Policy rate has no transmission effect on lending rate…… Na who cause am? The case of Ghana.
According to the Ghana Statistical Service, Ghana’s economy contracted by 3.2 percent in the second quarter for the first time in 37 years. However, growth has returned slowly as some of the covid-19 restrictions have been lifted.
Apart from the contraction experienced by the country, the Standard & Poor (S&P) Global Ratings recently downgraded Ghana’s credit rating from B to B-. This may have been erroneous considering the Ministry of Finance’s reasons for fiscal deterioration, being interventions and unbudgeted expenditure amid the Covid-19 pandemic.
However, we are likely to face further downgrade in the months to come. The S&P Global
Ratings may have been too pessimistic about Ghana’s economy. Hence there is the need for the Bank of Ghana (BoG) to tread cautiously in their decision making at the 96th Monetary Policy Committee (MPC) meeting, and come out with structured finance policies that can withstand and address the fiscal challenges and avoid a further heighten of the situation.
It was unsurprising that the MPC kept the policy rate the same at their previous meeting due to the slowdown in global market demands and the zeal to improve liquidity within the domestic market. I believe a policy direction this time is non-negotiable.
I am reminded by an article written in the New York Times by David Brooks, dated 10th April, 2014 and titled, “The moral power of curiosity”. He stated that capitalism requires the full range of motivation together with an intrinsic drive for knowledge and fairness.
I indicated in our earlier piece about the need for fiscal stimulus around mid-September and November, 2020 as a form of recommendation for the government.
BoG must provide a clear evidence that there has been significant progress before tightening up the monetary policy either by increasing the policy rate from 14.5 percent or decreasing it to the benefit of the real sector of the economy. This directive by BoG is expected to re-enforce consumer spending and get borrowing cost reduced to foster the growth of businesses in the country.
Also the rebound in growth in August is not necessarily a good guide to the future, as covid-19 is likely to constrain spending and weigh on investments due to the uncertainties surrounding businesses. Such a development calls for the need to implement strategic monetary policy measures that seek to provide a full structural change and complement the fiscal measures taken by the government to sustain the economy in this era of covid-19.
As has always been my stand, let us be reminded that this is advisory and not binding.
MONETARY POLICY RATE RISK ASSESSMENT
Covid-19 has put the global economy into disarray as their balance sheets are overly burdened. Governors of Central Banks are struggling to understand and navigate a route to ensure they meet their targeted monetary rate; therefore Bank of Ghana (BoG) is not an exception.
A second wave and surge in covid-19 cases in Europe and other continents would likely affect the recovery of the economy of Ghana, and therefore what can sustain our businesses would be putting in place timely intervention through BoG’s quantitative easing programme.
Though we possibly missed the opportunity to shore up the system and boost businesses within the economy in mid-September, 2020 through the quantitative easing method, it is about time BoG moved from the wait and see mood in their MPC meeting to start quantitative easing (QE) with a target value.
It is also time to do the heavy lifting on both short and long-term threats and avoid further
contraction of the economy.
Ghana’s economy with its performance has been fluctuating over a period of time with numerous challenges and risks components including Currency risk, Specific Financial Risk, Specific
Economic Risk, and Political Risk.
It is very refreshing to note and acknowledge the effort made by the Government to purchase a USD 1 billion Repo arrangement with the Federal Reserve to bring stability to Ghana’s currency markets. However the risk components remain a threat for the recovery of the economy.
I am guided by the history of the Great Depression where the Federal Reserve made errors and missteps in their decision which led to a further worsening of the economic hardship in the 1930’s.
According to Ben S. Bernanke (Former Governor of Federal Reserve, USA) in his speech
delivered on key failures of the Central Bank in the 1920s and 1930s at the H. Parker Willis
Lecture in 2004, highlighted the following:
Firstly, tightening of monetary policy in 1928 and 1929 caused a serious economic downturn before the stock crash in 1930. The monetary policy tightening was unnecessary and the consequences were as a result of the poor decisions taken by the Federal Reserve.
