NO. 27 IEA MONOGRAPH High Intrst Rats In Ghana, A Critical Analysis IEA Ghana THE INSTITUTE OF ECONOMIC AFFAIRS A Public Policy Institut
High Intrst Rats In Ghana, A Critical Analysis 1 by DR. J. K. KWAKYE 1 Dr. Kwaky workd with th Bank of Ghana for twnty yars until 2, prdominantly in th Rsarch Dpartmnt. For th following tn yars, h workd at th Intrnational Montary Fund in Washington, D.C., as Advisor to th Excutiv Dirctor Rsponsibl for Ghana. Dr. Kwaky is currntly a Snior Fllow at th Institut of Economic Affairs.
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1 Introduction Th high lvl of Ghana's intrst rats has continud to b a sourc of concrn in th country. Evn as som masur of macroconomic stability has bn achivd in th past and rcntly, intrst rats hav gnrally rmaind stubbornly high. Th importanc of th subjct and th nd to fill an obvious public information gap motivatd this papr. Th first to b xplaind is th xistnc of diffrnt intrst rats and point out how thy may b rlatd. This will b followd by a discussion of th principal actors in th markts and how thy influnc intrst rats. Th nxt sction will numrat th conomic costs of high intrst rats, followd finally by suggstions as to how to addrss th high lvl of intrst rats. 1. Diffrnt Intrst Rats in Diffrnt Financial Sgmnts Whil high bank lnding rats may hav bn th focus of attntion and angr, w hav to rcogniz that thr ar svral intrst rats out thr that ar dtrmind in svral sgmnts of th financial systm. Among thm ar th Policy Rat, intrbank rat(s), govrnmnt scuritis rats and banks' lnding and dposit rats. At th apx of th intrst rat rgim is th Policy Rat, Bank Rat, or Prim Rat as it is 2 variously calld. This is th rat st by th montary authoritis and chargd on (ovrnight) short-trm crdit it xtnds to banks to rplnish thir liquidity shortfalls. In this rgard, th Cntral Bank xrciss its rol as lndr of last rsort. Th Policy Rat (PR) plays th rol of a bnchmark that is usd to signal th cost of funds. As such, it is xpctd to b transmittd throughout th financial systm, as banks rflct it in transactions among thmslvs and with th public. Th dgr of transmission of th PR, howvr, dpnds on th dgr of dvlopmnt of and comptition in th financial systm. In Ghana, th rflction of th PR in particular banks' lnding rats has bn xtrmly tardy. Th nxt rat of intrst is th intrbank rat, which banks us for financial transactions among thmslvs. As such, ths rats may not b quit visibl to th gnral public. Thr is also a st of rats on govrnmnt scuritis that typically rang from 91 days to 5 yars. Nxt ar banks' lnding and dposit 2 Th Ghanaian montary authoritis hav dcidd to call thirs th Policy Rat, that nam is usd in th papr.
