposits held by non-bank deposit taking institutions.

Net foreign assets recorded a massive expansion from a contraction of 32.1 percent in 2018 to 46.7 percent growth in 2019. However, this growth was moderated by sharp contraction in net domestic assets.

Nevertheless, market experts opine that the ongoing liquidity growth will eventually become available mainly to domestic economic operators – with enterprises becoming better positioned to expand output and households getting more liquidity with which to effectively demand the increased output of those enterprises.

Most importantly, increased liquidity is being funneled into credit driven increased production and consumption as private sector credit growth has gained some momentum – this stemming from the improved liquidity positions of the banks on the back of the recapitalization exercise and the resumption of growth in bank deposits, now that the confidence of the banking public in them has returned.

The central bank indicates that Deposit Money Banks (DMBs’) credit to the private and public sectors rebounded strongly in 2019.

Private sector credit grew by 18.3 percent year-on-year in nominal terms to GHc 44.5 billion in December 2019, compared with 10.6 percent growth over the one year up to December 2018. In real terms, private sector credit growth was 9.7 percent. Distribution of the credit was broad-based and almost all the key economic sectors recorded higher credit growth in 2019 relative to what was observed in 2018. The major sector beneficiaries were Services with 24.1 percent, Commerce and Finance with 20.9 percent, and Manufacturing with 10.9 percent.

Supporting the rebound in credit growth, the Bank’s latest credit conditions survey conducted in December 2019 points to a net easing in overall credit stance to enterprises. The survey findings also suggest that credit demand by enterprises would increase in the first quarter of this year.

Underscoring these favourable survey results, the banking sector data showed a significant jump in new advances by 27.3 percent year-on-year to GH¢29.7 billion in 2019.

The latest data from the Ghana Statistical Service points to firm growth during 2019, although at a relatively slower pace than was recorded in 2018. GDP growth outturn for the first three quarters of 2019 averaged 6.0 percent, almost unchanged from the 6.1 percent recorded in the same period of 2018. Similarly, non-oil GDP growth averaged 5.0 percent against 5.9 percent over the same comparative periods. Overall, GDP growth for 2019 is projected to fall short of the target of 7.0 percent, but not by much.