1. STATE OF THE GHANAIAN ECONOMY AND ITS IMPACT ON THE BANKING SECTOR. BY: BRA KAY

2. OVERVIEW OF THE ECONOMY  In the 2013 budget, one of the primary objectives of government was to deal with the high budget caused by overruns STEMMING FROM FIVE MAIN AREAS; SHORTFALLS FROM CORPORATE INCOME TAXES FROM THE PETROLEUM SECTOR, SUBSIDIES ON PETROLEUM PRODUCTS AND UTILITIES, SIGNIFICANT DELAYS IN INFLOWS FROM DEVELOPMENT PARTNERS, A SIGNIFICANT WAGE AND SALARY BILL AND FINALLY, INCREASES IN INTEREST PAYMENTS ON GOVERNMENT DEBT. ESSENTIALLY 2013 WAS A CHALLENGING YEAR FOR THE ECONOMY AS IT FAILED TO MEET ITS TARGET.  In 2014, the first quarter of the economy has experienced increases in inflation, debt sustainability, depreciation of the cedi, increases in the policy rate, among others. Ghana’s economy is set to grow 6.1% this year according to IMF. The government has pledged to reduce its budget deficit to 8.5% GDP this year from 10.2%. The trend of inflation for the first quarter of the year is represented on the chart below;

3. overview

4.  Inflation has increased during the first quarter of the year as seen in the charts. The increase in the inflation rate was caused by the hikes in petroleum prices, utility tariffs for electricity and water and commodity prices, excessive money supply in the economy, etc.  Inflation causes global concerns because it can distort economic patterns. Inflation can result in the redistribution of wealth when not anticipated. For instance, inflation tends to benefit borrowers at the expense of lenders whenever rates are underestimated over the life of a loan.  Inflation has a corrosive effect on savings. As price surge, the value of savings will decline if the rate of inflation exceeds the rate of interest. People on fixed incomes are hurt by inflation. Workers who retired on fixed incomes are often hurt because of the declining value of their monthly cheques as a result of rising inflation. Thus inflation is a worry for the health of the worlds economy and sustenance of the global financial system.

5. IMPACT ON THE BANKING SECTOR  Reduced ability to mobilize deposit as a result of low business activity and fluctuating inflation rate making people keep money in foreign currency instead of depositing ; It is documented that dollarization increases when inflation is high because the USD for example is stable, people will substitute the GHC in order to store value. Normally, when inflation is high the stable currency will be used as a medium of exchange because the value of the cedi will reduce causing businesses to only break even on their output. It is obvious in the Ghanaian economy that accepting the local currency in transactions and as deposits is risky because the GHC might lose value before it is exchanged for goods-that is purchasing power risk. People will not deposit in the banking sector but rather hold their money in foreign currencies which will in turn have a negative impact on the banking sector since it will not make them meet their target for the year.

6. CONTINUE  High default rate- as a result of low business activity and poor sales; the increase in inflation has caused the banking sector to increase interest rates since prices of utilities have increased in order not for them to experience loses, and the increase in interest rates has caused the price paid by borrowers on loans to increase and since the cedi has also lost its value, borrowers either default on the payment of their loans or pay them very late which in turn affects the banking sector performance which will not enable the banking sector to meet its target for the year.

7. CONTINUE  Increase in overhead expenses of banks as a result of rising prices of goods and services leading to decrease spread and profitability; overhead expenses are the day to day expenses that occurs in a bank when it starts its operations that is, the cost of utility bills, cost of paying staff, cost of fuel of bank vehicles, etc. since inflation is on the increase, the banks may incur loses since people are not depositing money with the bank but holding money in foreign currencies and since banks are always working but without any increase in the profit they incur for their operations, they may not meet their target at the end of the year.

8. CONTINUE  The above mentioned are some of the impact the inflation rate has on the banking sector due to the state of the Ghanaian economy for the first quarter of the year 2014, dollarization is not a problem but inflation. Inflation is caused by the increase in prices of commodity goods and the government using printing of money to service its debt. If inflation increases, people decide to hold their assets in dollars which is stable than to hold it in cedi’s which will lose its value. So the cedi loses its value to the dollar due to high inflation in the economy.

9. CONCLUSION  The currency which was forecasted by the bank of Ghana to record stability by the end of the second quarter keeps depreciating on its value especially to the US dollar and GB pound. This trend necessitated the need for the managers of the currency to take a second look at the directives earlier put in place at the recently held economic forum. The high forex demand, fiscal pressure, high imports and falling commodity prices are among the factors resulting in the current trend of the declining cedi. The situation might not improve in the short term if the managers of the economy do not take steps to mitigate the current and capital account situations in the economy and might continue in the long term, the cedi might be exhibiting a mixed performance in the last days of the second quarter.

10. RECOMMENDATIONS  The government must start using the state’s purchasing power to buy made in Ghana goods and services including encouraging our entrepreneurs to produce what we need, provide special incentives to those who process raw materials such as cocoa, timber, oil and gas, pineapple, etc., give double bonuses to those who invest in our towns & villages by putting together a fund to provide road, water, electricity, etc. and tax incentives as well.  Measures has to be put in place by the central bank to ensure a stable exchange rate if not totally fixed, then pegged for a period of time. This brings certainty into the economy for international trade and investments to be less risky because profits are not affected by moving exchange rates. Such ‘pegged’ exchange takes away speculations within the period. It will prevent the government from pursuing irresponsible macroeconomic policies and keeps inflation down. The Bank of Ghana can therefore consider this ‘pegged’ system of exchange rate and be mindful that it will not conflict with interest of domestic business and the economy as a whole.

11. RECOMMENDATIONS  Money supply has to be reduced by the central banks by raising reserve requirement so that each cedi of reserves support fewer cedi's of demand deposits, thereby forcing a contraction of banks loans and demand deposits.  Raise cost of borrowing reserves from monetary authorities, which induces banks to raise interest charges to their borrowers and warn the banking community that monetary authorities desire credit constraint.  The central bank should sell securities from its own portfolio to the commercial banks, which pay for them by reducing their deposits (reserves) at the central bank and/or to the public, which pay for them by reducing its demand deposits at commercial banks.  Again, the central bank should sell Chinese currency in the foreign exchange market of our country since a sizeable imports come from china. Such a move will ease the pressure on the US dollar.  They may also fall on the country’s reserve to inject more dollars into the economy.

12. THANK YOU.