2 Th Institut of Economic Affairs rats. Ths ar probably th most visibl rats to th public and which, arguably, ar th primary subjct mattr of th dbat rgarding high intrst rats, at last on th lnding sid. Thr is much about th lvls and sprads of ths rats latr on in th papr. Whil thy diffr, th intrst rats in th diffrnt sgmnts of th financial systm tnd to b rlatd somwhat, rflcting th cost of funds as signald by th PR. Thir rlationship also drivs from th principl of arbitrag which argus that funds will flow, within cost margins, from markts whr thy rciv lowr rturns to othrs whr thy rciv highr rturns. In thory, som quilibrium lvl of intrst rats will b rachd in ach sgmnt of th loanabl funds markt, rflcting th point whr availabl supply of funds is qual to dmand for thm. That said, thr ar svral layrs of influnc and actors in th markts 3 that affct th flow of funds that go to dtrmin intrst rat lvls. 2. Th Principal Markt Actors and Factors That Influnc Intrst Rats Thr ar svral actors in th markts whos actions and prfrncs influnc th lvl of intrst rats. Th ky actors ar borrowrs, lndrs, banks and th montary authoritis. 2.1 Borrowrs Lt s first tak th dmand sid of th loanabl funds markt. Th usrs of funds ar th govrnmnt, companis and individuals. Th govrnmnt dmands funds to financ th gap btwn its rvnu and xpnditur or th budgt dficit. Th govrnmnt is oftn a big playr in th markts whr it compts with othr usrs of funds. In that sns, th public sctor borrowing rquirmnt (PSBR) has a big influnc on th pric of funds or th intrst rat. Companis and individuals also borrow for consumption and invstmnt purposs. Thir dmand for funds will also influnc th pric or intrst rat. Govrnmnt borrowing to financ budgt dficits has bn on of th major factors that hav sustaind th high lvl of intrst rats in Ghana. Th immdiat ffct is on th Trasury Bills and Nots/Bonds markt. But, as notd, intrst rats across markt sgmnts tnd to b linkd somwhat through arbitrag and also bcaus of limitd 3 Rcognition is takn of th xistnc of informal markts lik th susu schms and lon-lndr systms, which could nrich th discussion if appropriatly analyzd. For now, howvr, th discussion is kpt simpl and attntion is focusd on th formal financial markts.
rsourcs govrnmnt borrowing has an ffct on all intrst rats. Whn govrnmnt issus high lvls of its scuritis, it has to pay a high pric in th form of intrst to b abl to rais its financing targt, bcaus of rsourc limitations. By compting with othr usrs of funds, govrnmnt borrowing may put prssur on intrst rats in othr markt sgmnts as wll as crowd out privat borrowrs. That is th rason why high dficits and xcssiv govrnmnt borrowing may b bad for th conomy. 2.2 Lndrs/Invstors In a world of limitd rsourcs, lndrs both domstic and forign hav a grat dal of influnc on th pric of funds or th intrst rat. In gnral, lndrs will dmand highr intrst rats th gratr thy prciv th risks associatd with thir lnding. Ths risks ar both conomic and political. Economic risks includ xpctd currncy dprciation and 4 inflation. Both factors rod savings/invstmnts and, thrfor, hav to b compnsatd for. Othr conomic risks ar high xtrnal account dficits, budgt dficits, and public dbt, which signify that th capacity of a borrowing govrnmnt to srvic its dbt may b compromisd and th risk of dfault is high. Political risks, on th othr hand, includ political instability, corruption, and lack of ffctiv institutional mchanisms for protction of invstd funds. Th markt will sk compnsation for ths risks by dmanding highr intrst. Whn Ghana's intrst rats ar considrd high, it is bing rlatd to rats in othr countris, spcially our prs in Africa and in othr parts of th dvloping world. Thory postulats that domstic intrst rats rflct a