Data says ease, MPC says squeeze: Private sector credit growth remains weak – Nsemkeka
The Bank of Ghana’s Monetary Policy Committee (MPC) has opted to maintain its benchmark interest rate at 28% in May 2025, a decision that appears increasingly disconnected from Ghana’s improving economic fundamentals. This conservative stance persists despite inflation declining to 21.2% in April from 23.8% in January, representing a 2.6 percentage point drop in just four months.
The cedi’s remarkable 24.1% appreciation against the US dollar year-to-date and the reduction of public debt to 55% of GDP from 61.8% in December 2024 further underscore the economy’s strengthening position.
These positive developments raise serious questions about the MPC’s rationale for maintaining such restrictive monetary conditions. The cedi’s sustained appreciation has created natural disinflationary pressures by reducing import costs, particularly for fuel and food items that significantly influence consumer price indices.
Meanwhile, Ghana’s external sector demonstrates unprecedented resilience, with a $2.1 billion current account surplus driven by strong gold and cocoa exports, complemented by healthy foreign reserves covering 4.7 months of imports.
The MPC’s decision becomes more perplexing when examining private sector realities. While policymakers tout economic prudence, credit growth to businesses remains anemic at just 2.3%, with commercial lending rates hovering between 32-35%.
This credit squeeze has forced 23% of SMEs to reduce workforces according to industry surveys, while industrial capacity utilization has slumped to 58% – levels not seen since the pandemic’s peak. Such conditions directly contradict the government’s narrative of economic recovery.
A more appropriate policy rate of 25% would better reflect Ghana’s current economic realities. This 300 basis point reduction could be safely implemented given the inflation trajectory, exchange rate stability, and robust external reserves.
The move would maintain positive real interest rates while providing critical breathing space for businesses. It would also align Ghana with regional peers like Nigeria and Kenya, which have implemented rate cuts despite facing higher inflation.
Going forward, policymakers must adopt a more balanced approach. The Bank of Ghana should phase out remaining forex restrictions to complement the cedi’s natural strength, while fiscal authorities must channel commodity windfalls into targeted SME support programs. Structural reforms to boost cocoa processing and refine inflation-targeting frameworks would reduce future need for drastic monetary interventions.
Ghana’s current economic improvements present a golden opportunity to transition from crisis management to growth promotion. By maintaining excessively tight monetary policy, the MPC risks squandering at this moment. A moderate rate cut to 25% would strike the crucial balance between controlling inflation and reviving private sector activity, setting the stage for sustainable economic recovery.
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Author:
Prof. Isaac Boadi, Dean, Faculty of Accounting and Finance, UPSA, Executive Director, Institute of Economic and Research Policy, IERPP