The Bank of Ghana (BoG) has reported a contraction in credit to the private sector for the month of October 2023.
This contraction is attributed to banks redirecting their resources toward short-term investments rather than the extension of credit.
Governor of the Central Bank, Dr. Ernest Addison announced this during the 115th Monetary Policy Committee (MPC) media briefing on Monday, November 27, 2023.
The contraction in credit is a response to heightened risks associated with lending, emanating from the unstable macroeconomic conditions and the impact of the Domestic Debt Exchange Programme (DDEP).
Private sector credit recorded a notable contraction of 7.5 percent in October 2023, an outright contrast to the robust 57.3 percent growth witnessed in the same month of the previous year. In real terms, the contraction was even more pronounced, reaching 31.6 percent, compared to a growth of 3.0 percent in the corresponding period.
The tightening of credit conditions is likely to have a negative impact on economic growth.
However, the BoG believes that the contraction is necessary to contain inflation and maintain financial stability.
The MPC is scheduled to meet again in January 2024. It remains to be seen whether the Committee will maintain the current policy stance or make further adjustments.
Key Highlights
Private sector credit recorded a notable contraction of 7.5 percent in October 2023, compared to growth of 57.3 percent in the same month of 2022.
The interbank weighted average rate increased from 23.98 percent in October 2022 to 28.49 percent in October 2023.
The average lending rate of banks increased to 32.69 percent in October 2023, compared to 31.40 percent in the corresponding period of 2022.
Implications
The MPC’s findings underscore the cautious approach adopted by banks in the face of economic uncertainties. Banks are prioritising risk management and short-term investments over credit expansion.
Overall, the contraction in private sector credit is a reflection of the challenging economic environment in Ghana. The Central Bank will need to carefully monitor the situation and take steps to support economic growth.
By Eben Agyekum-Boateng, 3Business