GRi Business, Economics & Finance 18 – 06 - 2003

Introduce long-term instruments – BoG urged

Inter-bank exchange rates of the cedi

Introduce long-term instruments – BoG urged

Accra (Greater Accra) 18 June 2003 - The Central Bank has been asked to fashion long-term financial instruments with the view to reducing the high interest rates induced by increased government borrowing.

This has the potential to reduce inflation and make manufacturing companies and individuals produce more to propel the economy forward.

These were the views of economists, statisticians and bankers at a panel discussion on Monday on "Inflation and Interest Rate Determination in Ghana" organized by the Ghana Stock Exchange (GSE) to generate debate on the subject.

The speakers were Dr James Akpo of Strategic Initiatives Incorporated, Dr Cletus Dordonoo of Claydord Consult, Dr Nii Kwei Sowa of the Centre for Policy Analysis (CEPA) and Dr Emmanuel K. Addison of Bank of Ghana.

Dr Akpo said the variables that go into the fixing of the Prime Rate by the Bank of Ghana must be clear to all, especially the commercial banks as they would help them to not only fix right rates but also corresponding interest rates.

He said monetary policy in the country had not been the best and would definitely need to be looked at again to change its negative impact on the economy.

He said it was impossible for a refined ground to exist if government continued to rely heavily on borrowing from the public sector, thus pushing up interest rates, and yet expect that the banks maintained a lower interest rate.

"It is true that the banks are not doing enough to help the situation, but they must survive and so develop products and activities to meet their needs, which on the other hand squeezed out poor customers."

Dr Sowa said it was wrong for the banks to be relying solely on guaranteed government treasury bills at between 33 to 39 per cent and yet expect their loyal customers and the poor to borrow at almost similar levels.

He said high interest rates though induced by government actions could also be blamed on the banks through some of their policies. Dr Sowa described as most unfair the practice where after all these benefits by the banks from the system, they came up with hard conditions for customers.

"Our banks now have so many charges that when one adds up all of these, you will realize the real charge."

Several banks currently demand one million cedis as minimum savings deposit. Dr Sowa urged government to rely on the year-on-year figures of inflation, "since this will give it a better view of the overall economic situation rather than the current point to point approach."

He said volatile elements - food, petroleum and utilities - exist in the indices forming the Consumer Price Index and the year-on-year approach in determining inflation was the best means to check these. Dr Dordonoo said it was sad that government and statistical bodies in the country were coming out with policy using the wrong variables.

"This is so because we as a nation do not have enough statistics available." He explained that the issue of average annual inflation demanded that Ghana built the right economic fundamentals.

He urged the Bank of Ghana to reduce the high reserve ratio for commercial banks since this was a major source of banks fixing high interest rates among other things to survive.

Dr Addison said the Central Bank's Prime Rate should be consistent with macroeconomic fundamentals and market expectations, "otherwise it would be irrelevant".

He said simply because government expected lower inflation next year did not mean that interest rates must be reduced now. "This is illogical since from a monetary point of view certain instruments must be employed to meet set targets.

"To put it simply, you do not stop studying hard if you expect to pass an exam at the end of the semester or if you have passed the first few tests." Dr Addison argued that annualising the monthly inflation rates, as the basis for setting monetary policy interest rates would be hazardous.

"No country in the monetary policy of the world has ever applied this methodology. No serious economist ever suggested this methodology because it is ridiculous". He said monetary policy was not conducted in a vacuum and must be formulated in a forward looking manner taking into cognisance a whole range of inflation and other indicators including fiscal developments, exchange market developments, money market developments and terms of trade and inflation outlook.

Jude Bucknor, Chairman of the GSE Council, urged government to pursue long-term financial instruments as a means of generating huge capital for economic development.

GRi…/

Send your comments to viewpoint@ghanareview.com