The private sector Purchasing Managers Index (PMI), produced by IHS Markit and sponsored by Standard Chartered, rose to an over two-year high for Ghana in October 2020. Economic growth is still projected to accelerate toward the second quarter of 2022, as external and domestic demand gain traction.
While this augurs well for the economy, the potential for frequent tipping points in business and industrial performances, and drops in business growth, resilience, and sustainability are likely to occur as persistently, high-interest costs to businesses and industries weigh on regional competitiveness (AfCFTA in mind), production costs, trade, and business operations.
The Bank of Ghana has a primary objective to maintain stability in the level of prices generally, per the amended section 3 of the Bank of Ghana Act 2002, (Act 612). The bank also has an extra responsibility to support the general economic policy of government, promote economic growth and development, and ensure effective and efficient operation of the banking and credit system, as well as contribute to the promotion and maintenance of financial stability.
This is where we believe the weightings employed in modelling tools available to the bank need reassessment, especially in areas allowing for high yields to government bond owners (domestic or foreign) and the use of policy rate to manage inflation (or inflation targeting). This, among others, keeps policy rates much higher than peers in the sub-region and the wider continent.
In addition, it’s difficult to provide a convincing metric that explains the spread between the policy rate and lending rate in Ghana. It’s easy, as a result, to attribute this shortcoming to thick walls of transmission mechanisms, inefficiencies, and suboptimal microeconomic management (and too much emphasis on macroprudential measures).
There’s very little evidence, according to the table below, that monetary policy tools effectively check and manage optimal inflation in West Africa. We have enough to show, through our recent research sponsored by BUSAC, to the contrary – that the high-interest rate regime in Ghana, taxes, and energy costs – in a pecking order of impact – impede business performance (growth, value, and resilience). The situation shuts out industries that may rather have higher economic multipliers and wider distributive capacities
Policy Rate, Lending Rates and Inflation Rates in West Africa
| Rank | Country | Last PR | Prev PR | Date | Last IfR | Prev IfR | Date | LR | Date |
| 1 | Cape Verde | 0.25 | 0.25 | Jun/21 | 1.5 | 1.3 | Jun/21 | 8.2 | 2020 |
| 2 | Benin | 4 | 4 | Jun/21 | 4.6 | 1.7 | Jun/21 | 5.1 | 2017 |
| 3 | Burkina Faso | 4 | 4 | Jun/21 | 3.5 | 2.3 | Jun/21 | 5.1 | 2017 |
| 4 | Guinea Bissau | 4 | 4 | Jun/21 | 0.2 | 0.7 | Apr/21 | 5.1 | 2017 |
| 5 | Ivory Coast | 4 | 4 | Jun/21 | 3.5 | 4.2 | Jun/21 | 5.1 | 2017 |
| 6 | Mali | 4 | 4 | Jun/21 | 5.3 | 4.8 | May/21 | 5.1 | 2017 |
| 7 | Niger | 4 | 4 | Jun/21 | 3.9 | 4.7 | Mar/21 | 5.1 | 2017 |
| 8 | Senegal | 4 | 4 | Jun/21 | 2 | 1.3 | Jun/21 | 5.1 | 2017 |
| 9 | Togo | 4 | 4 | May/21 | 6.2 | 3.7 | Jun/21 | 5.1 | 2017 |
| 10 | Mauritania | 5 | 5 | May/21 | 2.7 | 2.4 | May/21 | 17.0 | 2017 |
| 11 | Gambia | 10 | 10 | May/21 | 8.05 | 7.67 | Jun/21 | 28.0 | 2020 |
| 12 | Guinea | 11.5 | 11.5 | May/21 | 12.18 | 12.37 | Jun/21 | 12.9 | 2001 |
| 13 | Nigeria | 11.5 | 11.5 | Jun/21 | 17.75 | 17.93 | Jun/21 | 13.6 | 2020 |
| 14 | Ghana | 13.5 | 14.5 | May/21 | 7.8 | 7.5 | Jun/21 | 22.8 | 2021 |
| 15 | Sierra Leone | 14 | 14 | May/21 | 10.2 | 9.8 | Jun/21 | 23.5 | 2020 |
| 16 | Liberia | 25 | 25 | May/21 | 8.16 | 9.41 | May/21 | 13.3 | 2017 |
Source: Trading Economics 2021; World Bank 2021. Prev PR = Previous Policy Rate, Last IfR = Last Inflation Rate, LR – Lending Rate
Ghana is considered one of the most economically stable countries in West Africa (and joins Morocco and Botswana as the three most politically stable in Africa). The country is also rated among the top five growing economies in Africa, but all the four levels of interest rates – policy rates, interbank rates, government security rates and commercial lending rates – appear to betray these assertions because a promising economy should have a natural connection among economic stability, interest rates and inflation.
