The Institute of Economic Affairs (IEA) has reiterated the need for a more effective regulation of interest rates by the central bank, as a way of reducing the high cost of credit that prevails in Ghana.
Dr. Charles Mensa, IEA President, said the high lending rates in Ghana — in spite of historically low rates worldwide — are of monumental national importance due to their implications for private sector development.
He noted that the issue has consistently been cited by the world competitive index reports, as well as in surveys by the Association of Ghana Industries, as one of the major obstacles to doing business in the country.
Dr. Mensa’s statement was read on his behalf at a stakeholders’ forum on the theme ‘High Costs of Credit: Implications for Ghana and the Way Forward’, organised by the Ministry of Trade and Industry in collaboration with the IEA.
Dr. Mensa noted that the IEA in a previous work from 2012 had recommended reinforced regulation of lending rates.
The government then directed the Bank of Ghana to take appropriate action, which led to the institution of a cost-based system for setting banks’ base rates.
He maintained however that the new framework appears to have had limited impact on lending rates in the country, which remain very high and need to be addressed.
This, he said, is necessary as prevailing high lending rates in the country are stifling investments, development of the private sector, and economic growth in general.
He said the institute is willing to work with interested stakeholders to address the problem, which represents a stranglehold on private sector development and economic growth.
“We intend to work beyond conferences to engage with relevant stakeholders to sustain advocacy in order to ensure proposals emanating from conferences are carried to the attention and necessary action of all concerned,” he stated.
Dr. John Kwakye, IEA Senior Economist — in a presentation on ‘The causes and solutions of high cost of credit in Ghana’ — said the phenomenon is caused by multiple factors which are both domestic and international.
On the domestic front, Dr. Kwakye said IEA surveys have found that competitive government borrowing is a major cause of high lending rates in the country.
e said Ghana has had budget deficits for a long time, which are increased during election years, financed by successive governments borrowing both domestically and internationally.
This has driven up the rate for Treasury bills, which has become a de facto benchmark for bank rates. , government is forced to pay relatively high interest rates, which in turn forces the private sector to pay high rates for credit.
Also, high costs in the banking industry covering operational costs; energy costs due to the current energy crisis, as well as structural inefficiencies; high borrower risks emanating from inadequate collateral, lack of credit referencing and un-bankable projects; and general macro-economic instability have contributed to the high rates.
Internationally, depreciation of the cedi and high interest rate demands from foreign investors for bonds have also been contributory factors.
Dr. Kwakye recommended that in order to address these issues, government must restrain its borrowing by reducing the budget deficits. It must also consolidate the country’s macro-economic stability.
Other remedies suggested include increasing the efficiency of banks’ operational costs; addressing borrower risks; and, most importantly, reinforcing financial regulation in Ghana.
The forum was attended by public officials, economic experts, businessmen and women, bankers and a -section of the public.