Accra, July 24, 2017//-The Governor of Bank of Ghana (BoG), Dr Ernest Addison has jumped to the defence of the 36 commercial banks operating in the country when issue of high interest rates came up at the Monetary Policy Committee (MPC) press briefing today.
He asserted that although the policy rate has been reducing for the fourth consecutive time, since November 2016, the difficult operating environment in which the banks find themselves does not august well for a corresponding interest rates cut.
Dr Addison added that the high Nonperforming Loans (NPL) which currently stood at 21.7 percent in May 2017 in the banking industry , high operating costs including rent and salaries, IT infrastructure and general economy are making the banks difficult to slash down interest rates in the country.
Just today, the MPC reduced the policy rate from 22.5 percent to 21 percent, citing a long haul of disinflation process. “The disinflation process is still ongoing and this trend is likely to continue all through till the end of the third quarter. Barring any unanticipated shocks, the current stance of monetary policy and expected stability in the exchange rate should ensure price stability”, according to the MPC press statement.
The policy rate is the rate at which the central bank does overnight lending to the commercial banks in the country.
With the reduction, all the commercial banks are required to reduce their base rates accordingly. But the banks won’t reduce their base rates to correspond to the latest policy rate.
However, the Ghana Trades Union Congress (TUC), Association of Ghana Industries (AGI), Ghana Union of Traders’ Association (GUTA) and other businesses have called on the government to regulate the interest regime in the country.
They argued that regulating the interest rates in the industry will contribute largely in bringing down the rates being charged by industry players within the banking and non-banking financial institutions.
The TUC insisted that the move is one way of the surest ways of government showing its commitment to the private sector which will lead to the creation of the much-needed jobs and a friendly business environment which will boost private sector participation in the economy.
Why businesses are too concerned about interest rates
According to economists, high interest rate increases the cost of borrowing. Interest payments on loans and advances become more expensive to the debtor(s) or borrowers, individuals and businesses.
One of its paramount effects is that it discourages businesses or people from borrowing. Companies or people who already have loans will have less disposable income because they spend more on interest payments.
Therefore other areas of consumption will fall. Again, there is an increased incentive to save rather than spend because of the interest gained on savings and fixed deposit products. When consumption falls, business and economic growth becomes limited, according to analysts at Omega Capital Limited, a leading investment management, private equity and investment advisory firm based in Accra.
High interest rates can have a serious effect on small businesses, which tend to operate with limited cash flow. Higher interest rates may cause small businesses to set aside more money to repay loans and other debts. This in effect reduces a business’ disposable income and can affect its ability to pay receivables. An increase in interest rates can have a significant effect on a company’s growth plans as well. Not only do interest rates affect loan payments, but they also have an impact on the ability to secure funding by businesses.
On government fiscal operations, they explained that interest rates impact the government’s deficit. Government may need to borrow money to take care of infrastructural and social developmental projects among others.
As interest rates rise, the government has to issue bonds at higher rates to entice investors. Debt service becomes a larger component of the deficit, causing the government to have to spend more of the budget on interest payments and this could lead to increasing taxes in the future.
By Masahudu Ankiilu Kunateh, African Eye Report
