One of the critical and unresolved issues facing the Ghanaian economy in recent times is high inflation. It is a significant and sensitive economic phenomenon that can have far-reaching effects on various sectors and patrons of the economy, including consumers, producers, and governments. As important as fighting inflation is, taming it and achieving long-term price stability is a daunting task with significant challenges.
The latest inflation forecast indicates a slight elevation, driven by several factors. Firstly, there is a possibility of upward revisions in transport fares, which could be a significant contributor to increased consumer prices. Additionally, adjustments in utility tariffs, often influenced by various economic factors including the knock-on effect of the current power supply challenges, are expected to play a role in the inflation uptick. Moreover, higher ex-pump prices for fuel can directly impact transportation costs and other production inputs and, consequently, the prices of goods and services.
Lastly, the pass-through of exchange rate depreciation can further exacerbate inflationary pressures, especially in import-dependent economies like Ghana. These factors collectively suggest a challenging inflationary environment, which could impact consumer purchasing power and overall economic stability. This underscores the importance of effective monetary policy and fiscal measures to manage these inflationary pressures and ensure sustainable economic growth.
This policy shift, implemented through a tiered Cash Reserve Ratio (CRR) system, aims to incentivize universal banks to increase lending activity and unlock much-needed capital for economic growth. The objective is also to correct and restore credit to the private sector, as private sector credit growth stood at 5.1 percent, a significant drop from the 29.5 percent growth seen in February 2023. Banks’ investments in Treasury instruments reached GH¢53.6 billion by February 2024, making a 67.6 percent increase year-on-year.
The increase in the CRR from 15% to 25% will have significant implications for universal banks and the broader economy. Banks will be required to hold a larger portion of their deposits in reserves, reducing the amount of cash available for lending to the public. This reduction in lending capacity can constrain businesses’ ability to access credit, hindering their growth and potentially leading to higher borrowing costs. This could lead to potential repayment challenges and ultimately impact capital adequacy ratios due to high non-performing loans.
If universal banks decide to maintain a lower CRR – essentially holding less money in reserves – in response to the unintended monetary-induced expansionary policy, this incentivizes banks to lend more, potentially freeing up a significant amount of capital for new loans. This could lead to a timely boost for economic activity and new investments, potentially creating jobs and stimulating overall growth. However, although this is an effective way of inducing aggregate demand, the structure of the economy makes it costly. This has implications for our exchange rate, as most of what is consumed in Ghana are imported, hence putting pressure on the already struggling Ghana Cedi and further worsening the inflationary pressure. This could make the policy counterproductive if not followed by other measures to stimulate export and supply of forex to contain demand.
In summary, while the tiered CRR policy is a step towards addressing certain economic challenges, its effectiveness could have been enhanced by targeting specific productive sectors particularly exports, to stimulate foreign exchange earnings and job creation. Such a targeted approach would have addressed multiple economic challenges simultaneously. Additionally, there is a need to consider the broader implications of the policy, such as its impact on exchange rates and borrowing costs, to ensure that it supports sustainable economic growth and development. Economic policy coordination is an essential and indispensable to jumpstart price stability because monetary and fiscal policies are like two lungs in a body, they must breathe in and out together for the body to survive.
