Bank of Ghana to Scrap Special Cash Reserves for Banks, Shift to Open Market Operations—–In his swearing-in as Governor of the Bank of Ghana, Dr. Johnson Pandit Asiama wasted no time in signaling that one of his first moves is scrapping the use of differentiated cash reserves for banks and replacing it with a more flexible market-driven approach.
For years, the central bank has required banks to hold a certain percentage of their deposits as reserves, with different requirements depending on the type of bank. But Dr. Asiama believes it’s time to move away from that system and instead use open market operations, buying and selling government securities, to regulate money flow in the economy.
“We will discontinue the use of differentiated cash reserve requirements and instead rely on open market operations to manage liquidity conditions,” he announced.
His statement comes at a time when businesses and banks have been feeling the squeeze. Just a few years ago, the Bank of Ghana raised the cash reserve ratio from 12% to 14%, meaning banks had to lock up more of their money instead of lending it out. The goal was to reduce excess cash in the system and control inflation, but banks argued it was hurting their ability to give loans and support businesses.
The higher reserves meant that banks had less money to lend, and when they did, interest rates were often higher. Businesses, already struggling with economic uncertainty, found it even harder to access credit. Many industry players warned that this was slowing down investment, making it tougher for businesses to grow, and ultimately, affecting job creation.
Now, with Dr. Asiama at the helm, the central bank is taking a different route. Instead of forcing banks to hold onto a fixed percentage of cash, the new approach will allow the Bank of Ghana to control liquidity by actively engaging in financial markets. This means when there’s too much money in the system, the central bank can sell securities to mop up the excess. And when more money is needed to spur economic activity, it can buy securities to release funds into the system.
For banks, this could mean more room to operate and lend, instead of having large sums locked away as reserves. For businesses, it could mean better access to credit and lower borrowing costs in the long run.
But while the shift sounds promising, financial experts say it will take careful execution. Open market operations require strong monitoring to ensure inflation remains under control and that banks do not take excessive risks with their newfound flexibility.
