Limit banks’ investment in treasury bills; Amoah cautions Parliament, Bank of Ghana
The Chief Executive of Progeny Ventures, Dr Kofi Amoah, has called on Parliament and the Bank of Ghana to enact laws that limit commercial banks’ investment in treasury bills.
Advertisement
That, he said, would help free up funds to support a fast-track private sector growth, create jobs and increase exports.
Commercial banks’ interest rates currently 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.
But speaking at the product launch of Bond Financial Services in Accra, Dr Amoah, who is also a philanthropist, said “commercial banks must be regulated not to invest more than 10 per cent of their deposit base in treasury bills.”
The call is to curb the rising interest rates and control the domestic cost of borrowing by government. The interest rate and government borrowing have reached a six-year record, as more debt is issued to finance the deficit and mop up liquidity to rein in inflation.
Since August last year, the government has been paying 25 per cent per annum on 91-day debt, which is equivalent to 25 pesewas on every cedi borrowed.
The jump in treasury yields has also exerted pressure on the average lending rate of banks, which rose to an average of 32 per cent since the beginning of the year; the highest in five years. That rate of interest is the highest since the third quarter of 2009, when three-month borrowing costs peaked at almost 26 per cent.
While the call for interest rate cuts is being trumpeted by Dr Amoah and the Association of Ghana Industries (AGI), the Bank of Ghana, earlier this month, in a surprise move, raised its benchmark base rate by one percentage point to bolster the currency after it headed for a decline.
With the current high-lending rates, analysts feared the move by the central bank could trigger an increase in banks’ non-performing loans.
But Dr Amoah said commercial banks must have a ceiling of 15 per cent on lending rates, which should drop by one percentage point every year by five to end at 10 per cent.
Analysts have blamed the rising interest rates charged by the commercial banks on increased borrowing to finance the budget deficit.
Rising inflation
The rate is fuelled by the high consumer price inflation, which had risen to 16.8 per cent in April from 16.6 per cent in March due in part to a rise in the price of utilities.
But debt servicing, including interest paid on foreign loans, is already consuming more than 40 per cent of tax revenue and the consistent rise in domestic interest rates threatens to increase this ratio -- which analysts warn is unsustainable.
Three years ago, debt servicing cost 16 per cent of tax revenue, but after two consecutive years of record budget deficits and a steep decline in the cedi, the ratio has more than doubled.
This, coupled with the rise in public sector wage expenditure and interest payment by the government, exceeded the value of tax revenues.
These trends are fuelling more borrowing to finance the capital budget, creating a vicious cycle of rising interest rates that cause more debt to be sold to undertake public investment.
Role of Parliament unclear
It is unclear what role Parliament can play in curbing the rising interest rates and whether an enactment can stem the tide.
This is because in 2012, the then Speaker of Parliament, Justice Bamford Addo, directed the Finance Committee of the House to interrogate the nation’s banks over the high interest rates after MPs had expressed outrage over what they called “unacceptable astronomical profits” being made by both local and foreign banks operating in the country.
After years of complaints by small-scale businesses and consumers about the high interest rates charged by banks, Ghana’s Parliament has made a bold move to probe the issue of huge disparities between the Bank of Ghana’s base rate and the interest rates of the various commercial banks operating in the country.