The Bank of Ghana (BOG) has made a drastic reduction of the policy rate from 16 percent to 14.5 percent in response to the global economic slump. Both major and emerging economies have taken action to ease the financial pressures on businesses in the face of the COVID-19 Pandemic. The BOG’s actions were contained in a press statement released on March 18, 2020.
President Trump has requested for $1 trillion to support businesses. The UK government has also announced their own stimulus packages for businesses to reduce the impact of revenue loss in these COVID-19 times.
The US Federal Reserve has slashed its policy rate by 150 basis points to a range of 0 – 0.25 percent in the past two weeks and introduced liquidity measures to ease tightening financing conditions. Other central banks in advanced and emerging market economies have followed suit with policy rate cuts.
The BOG Actions
Bank of Ghana’s Monetary Policy Committee (MPC) has reduced the policy rate from 16 percent to 14.5 percent. This is expected to boost lending to the private economy and inject some stimulus. As to whether it would really happen is another thing. The last time the country saw the policy rate at 14.5 percent was in April 2012. The cut also exhibits government’s penchant to keep the rates low irrespective of other contradicting indicators such as forex rates. The lowering rates may however not be good for local investors who may have to still rake in some high-rated instruments from the safe government instrument.
Other Liquidity Actions
The BOG has additionally lowered the regulatory limits and the prudential rates for banks to enable them to release more money into the system. For instance, the central bank now requires;
- The Primary Reserve Requirement at 8 percent instead of the current 10 percent to provide more liquidity to banks to support critical sectors of the economy. This effectively extends the previous targeted reserves for SMEs under the enterprise credit scheme to all critical sectors.
- The Capital Conservation Buffer (CCB) for banks of 3.0 percent is reduced to 1.5 percent. This is to enable banks provide the needed financial support to the economy. This effectively reduces the Capital Adequacy Requirement from 13 percent to 11.5 percent.
- Provisioning for Loans in the “Other Loans Especially Mentioned” (OLEM) category is reduced from 10 percent to 5 percent for all banks and Specialised Deposit-Taking Institutions (SDIs) as a policy response to loans that may experience difficulty in repayments due to slowdown in economic activity. Provisioning norms for loans in all other categories are maintained. This should provide capital relief to banks and SDIs in these uncertain times.
- Loan repayments that are past due for Microfinance Institutions for up to 30 days shall be considered as “Current” as in the case for all other SDIs. This means banks may be a bit more tolerant to delayed loan repayments giving businesses some relief in terms of payments of loans.