Fight against high interest rates misplaced

Economist and investment consultant Kwame Pianim says the Ministry of Trade and Industry’s campaign against high cost of credit will fail as long as it is not directed at the key factors, such as weak management of the economy.

The renowned economist, who was the board-chair of United Bank of Africa, speaking at a forum organised by the Trade Ministry and the Institute of Economic Affairs (IEA) on the implications of high cost of credit on the country’s economy, said the high interest rates reflect a multiplicity of factors.

“The elephant in the room is the bad macroeconomic management that we have had for so long…High cost of credit is bad economic management, it’s bad for growth; it leads to exchange rate depreciation,” he said.

“Get steady macroeconomic management, good fiscals, so that government can contribute to domestic savings; so that the cost of credit can come down,” Mr. Pianim told the Forum, which was attended by bankers, businessmen, policymakers among others.

Currently, government borrows from the market at about 25 percent and individuals and private sector businesses access credit at a minimum of 30 percent -- largely because inflation is hovering around 16.6 percent with the central bank’s policy rate -- which largely dictates lending rates -- pegged at 21 percent.

Mr. Pianim alluded to government’s tendency to borrow heavily from the domestic market, which he said outmuscles the private sector in accessing cheaper cost of credit.

According to him, government’s securities are risk-free and banks and other financial institutions are more comfortable lending to government than to businesses, much less start-ups which come with huge risk levels and are capable of defaulting in terms of payment.

Also, a higher savings culture will make available cheap funds for banks to be onward-lent to businesses at a cheaper cost -- a situation that is hardly the case in Ghana.

The country, Mr. Pianim said, compares unfavourably with its peers in terms of deposit mobilisation from the public. He attributed the low savings attitude to what he describes as the “pittance” paid by banks on deposits they mobilise.

Those who save with banks, he said, need more incentives in order to attract more savings.

Speaking at the same forum, Trade and Industry Minister Ekwow Spio Garbrah, whose ministry has launched an incessant campaign to obtain a cheaper source of credit for businesses said: “Even as most of the world is experiencing historical low interest rates, Ghana’s rates have been intractably high.

“The high cost of credit is a major problem as it stifles investment and economic growth. It also increases the cost of production, which is passed on to consumers in the form of high prices of goods and services,” he said.

Treasury yields, which indicate the cost of government’s borrowing, have been falling consistently since the latter part of last month. The 91-day T-bill has fallen for 11 straight weeks, declining from 25.85 percent to 25.08 percent at last Thursday's auction.

Also, the 182-day bill has fallen for 10 straight weeks since February 27; declining from 26.41 percent to 25.74 percent at last week’s auction.

The current 91-day yield of 25.08 percent is the lowest since August 29, 2014; while the 182-day yield of 25.74 percent is the lowest since July 04, 2014.

Analysts say while the size of the decline in the yields is not significant, the development is positive and will be even more beneficial for the economy if maintained. Falling yields imply a reduction in the cost of borrowing for government, which is deemed crucial to facilitating fiscal consolidation.