Tackle monetary policy discontinuity to address lending rates problem –  analyst tells BoG

On Tuesday, July 2, 2013, all commercial banks started implementing this new formula for calculating the minimum lending rate for borrowers. 

In 2013, the Bank of Ghana under Governor Wampah – in an attempt to address the intractable high lending rates problem – announced a formula to be used by banks as a guide for loan asset pricing.

On Tuesday, July 2, 2013, all commercial banks started implementing this new formula for calculating the minimum lending rate for borrowers.  This was done in spite of concerns raised by civil society actors regarding some details about the policy. Some of the key issues raised were the following:

  • Lack of transparency and the paucity of details regarding policy implementation underlined public concern that such a commendable measure may only be an academic exercise.
  • Secondly, the formula seemed clearly like a policy direction toward price control as opposed to market intervention. As the case was, prior to introduction of the Economic Recovery Programme in 1983 and Structural Adjustment Programme in 1986, unintended consequences of central direct control created unpleasant gaps between policy aims and outcomes. Direct control in those eras involved the imposition of ceilings, both global and sectoral, on individual commercial banks’ lending. The policy objective was to achieve consistency with national macroeconomic targets such as growth, inflation and external balance. It’s a matter of public record that time proved these mechanisms to be ineffective and inefficient in realising the policy goals as originally intended.

In 2022, four years after implementation of the Ghana Reference Rate (GRR), the problem of high lending rates still persists. As at December 2021, the average lending rate was 20.4 percent – a more than 600 basis point spread over the Ghana Reference Rate (13.89 percent: Dec 2021).

Lessons from History

The history of monetary policy development in Ghana since independence shows a rough path, with many phases in between the extremes of direct official control to full liberalisation in 1992. Prior to introduction of the World Bank-sponsored Economic Recovery Programme (ERP) in 1983, the objective and direction as far as monetary policy was concerned was to ensure that the financial markets were aligned with government’s economic objectives.

Credit was allocated to certain sectors with little regard for sector risk as the primary basis of resource allocation. Foreign exchange was rationed on the basis of certain criteria, which was at best subject to the changing whims of bureaucrats and politicians. Suffice it to say that, ultimately, the end result was the country’s inability to realise its policy goals – thus creating an inefficient and dysfunctional resource allocation mechanism.

Many years passed while new arguments emerged to support a policy of market liberalisation mediated by strong institutional regulation. That argument clearly contrasted the inefficiencies of official control with the proposed benefits of markets as a more efficient allocator of resources for developmental purposes. It seemed apparent that interest rates, exchange rates and other asset prices forming a key component of enterprise cost structure would trend downward to levels which would make Ghanaian enterprises competitive both regionally and globally. Yet this was far from the case.

And so the question remains: why haven’t any of the policy packages worked effectively in addressing the interest rate issue?

Political Shifts

The transition from one policy approach to another is usually actuated by political shifts which trigger changes at the top of Ghana’s monetary policy citadel – the central bank. Unfortunately, such changes at the central bank have had unintended impact on policy continuity, as far as managing price stability is concerned. A typical example is the transition from Governor Wampah to Governor Addison. Following introduction of the ‘Wampahnomics’ model in 2013, there were calls on the Bank of Ghana to clarify certain aspect of the policy. The following questions, among others, were raised by some civil society actors:

  1. Was the formula applicable to only Deposit Money Banks?
  2. What was the expected impact of each variable on asset price?
  3. Does each variable within the formula carry the same or different weights, and how much?
  4. Would Return on Equity (ROE) be used on projected or historical basis?

Indeed, there were calls for the regulator to clarify how the policy was going to be implemented and what institutional compliance would look like. Some also called on the central bank to provide regular updates and impact assessment reports to enable Civil Society Organisations (CSOs) and interest groups to weigh-in with independent analyses of the policy’s effectiveness, as a way of building momentum for implementation.

I quite recall publishing a policy brief with clear recommendations for BoG to take steps to build public confidence – especially with the backdrop of scepticism expressed by certain financial sector big-wigs at the time. In 2018, the Ghana Reference Rate (GRR) came into effect. Fast forward to 2022 – Ghana’s private sector continues to grapple with comparatively high interest rates notwithstanding introduction of the Ghana Reference Rate, which was expected to address the lending rates problem.

The Need for Policy Evaluation

Here are two questions for the central bank:

  1. Was there any evaluative inquiry into why the ‘Wampahnomics’ model didn’t deliver on its expected outcomes?
  2. Based on available data, what has been the impact of the Ghana Reference Rate (GRR) on interest rate movement since its introduction?
  3. Has the passage of time validated the assumptions behind the GRR’s theory of change prior to its introduction?

There is a need to deepen evaluation practice in the conduct of monetary policy in order to promote continuity. There is no better place to start than with a comprehensive review of previous and current policy models to determine if their in-built result frameworks are logically consistent. That’s how we can begin to really address the problem of high lending rates.


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