The proportion of bank loans classified as non-performing rose to 17.3 percent in August from 15.5 percent a year ago, according to the latest banking sector performance statistics released by the Bank of Ghana (BoG).
The increase in bad loans has coincided with slackening credit growth despite a marginal fall in the average interest rate on bank loans since a year ago.
Whereas bank credit to both the public and private sectors grew by 15.6 percent year-on-year in August 2020, the growth rate decelerated to 8.7 percent in August this year, the central bank data showed. The data, which was released on Friday ahead of today’s monetary policy committee press briefing, also reported an average interest rate on bank loans of 20.5 percent in August compared with 21.4 percent twelve months before.
It appears, as non-performing loans worsen and potential credit losses mount, that banks have become more risk-averse, which explains the weak growth in their lending despite robust deposit mobilisation from customers.
The situation does not seem to have had a significant impact on economic activity, however, as the Composite Index of Economic Activity (CIEA), by which the BoG monitors the strength of the economy, increased in real terms by as much as 20 percent year-on-year in July compared to an increase of 3.9 percent in the same period last year.
This implies the monetary policy committee is not likely to worry so much about economic growth as it resets its policy rate today. On the contrary, the recent weakness of the cedi and the rise in inflation—from 7.5 percent in May to 9.7 percent in August—will weigh considerably on the committee’s mind, leading most analysts to forecast that it will vote to keep the policy rate at 13.5 percent for the next two months.
“We expect the BoG to refrain from cutting rates and to stay on hold at 13.5 percent, in line with the unanimous consensus,” said the macroeconomics research unit of Goldman Sachs, the global investment bank, in a note to clients last week.
“The cedi weakened post the interest-rate cut in May and inflation has picked up significantly, which now restricts the Bank of Ghana’s space to ease policy, in our view,” the bank’s analysts added.
They further forecast the BoG to stay on hold at 13.5 percent until the end of 2022, arguing that “the global and domestic developments, especially on inflation, exchange rate, and the financial accommodation front since the last meeting, make for a generally hawkish backdrop in the context of monetary policy.”