In addition, Ghana has one of the largest natural resource backings to put her atop any liquidity buffer that supports exchange stability and risk profiling inherent in interest rate pricing, yet the country seems to be one of the highest interest rate jurisdictions in West Africa if not the entire Sub-Saharan region. Many reasons can be attributed to this anomaly:
Interest Rate Constraints and Challenges in Ghana
- Government’s crowding out domestic borrowing behaviour.
- Slow transmission mechanisms from policy rates to the markets.
- Overemphasis on macroprudential programmes.
- Short-changed microeconomic programmes which mimic behavioural trends of household, businesses and industries.
- Treasury bill rate playing instrumental role in MPR Modelling.
- Inflation targeting and exchange rate controls.
- Inefficient operations.
- Demographic challenges.
- Pursuit of excessively high net margins by banks.
- Extremely high spread between lending rate and deposit rate.
- High return on equity.
- Mechanical pricing based on bands around policy rate.
- Inefficiencies and structural weaknesses.
- Risk perception pricing (Instead of pricing around real business and industry information)
- Ownership structure of Ghanaian banks (Driven by a high percentage of international capital)
If Ghanaian banks and policy innovators can adapt to new pricing and modelling regimes quickly and decisively, they can capture huge benefits. Much of this improvement will come from better risk management, lending practices and the optimisation of operations and fees. A lot of benefits will also accrue as well from reducing price leakages and adjusting deposit list prices.
Modern pricing strategies and borrower profiling can also create closer relationships with core customers—a critical advantage if the sector is structured to enjoy a more competitive environment — and improve performance in scale and scope throughout the banks’ structures.
Recommendations
- Innovations in operations and asset ownership to reduce capital outlay in setting up and operating new branches.
- Cost-sharing strategies; for instance, cash in transit.
- Operational optimisation and risk management (financial, non-financial, and strategic).
- Improvements in business and industrial resilience.
- Market-driven cuts in interest rates to businesses and industries as against taxes to governments.
- Improved pricing techniques and borrower profiling based on:
- Industry
- Cash flow
- Liquidity
- Business model
- Trade type, etc.
- Increased competition.
- More indigenous ownership of banks.
- Encourage more savings to allow for cheaper mobilisation of capital.
The solution to high-interest rates and finance costs relies more on microeconomic diligence, using competition laws and structures, and path-walking, particularly industry value chain development (IVDC), than on macroeconomic prudence. This is because data, as provided in the above table, documenting the distribution and ranking of policy rates, lending rates, and inflation rates in West Africa, lack consistency in the use of policy rates to target inflation.
In fact, the data largely reveal the opposite – low policy rate jurisdictions have low inflationary pressures. Efficient competition laws, optimal risk pricing, and IVCD appear to be the microeconomic poster boys, and more sustainable tools needed to manage interest rates and inflation stability, rather than the excessive reliance on macroprudential policies.
This means pursuing increased competitiveness, financial innovations and inclusions, borrower profiling, cost efficiency programmes, proper risk management and IVCD (which provides adequate information for banks to price risk on real business, markets and industry dynamics and not on the risk perception playboy). These micro-programmes, if decisively fashioned out, will surely push down financial costs to encourage new investments, reinvestment, resilience, sustainability, business and industrial growth.
The writer is the CEO Of Afrideg Ghana Limited. President, Citi-Africa
