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Opinions of Sunday, 30 October 2016

Columnist: Angela Kafui Amenyo

Astronomical interest rates, killer of businesses

One and five Ghana cedis notes.        File photo. One and five Ghana cedis notes. File photo.

“Well, I do not think I will be able to go for the loan for us to undertake the project. The interest rate the financial institutions are quoting is too much and that will, without doubt, increase our cost of operation and hugely affect our profit margin”.

These were the devastating words I heard from my very good friend who had earlier on discussed with me about a worthwhile short project he had won and was about to undertake.

Unfortunately, he had to backtrack and completely abandon the project, due to the humongous and business unfriendly interest rate demanded of him by all the financial institutions in Ghana he approached.

To cut a long story short, due to the astronomical interest rates, he has to abandon the project and only hope for a financial miracle in the days to come, which I doubt will ever come.

It is no secret that over the years, private enterprises in Ghana, who employ more than 70% of Ghana’s labour force, have lamented over the high cost of borrowing in the country and its adverse effects on their activities and the many ripple effects on our economy.

The Monetary Policy Committee (MPC) has held its benchmark policy rate at 26 percent since November, following an increase of 500 basis points during 2015.

The MPC said inflation remains above the medium-term target band of 8±2 percent but noticed a slowdown since its last meeting due to cedi stability, easing inflation pressures and tight credit conditions.

The interbank rate has remained between 25 and 26 percent over this period, within the policy rate corridor (+/- 1 percent).

Growth in credit to the private sector slowed even more sharply than broad money, from 36.3 percent to 9.0 percent over the same period.

Banks’ average lending rates have also tightened significantly, to 32.7 percent in June 2016 from 27.5 percent at end 2015.

Interest Rate in Ghana averaged 17.66 percent from 2002 until 2016, reaching an all-time high of 27.50 percent in March of 2003 and a record low of 12.50 percent in December of 2006. Interest Rate in Ghana is reported by the Bank of Ghana.

Businesses, through their umbrella bodies such as the Association of Ghana Industries (AGI) and the Ghana National Chamber of Commerce and Industry (GNCCI), have, for donkey years, as it were, stood upon mountains and hills screaming on top of their voices about this regrettable situation in the country that has curtailed and continue to restrain the desired growth of businesses.

This situation also has negatively impacted their profit margins, ability to compete with foreign imports, capacity to employ the many unemployed youth scattered along the length and breadth of Ghana among other teething challenges.

Mr Seth Adjei-Baah, the immediate past President of Ghana National Chamber of Commerce and Industry, during their 40th Annual General Meeting (AGM) opined that high interest rates disrupt the smooth operations of businesses and that commercial banks’ lending rates in Ghana, which ranged between 27 and 35 percent, was amongst the highest worldwide.

He cited a recent World Bank survey, which indicated that access to affordable credit was a major challenge inhibiting business growth in Ghana.

His comments were published on January 13, 2016.

Adding his voice to this seemingly incurable cancer, the then President of the Association of Ghana Industries (AGI), Nana Owusu-Afari, when interviewed by a journalist from an Accra-based private radio station, CitiFm, noted that government should quickly step in to intervene in the situation as it is crippling industries.

According to him, no industry can survive on the type of interest rates financial institutions are charging in Ghana.

Available statistics point to the fact that Ghana has one of the highest interest rates in the world.

Ghana is said to have one of the highest lending rates to the world, placing second in the latest ranking released by Trading Economics, a development which has been identified as a disincentive for the business community.

Financial institutions continue to enrich themselves by charging these high interest rates and they have justified their actions time and again with financial idiolects which they alone understand best.

It is clear that they have endeavored to do very little or close to nothing about this situation considering the fact that they enjoy great successes and profits from this act.

It is, therefore, not surprising that financial institutions have dominated the Ghana Club 100 more often than not. Interest rates in Ghana are so abnormally high that it leaves me with no option but to conclude that our financial institutions delight in raking in supernormal profits and would care less if this situation remains unchanged.

Well, I do know that businesses exist to make profit for which reason commercial banks and financial institutions also peg their interest rates at a level that enhances their profit margin.

However, I do believe without any equivocation that given the right economic and fiscal policies, interest rates can be drastically reduced and our financial bodies can still enjoy a very good profit margin.

Over the years, I have heard government officials during flamboyant and colorful events, whether organized by themselves or as invited guests speaking about the fact that the private sector is the engine of growth for our economy.

They continue to stress on the benefits that Ghana derives as a result of a vibrant private sector and how businesses need to be competitive with their international counterparts and also provide employment for the youth of Ghana.

As they go on and on about these benefits, it begs for me questions like, how in the world can we expect the private sector of Ghana to provide us with all these benefits when little is being done to reduce their cost of operation?

How can government expect the private sector of Ghana to be at their optimal best without actually ensuring that the right conditions exist for them?

How can we make our exports cheaper and favorably compete with foreign goods if manufacturers are faced with high cost of borrowing, a situation for which same cannot be said about some of their counterparts abroad?

This I can say is comparable to attempting to fill a barrel full of water with basket; simply not attainable!

The time has come for the government, the Central Bank of Ghana and all stakeholders who matter, to come on board to demonstrate their commitment in seeing a healthy and a vibrant private sector by putting in place measures and policies that will drive interest rates downwards. This ‘much-ado-about-nothing’ syndrome cannot continue.

If Ghana is to enjoy growth and development that we all desire, then we cannot downplay the importance of an effective private sector.

For most advanced economies like the United States of America, Canada, United Kingdom and so on, governments have made deliberate efforts in ensuring that their private sector enjoy great successes as that automatically benefits their economies.

I wish to call on the central bank of Ghana to begin to work towards creating the right financial atmosphere where commercial banks and financial bodies whose prime agenda, as I have come to believe, is to enjoy more and more profit begin to lower their interest rates.

This will offer businesses the luxury of borrowing at a lower cost which will, in turn, enable them contribute their bit to the growth and prosperity of Ghana.

When this is done, then we can be confident that businesses will see a reduced cost of operation, increased profit which will be translated into expansion, greater exports and also offer employment for Ghana’s labour force.

Even though it is a fact that interest rates alone is not the only factor affecting businesses in Ghana, I subscribe to the school of thought that says the journey of a thousand miles begins with a step and so the time to act to reduce interest rates in Ghana is now!!!