markup ovr forign ons, th markup rprsnting prcivd risks. Thus, in gnral i d = i f + risks -------------------------------------------------------Equation(1) whr, i d is domstic intrst rat, i f is forign intrst rat, and 'risks' rprsnt all risks associatd with lnding to th country. As notd abov, on important risk is currncy dprciation, which rods th valu of invstmnts in forign currncy trms, for which th markt will dmand compnsation. Forign lndrs will b mor concrnd with this typ of risk, givn that thy hav to rpatriat thir funds in th futur in forign currncy. Th markt markup basd on currncy dprciation is rprsntd by th classical Intrst Rat Parity Thorm (IRPT). Th IRPT 3
4 Th Institut of Economic Affairs stats that th markt will dmand an intrst rat prmium basd on xpctd dprciation of th domstic currncy. Thus, domstic intrst rats will b qual to forign intrst rats plus a markup basd on prcivd dprciation of th domstic currncy. In an quation form, th IRPT can b statd as: i = i + E ------------------------------------------------------Equation(2) d f whr, i d, i f ar as statd abov, and E is xpctd chang in th domstic currncy. Thus, vn basd on xpctd currncy dprciation alon, domstic intrst rats will b highr than forign ons. Givn that th cdi has bn dprciating for most of its history, it should thrfor not b surprising that th markt has continud to dmand a prmium on Ghana's intrst rats. Evn whr th xchang rat has bn stabl d facto, as w ar xprincing currntly, th markt may still dmand a prmium if it dos not bliv that th stability is ral or will last, and that futur dprciation is a crtainty. Th risk hr is a mattr of prcption rathr than of fact. 2.3 Commrcial Banks Most of th ir about high intrst rats has bn dirctd at commrcial banks and may b rightly so. As w know, th banks st rats at which thy lnd funds to borrowrs and rats thy pay on dposits lodgd by customrs with thm. It is thn lft to borrowrs and savrs to dcid which banks thy want to dal with and in what amounts. In a situation whr th financial systm is not wll-dvlopd and is infficint and uncomptitiv, howvr, banks' lnding rats could b artificially high and dposit rats artificially low, with borrowrs and savrs rducd ssntially to prictakrs in th markts. This is to say that th markt has to accpt rats thrown up by an uncomptitiv and infficint banking systm. Not surprisingly, banks' lnding rats hav rmaind stubbornly high in Ghana, vn as th bnchmark PR has bn rcntly rducd. Svral indicators ar usd to buttrss this point. As Tabl 1 and Chart 1 indicat, during Jun 29-Jun 21, banks avrag lnding rat dclind by 2.12 prcntag points. This compars unfavorably with dclins of 3.5 and 12.93 prcntag points rspctivly in th Policy Rat and th 91-day Trasury Bill rat. Official information obtaind indicats that as at nd-jun, lnding rats in th industry rangd from 23.5 prcnt to 37.5 prcnt, with an industry avrag of 3.63 prcnt. On th othr hand, savings dposit rats rangd from 2. prcnt to 11.5 prcnt, with an industry avrag of 7.25 prcnt. This lavs an unaccptably larg sprad, a point takn up latr. Apart from nominal rats, banks ral lnding rats hav bn qually high. Rfrring to Tabl 2 and Chart 2, banks avrag ral lnding rat narly doubld from 12.1 prcnt in Jun 29 to 21.11 prcnt in Jun 21. During th sam priod, th ral 91-day Trasury Bill rat
