The decline in economic activity forced upon the Ghanaian economy by the COVID-19 outbreak has inevitably led to a slowdown in liquidity growth.

Total liquidity growth (measured by M2+) grew year on year by 20.1 percent in June 2020, down from year on year growth of 22.1 percent as at December 2019.

This is revealed by the latest data released by the Bank of Ghana’s Monetary Policy Committee.

Even more instructively, the slowdown in total liquidity is a result of a sharp slowdown in net foreign assets; indeed the growth in total liquidity was almost entirely the result of growth in net domestic assets, itself deriving from a sharp increase in currency held outside the banking system ostensibly in response to uncertainties instigated by the coronavirus outbreak.

Net foreign asset growth declined sharply to 6.2 percent year on year, by June, as against 51.7 percent growth as at December 2019.

This reflected in a slowdown in foreign currency deposit growth from 42.6 percent, year on year, as at December 2019, to 14.0 percent as at June 2020.

This is ostensibly largely the result of lower interest rates in the western hemisphere – which almost fell to zero at the height of monetary easing in response to the economic slowdown brought about by the outbreak of the coronavirus pandemic – as well as the slowdown in cedi depreciation against the United States dollar from 8.3 percent for the first seven months of 2019 to just 2.5 percent for the corresponding period of this year.

Besides the buildup of Ghana’s gross international reserves from US$8.4 billion (enough for 4.0 months import cover) as at December 2019, to US$9.2 billion (enough to cover 4.3 months of imports) as at June 2020 suggests that cedi depreciation will be minimal going forward as well despite this being an election year.

Therefore, there has been a major shift towards domestic asset holdings during the first half of 2020. Net domestic asset growth was 24.7 percent year on year as at June 2020, up from 15.0 percent as at December 2019.

But the strongest driver of net domestic asset growth has been growth in currency held outside the banking system, which grew year on year by 36.7 percent as at June 2020, up from 20.2 percent as at December 2019.

This was ostensibly the result of cash hoarding by the banking public in response to the economic uncertainties created by COVID 19.

The next strongest driver of net domestic asset growth has been interest-earning savings accounts and fixed deposits.

Although the average interest rates offered on savings accounts as well as both three month and six month fixed deposits have remained unchanged during the first half of 2020 at 2.55 percent, 11.50 percent and 10.50 percent respectively, they collectively experienced growth of 13.4 percent, year on year as at June 2020, up from just 3.4 percent as at December 2019.

Stronger growth appears to have been instigated in part by falls in treasury instrument yields; during the first half of 2020, the 91-day treasury bill rate fell from 14.69 percent to 13.97 percent and the 182-day rate declined from 15.17 percent to 14.05 percent, this the result of deliberate monetary easing by the central bank to stave off the negative impacts of COVID 19 on the domestic economy.

Growth in demand deposits (current accounts and money on call) however fell from 28.3 percent, year on year, as at December 2019 to 24.3 percent by June 2020.

Slower growth in liquidity is helping to keep inflation in check but is reflecting slower economic growth. However, economists expect increased public expenditure and pre-election political spending to increase liquidity growth over the coming months.