The BoG has bigger problems than inflation

The MPC of the BoG has maintained the policy rate at 26% as was predicted by CediTalk.com.

Inflation fell to 18.7% in April from 19.2% the previous month. It is better than an increase but it casts doubts on the 8±2% medium term target of the central bank especially as fuel prices may rise (crude is at an 8 month high). So inflation is a big problem for Dr Abdul-Nashiru Issahaku, the BoG’s governor. But there is a bigger problem.

The B&FT reports an increase in NPLs from 14.6% in January to 16.2% at the end of the first quarter. The average lending rate increased from 27.5% at the start of the year to 32.1%.

One would think that a high inflation regime would be beneficial for debtors who would be experiencing a quick depreciation in the real value of their debts. However, the bad loans on the balance sheet of the banks has swollen to 16.2% of loans outstanding. The increase in the average lending rate is likely linked to this increasing risk.

In March this year I warned that the increasing size of government securities in the portfolio of banks was a danger for the financial system as it withdrew the needed liquidity for businesses. The situation does not seem to be getting better.

This is a country without deposit insurance and it is therefore of the utmost importance that banks do not even have the appearance of liquidity problems. Ensuring the stability of the financial sector should trump concerns about the inflation rate (which appears not to even respond to interest rate hikes anyway). Every policy tool must be on the table for ensuring stability, including a reduction in the policy rate.

With the political risk of an election upcoming, the situation may not be getting better this year and the BoG has to be ready to act to preserve liquidity and confidence.

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Jerome Kuseh

Financial Analyst | Accountant | Private Investor
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