Latest data emanating from the Bank of Ghana in its newly released Quarterly Bulletin covering the second quarter of 2020, illustrates the effects of the arrival of COVID 19 on liquidity in the Ghanaian economy. Inevitably the slump in economic activity brought about by the pandemic and the requisite public policy responses imposed by the government reduced liquidity growth in the economy. But it also illustrates fundamental shifts in the behavior of private sector economic actors – enterprises and households alike – as a result of the uncertainties thrown up by the arrival of the pandemic in Ghana and the socio-economic restrictions imposed to curb its spread.
Developments in monetary aggregates for the second quarter of 2020 showed a slowdown in the growth of broad money supply (M2+) on year on year basis. Growth in broad money supply (M2+) reduced on account of a significant decrease in the growth in Net Foreign Assets (NFA) which was moderated by an increase in Net Domestic Asset (NDA). The decline in the growth of NFA of depository corporations was mainly due to significant reduction in the NFA of Domestic Money Banks (DMBs).
This reflects a retreat to home territory by banks at a time that the global economy was being faced into domestication by travel restrictions and international trade supply chain disruptions. The resultant appreciation of the cedi has provided further impetus to keep faith with domestic financial assets.
Curiously however, the growth in M2+ was higher than what was recorded for the first quarter of 2020 although economists see this as primarily the result of a slow start to the year with regards to economic activity in Ghana.
Broad money supply developments in the monetary aggregates showed a slowdown in the growth in M2+ on a year-on-year basis from 22.10 percent in the second quarter of 2019 to 20.33 percent in the second quarter of 2020. The stock of M2+stood at GH¢100,498.91 million by the end of June, compared with GH¢83,517.12 million a year earlier and GH¢92,905.07 million by the end of then first quarter of 2020.
The decrease in year-on-year growth of M2+ during the second quarter of 2020 reflected in the decline in growth of demand deposits and foreign currency deposits relative to that of the second quarter of 2019. However, growth in currency with the public and saving and time deposits increased during the comparative period of 2020
This reflects a retreat to cash by the general public with COVID 19 accompanied in part by the desire to lock into interest rates at that time out of suspicions that further monetary easing would subsequently take them lower still.
Trends in developments of monetary aggregates were broadly consistent with the trends in inflation. For the period under review although growth in monetary aggregates showed a downward trend, inflation remained fairly flat during the review period indicating that the factors driving inflation during the review period were largely non-monetary shocks to food prices attributed to increased demand, and supply constraints on account of COVID-19 global supply chain disruptions.
The observed contraction in M2+ was mainly attributed to considerable reduction in Net Foreign Assets (NFA) which was moderated by an increase in Net Domestic Assets (NDA). Growth in NFA decreased significantly from 22.5 percent in the second quarter of 2019 to 6.2 percent at the end of the second quarter of 2020. This was however higher than the growth of negative 8.2 percent recorded during the first quarter of 2020
The slowdown in growth of NFA during the period can be attributed to energy sector payments, debt servicing and balance of payments support. In contrast, Net Domestic Assets (NDA) increased from a growth of 22.0 percent in Q2:2019 to 25.0 percent growth in the second quarter of 2020 compared the growth of 25.4 percent recorded in the first quarter.
In terms of components of NDA, growth in net claims on government and claims on public sector increased from 71.4 percent and 9.3 percent respectively in Q2:2019,to 111.1 percent and 30.5 percent respectively in Q2:2020. This was influenced by increases in government expenditure to contain the impact of COVID-19 disruptions on business activities and economic growth.
However, growth in claims on private sector declined from 15.8 percent to 12.7 percent over the same comparative period, influenced by sluggish demand for credit due to uncertainties associated with COVID-19. Growth in Other Items (Net) amounted to139.9 percent in the second quarter of 2019 compared to 215.5 percent in Q2:2020.