Govt borrowing to blame for declining credit to private sector

By Isaac AIDOO, Accra

The Institute for Fiscal Studies (IFS), an economic policy think tank, has expressed serious concerns over the increasing reliance on domestic financing to support Ghana’s national budget.

This shift comes as the country faces a debt crisis that has effectively blocked access to international capital markets, particularly the Eurobond market.

According to the IFS, this growing dependence on domestic borrowing is leading to heightened competition between the government and the private sector for loanable funds, with potentially damaging consequences for economic growth.

In a policy brief prepared with reference to the Mid-year budget review, the IFS warned that the government’s aggressive borrowing from domestic sources “is likely to result in a scarcity of funds available for private sector investment.

This competition is expected to sustain high interest rates, further hampering private sector growth and exacerbating the country’s already sluggish economic performance and high unemployment rates.”

Data from the Bank of Ghana underscores the IFS’s concerns, showing a marked slowdown in private sector credit growth over the past year.

As of April 2024, private sector credit growth had decelerated to 10.8%, a sharp decline from the 19.8% recorded in April 2023.

When adjusted for inflation, credit to the private sector actually contracted by 11.4% during this period, compared to a 15.2% contraction in the previous year.

This trend has been consistent over several months.

In February 2024, private sector credit growth was just 5.1%, a significant drop from the 29.5% growth seen in February 2023.

Meanwhile, banks’ investments in government securities soared, with holdings in Government of Ghana (GOG) and Bank of Ghana (BOG) instruments reaching GH₵53.6 billion in February 2024, a 67.6% year-on-year increase.

This stark contrast highlights the shifting priorities of financial institutions away from lending to the private sector and towards the relatively safer government securities.

The situation was similar in December 2023, when private sector credit growth slowed to 10.7%, down from 31.8% in December 2022.

In real terms, this represented a 10.2% contraction in private sector credit, further underscoring the challenges faced by businesses in securing financing.

The IFS’s analysis suggests that this trend, if unchecked, could lead to prolonged low economic growth and persistently high unemployment rates in Ghana. The think tank calls for urgent measures to address the imbalance between government and private sector borrowing to ensure that adequate funds are available for private sector investment, which is crucial for sustainable economic growth.