A sharp decline in money supply also resulted in fallen output and prices due to the decline in income and spending, creating the vacuum of making individuals require less money to carry out transactions. This development forced the Federal Reserve to persuade banks not to lend.
This made the Federal Reserve strategy proved to be ineffective and further dissuaded lending directly due to the rise in the cost of borrowing.
At this critical moment that the Ghanaian economy is experiencing a significant contraction
coupled with consumer spending constraints and the call on the government to sustain
businesses, I fear that the MPC could be arm-twisted in not lowering the policy rate between 50 to 100 basis points. Notably, a decision by the MPC would determine the future direction of the economy. I therefore entreat the Committee to walk the path of proactiveness and practicality.
Today’s economic crisis attributed to covid-19 pandemic has heightened the rise in job cuts, drip in remittances, increased inequality and poverty, rise in fiscal gaps and created room for digitization.
In order to alleviate the plight of citizens and restore confidence to the economy, most countries at this crucial period have initiated and implemented welfare programmes to provide relief support to individuals, businesses, and industries at large. In Nigeria, which is estimated to have about 21.7 millions of people unemployed, and is likely to soar under covid-19 pandemic.
As a means to avert the further rise in unemployment, the government has executed social
intervention programmes to relief and support the poor and businesses within and across the country. In the United Kingdom, the government has implemented the “eat out to help out” scheme as a means to cushion expenses on goods and services, increase consumption and revive their hospitality industry.
Likewise, Ghana is not exceptional amid the pandemic and has equally provided relief support to individuals, communities, and businesses in the country through the government GH¢1 billion stimulus package and the covid-19 Support Fund.
These are expected to contain and sustain the economy in case the unexpected second wave of covid-19 does occur. Since experience from the 1918 influenza pandemic suggests the possibility of an even more severe second wave [ref. IMF].
The BoG monetary policy rate must be accommodative particularly at these pressing times to help contain, sustain, and drive the economy in the future. Notwithstanding the BoG’s inflation policy target, it must ensure that there is sound liquidity flow devoid of credit crunch in the near future.
The BoG should also consider the implementation of the government’s stimulus package provided to Small and Medium-Sized Enterprises (SMEs), through the National Board for Small Scale Industries (NBSSI). In the sense that the shortfalls that would be created by NBSSI can be washed off by BoG’s expected positive injections into the economy.
Additionally, individuals and businesses that are unable to access the NBSSI facility should have access to funds from banks at a reduced rate of borrowing, provided the MPC rate is reduced.
Failure on the part of BoG to reduce the policy rate can result in unemployment cases, decline in production, reduced purchasing power, create shortfalls in wages and growth coupled with difficulties in sustaining the economy amid the 2020 general elections.
To improve liquidity on the domestic market, the BoG has to take a closer look at the current lending rate of Banks. Since the policy rate is claimed to have no transmission effect on lending rate considering the current 14.5 percent of the policy rate. The policy rate reduction by 150 basis points to 14.5 percent earlier was expected to cause a sharp decline in the lending rates of Banks rather than witnessing the marginal difference in cost of 6.5 percent arising from the above 21 percent lending rate charged within the credit market.
It would be proper that these factors such as risk premium, fees, insurance, individual or corporate risk and credit policies used by financial institutions in determining loan prices is duly assessed to make future MPC rates more effective capitalizing on the Ghana reference rate. Reckoning the fact that, “If NBSSI fails, Ken Ofori-Atta has failed and Addison injection would be incongruous”.
As such the Bank of Ghana must be strategic in its injections especially at this time of covid-19 by riding on the back of NBSSI stimulus packages, foreign inflows from repos, IMF facility, payment of customers of the defunct Savings and Loans, Microfinance institutions, etc. to provide a sound monetary policy direction to increase liquidity to help contain, sustain, and drive the growth of the economy in the short-to-medium term.
AUTHOR: SAMUEL OKYERE DONKOR – INVESTMENT BANKER
CO-AUTHOR: ATTA TAKYI – POLICY ANALYST
Contact #: 0268828132
Email Address: [email protected]