Macroeconomic imbalances and bank lending behaviour in Ghana

Macroeconomic imbalances as manifested through persistent inflationary pressures, exchange-rate volatility, and sustained fiscal stress, have become a defining feature of Ghana's macroeconomic environment over the past decade. While these imbalances intensified globally following the 2007-2008 financial crisis, their effects have been particularly pronounced in emerging and developing economies, where financial systems are bank-dominated and highly sensitive to macroeconomic shocks. In Ghana, the period since 2019 has been marked by severe macroeconomic disruptions that have fundamentally reshaped banking sector behavior and private-sector credit dynamics as the banking industry constitute more than 76% of the total asset base of the financial subsector with very high interconnectedness with the insurance subsector and others. This policy brief examines the effect of macroeconomic imbalances on bank lending in Ghana, with particular emphasis on exchange-rate movements, inflation, and fiscal conditions. Bank lending behavior is analyzed through loans and advances to customers, asset quality, and banks' risk posture. Using a panel dataset covering 18 universal banks over the period 2015-2024, the study applies fixed effects and dynamic System Generalized Method of Moments (GMM) estimation techniques to account for persistence in lending behavior, endogeneity, and unobserved bank-specific heterogeneity. The findings show that bank lending in Ghana is highly persistent and strongly constrained by deteriorating asset quality, as reflected in elevated non-performing loans. Exchange-rate movements exert a significant influence on lending, largely through nominal and valuation effects associated with currency depreciation. Inflation and fiscal stress primarily affect lending indirectly, operating through tighter monetary conditions, higher interest rates, and heightened risk aversion. Persistent Fiscal imbalances as captured by weak primary balances and rising public debt are found to suppress bank lending by increasing macroeconomic uncertainty and reinforcing crowding-out effects. Overall, the results indicate that macroeconomic imbalances shape bank lending in Ghana more through risk management, pricing behavior, and balance-sheet adjustments than through sustained real credit expansion. The study highlights the importance of credible macroeconomic policies, fiscal discipline, and forward guidance in restoring confidence, strengthening bank risk appetite, and supporting sustainable private-sector credit growth.