BoG trades off interest rates to save plummeting cedi
The Bank of Ghana is trading off interest rates hikes to save the cedi which has dropped by about 18 per cent this year, underlining the economic difficulties the country faces.
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The Institute of Economic Affairs (IEA) and the Association of Ghana Industries (AGI), Ghana National Chamber of Commerce and Industry (GNCCI) and Ghana Employers Association have on separate occasions raised concerns about the rising interest rates in the country.
The cedi lost has lost 18 per cent this year and it is already trading at GH¢ 4.00 to the dollar after a surprise 100 basis points increase in the main borrowing rate to 22 per cent.
Currently, banks’ interest rates average between 30 and 33 per cent, while that of microfinance companies range between 70 and 75 per cent per annum. However, bank depositors attract an average spread of between four and eight per cent on their deposits.
Bank of Ghana Governor, Dr Henry Kofi Wampah, told the Graphic Business that the rise was intended to stabilise the cedi and rein in expectations for inflation, which hit 16.8 per cent last month on the back of a lower exchange rate.
Moral persuasion
“I agree that there have been a lot of complaints about how much the banks charge, especially in the light of the profits they are making and so on.”
“Some of these things we do through moral persuasion. The major factor in this regulatory environment where we have deregulated interest rates is that, if we have sustained macroeconomic stability, that can have significant effect on interest rate or lending rates,” Dr Wampah said.
But the unexpected interest rate rise by the central bank to stem inflation has failed to stop the debt-stricken country’s cedi plunging to a low.
“The higher interest rate should also serve to make the country less vulnerable to the adverse implications of US interest rate rises,” he added.
“The exchange rate depreciation is one of the factors that the committee considered before moving up on the policy rate because we found out we need further tightening to rein in aggregate demand and, therefore, reduce the pressure on the foreign exchange market,” he said.
Weakening currency
A weakening currency and a high budget deficit are among problems that are starting to lower the country's growth trajectory.
Businesses are feeling the pinch not least as cuts to utility and fuel subsidy cuts last year, introduced by the government in a bid to reduce the deficit, helped push inflation to a five-year high of 16.8 per cent in April.
Most traders in some of the country’s busy markets in Accra and Kumasi routinely travel to southern China for cheap goods, buying dollars on the foreign exchange market and converting them into Chinese yuan to import everything from fake Armani jeans to kitchenware.
Those business trips are getting pricier because of 18 per cent fall in the cedi this year caused by unmet demand for dollars for imports and fiscal instability.
The current troubles of the cedi underlines economic difficulties faced by a country that was long one of Africa’s top performers but which has suffered from the fall in global commodity prices.
The country was forced to seek a US$918m bailout loan from the International Monetary Fund in March to plug a budget deficit that is expected to come in at 7.5 per cent of gross domestic product this year.
Anchoring inflation
But while some economists say the interest rate hike by the Bank of Ghana would do little to anchor the currency in the short term, others say the move could renew investor confidence by providing evidence of the government’s commitment to fiscal consolidation demanded by the IMF.
Head of Africa Research at Standard Chartered Bank Ms Razia Khan praised the monetary policy committee for raising its benchmark interest rates.
“Having made a sizeable contribution to the financing of the deficit last year, the Bank of Ghana needed to do more to restore its anti-inflation credibility,” adding that, “Unquestionably, it’s the right thing to do.”
“The key is still whether the Bank of Ghana will be able to meet IMF targets on a consistent basis,” said Ms Khan.
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Economist and Chief Executive of Progeny Ventures, Dr Kofi Amoah, is not the least enthused about the rising interest rates and had called on Parliament and the Bank of Ghana to enact laws that limit commercial banks’ investment in treasury bills.
That, he said, would help free up funds to support a fast-track private sector growth, create jobs and increase exports.
Other analysts were sceptical about the central bank’s decision to push the benchmark rate to its highest level since 2003.