To fully realise benefits from the new investment guidelines for the pensions industry, policymakers should make efforts to address most of the inherent factors in the economy which could drive down interest rates, senior economics lecturer at the University of Ghana, Priscilla Twumasi Baffour, has said.
The new guidelines on investments of Tiers 2 and 3 Pension Funds by the National Pension Regulatory Authority (NPRA) seek to mandate fund managers to diversify away from government securities, which has become necessary given the private sector needs for investment.
However, Dr. Baffour, in a presentation at the 2022 Pension Strategy Conference organised by Axis Pension, stated that for the new guidelines to materialise, it will require that policymakers attend to factors inherent in the economy which will address the high-interest rates.
“We need to drive down the interest rate, which will improve the viability of investment options. A lot of people will dare to borrow if the price is low, to venture into production activities that will accrue to growth of the economy.
“There is a need to lower risk and develop alternative capital markets via a vibrant equity market, to get an alternative asset class. Because, as it stands, the alternatives are not too great when you look at the stock market’s capitalisation,” she said.
According to the Bank of Ghana, the weighted average interbank rate declined further to 12.68 percent from 13.56 percent, largely induced by persistent structural liquidity on the interbank market. This transmitted to the retail end of the market, and average lending rates of banks declined marginally to 20.04 percent in December 2021 from 21.20 percent recorded in the corresponding period of 2020.
Some identified policies to address the inherent factors include keeping inflation under control – as it feeds directly into the cost of capital – through the use of monetary instruments, while tackling structural bottlenecks. Currently, inflation hangs at around 13.9 percent; exceeding the central bank’s upper band target of 10 percent.
Government Expenditure
Another policy measure the economist identified is for government to curtail its borrowing by keeping the budget in check to reduce the fiscal deficit.
“In this case, prudent expenditure management is critical along with increased revenue mobilisation efforts to raise the needed tax. We find that there has been a lot of initiatives which have been undertaken but are not yielding results in terms of widening the tax net,” she said.
Dr. Baffour further called on government needs to be checked, given its inability to generate the needed revenue to run the economy.
Nonetheless, last month the Minister for Finance, Ken Ofori-Atta, announced a 20 percent cut of the approved 2022 budget expenditure, as government’s fiscal consolidation agenda is primarily driven by the expenditure side with support from additional revenue.
As part of efforts to rationalise government expenditure, the Ministry of Finance says it has come up with policy measures that include: savings of US$13.2 billion from renegotiation of the Power Purchase Agreements (PPAs) with Independent Power Producer (IPP); a staff restructuring exercise; suspension of new projects under the Infrastructure for Poverty Eradication Programme (IPEP) in 2022.
The ministry intends to roll out expenditure commitment control mechanisms to curb expenditure overruns, as well as ensure strict use of the Ghana Integrated Financial Management System (GIFMIS) to minimise off-budget expenses; and suspend vehicle purchases by MDAs and MMDAs.
