High interest rates: concern of all

President Nana Addo Dankwa Akufo-Addo has publicly expressed concern about the high lending rates in the country.

While addressing chief executive officers (CEOs) at the Executive Forum in Accra recently, the President declared: “I have requested the Governor of the Bank of Ghana (BoG) to interrogate the issue of high interest rates in Ghana and how the problem can be addressed to enhance the competitiveness of the private sector.”

The President is not alone in expressing this concern, as high interest rates continue to be a source of worry to many people, including the business and the investor communities.

A measure of macroeconomic stability has been achieved in the past and recently, interest rates have generally gone down, but they still remain stubbornly high, hovering between 24 and 27 per cent, after the BoG began a string of Policy Rate cuts.

The Policy Rate, which is the benchmark that is used to signal the cost of funds, has dropped from 25 per cent in 2017 to 16 per cent since July 2019, all in a bid to drive down lending rates.

Ordinarily, this is expected to be transmitted throughout the financial system, with banks reflecting it in transactions among themselves and with the public.

But the degree of transmission of the policy rate among the commercial banks has been very weak, thereby making lending rates worryingly high, in spite of the progress made in driving down the rates.

This is irking the investor and the business communities, which makes the President’s intervention most timely and helpful.

Nobody has a better appreciation of the effects of high interest rates than industrialists who are at the forefront of production in the country.

It is not surprising, therefore, that the Association of Ghana Industries (AGI), along with the United Traders Association of Ghana (UTAG) and the Ghana Chamber of Commerce (GCC), have been the most vocal in decrying the high level of interest rates.

We at the Daily Graphic are concerned about high interest rates because they reduce the incentive to invest and thereby slow down not only industrial growth but also economic growth.

Indeed, Ghana's relatively high interest rates and high cost of credit make the country less competitive in attracting investments, a situation which inhibits its growth.

The high cost of credit ranks among the top concerns often cited by investors as impeding business in the country.

If interest rates and the cost of credit are brought down significantly, Ghana will be able to attract higher levels of investments which will add several notches to its growth rate.

High interest rates also result in high prices of goods and services.

High interest rates can, therefore, both inhibit economic growth and cause inflation. Ghana's economy has, probably, long been caught up in this undesirable scenario.

While growth rates in the last few years looked “respectable”, to achieve the Sustainable Development Goals (SDGs) would require much higher growth rates.

This is why no stone should be left unturned in the collective drive to interrogate the issue of high interest rates in the country and how the problem can be solved to enhance Ghana’s economic competitiveness.

For us at the Daily Graphic, we think the central bank must act decisively to curb the high level of bank lending rates and spreads, which cannot be justified on the basis of their costs, especially in the light of their continued high profitability.

The use of moral suasion by the BoG has never worked and a new approach is warranted. An option will be to cap interest rate spreads at 10 per cent initially, to be reviewed after a year or two.

The banks should be allowed to continue to set the levels of their lending and deposit rates. Since deposits represent banks’ principal source of funds for lending, imposing a limited mark up of lending rates over deposit rates will not be out of order.

Even if this measure results in both lending and deposit rates remaining high, it will at least achieve the useful purpose of ensuring that due return is paid on savings.