dclind from 5.8 prcnt to 3.37 prcnt (although it ros through Novmbr 29). This trnd mant that govrnmnt bnfitd from dcrasing cost of crdit through Trasury Bill issus. Throughout th ntir priod, th banks' avrag ral savings rat rmaind, albit dcrasingly, ngativ. This shows th xtnt to which savrs hav born th brunt of banks' policis. Th situation is not conduciv for mobilizing savings and dvloping a savings cultur in this country. It is notd hr that th ral PR also incrasd stadily throughout th priod, transitioning from ngativ trritory arlir to positiv trritory latr. This issu is takn up in Sction 2.4 blow. Nxt, a look at banks' intrst rat sprads buttrsss th problm of thir high lnding rats alongsid dprssd savings rats. During th rviw priod, banks avrag lnding ratsavings rat sprad stayd within a rang of 24.83-21.83 prcntag points, dclining by a mr.87 prcntag points (S Tabl 3 and Chart 3). Furthr, th lnding rat-pr sprad showd a gnral rising trnd in th rang of 14.25-16.83 prcntag points. Also, th lnding rat-t'bill rat sprad widnd sharply from 6.93 prcntag points to 17.74 prcntag points. Thrfor, by vry masur, banks' lnding rats rmaind mils abov comparabl rats in th financial systm. Th Cntral Bank, govrnmnt officials, and concrnd privat groups and individuals hav 5 rpatdly urgd banks to rduc thir lnding rats (s blow). Ths appals, howvr, sm to hav largly falln on daf ars. It would appar that moral suasion alon may not b nough and that th montary authoritis would hav to find mor ffctiv mans of gtting thir mssag across. Thy hav a duty to nsur that banks conform to accptabl ruls of bhavior vn in th contxt of a libralizd financial rgim or fr markt conomy. Th high lvl of lnding rats or th cost of crdit is consistntly citd by businssmn to b on of th important impdimnts to invstmnt, privat sctor dvlopmnt, and conomic growth in Ghana. As notd abov, dposit rats, on th othr hand, hav bn prsistntly pggd low, laving larg sprads btwn th two rats. Larg sprads ar usually symptomatic of undrdvlopd, infficint, and uncomptitiv financial systms. Banks try to justify ths sprads in trms of thir high cost of funds and lnding risks. Among th costs thy cit ar oprational costs, costs associatd with macroconomic instability, and costs rlatd to th unrmunratd cash rsrv rquirmnt imposd by th montary authoritis. Th banks may also argu that lnding to sctors lik shock-pron agricultur and to customrs who lack crdit rfrnc, incras th dangr of loan dlinquncy, thrby incrasing risks for th banks. Whthr ths factors justify th larg sprads, is, howvr, 5
6 Th Institut of Economic Affairs TABLE 1 : KEY INTEREST RATES, JUNE 29-JUNE 21 Priod 29:Jun Jul Aug Sp Oct Nov Dc 21: Jan Fb Mar Apr May Jun Jun'9-Jun'1 Chang Policy Rat 18.5 18.5 18.5 18.5 18.5 18. 18. 18. 16. 16. 15. 15. 15. 91-Day T- Bill Rat 25.82 25.9 25.89 25.89 25.83 25.47 23.7 2.13 17.78 16.16 13.71 13.14 12.89 Av. Lnding Rat 32.75 32.75 32.75 32.75 32.75 32.75 32.75 32.75 32.38 31.83 31.83 31.83 3.63 Av. Savings Rat 8.5 9.5 9.5 9.5 9. 7.25 Inflation Rat 2.74 2.5 19.65 18.37 18.4 16.92 15.97 14.78 14.23 13.32 11.66 1.68 9.52-3.5-12.93-2.12-1.25-11.22
7 CHART 1: KEY INTEREST RATES, JUNE 29-JUNE 21 P r c n t 35. 3. 25. 2. 15. 5.. Ky Ky Intrst Rats, Jun, Jun 29-Jun 21 n Ju J u l : A ug S p O ct N ov D c n Ja 2 9 : 1 2 Priod b F a r M p r A a y M J u n Policy Rat 91-Day T-Bill Rat Av. Lnding Rat Av. Savings Rat Inflation Rat P r c n t 35. 3. 25. 2. 15. 5.. Ky Intrst Rats, Jun 29-July 21 Policy Rat 91-Day T-Bill Rat Av. Lnding Rat Av. Savings Rat n Ju J u l : A ug S p O ct N ov D c n Ja : F b M ar A pr M ay J un Inflation Rat 9 1 2 2 Priod
8 Th Institut of Economic Affairs Tabl 2 & Chart 2 Ral Intrst Rats, Jun 29 - Jun 21 Priod 29:Jun Jul Aug Sp Oct Nov Dc 21: Jan Fb Mar Apr May Jun Jun'9-Jun'1 Chang Ral Lnding Rat 12.1 12.25 13.1 14.38 14.71 15.83 16.78 17.97 18.15 18.51 2.17 21.15 21.11 Ral Savings Rat -12.24-11. -1.15-8.87-8.4-6.92-5.97-4.78-4.23-3.32-1.66-1.68-2.27 Ral T-bill Rat 5.8 5.4 6.24 7.52 7.79 8.55 7.73 5.35 3.55 2.84 2.5 2.46 3.37 Ral Policy Rat -2.24-2. -1.15.13.46 1.8 2.3 3.22 1.77 2.68 3.34 4.32 5.48 9.1 9.97-1.71 7.48 25. 2. Ral Intrst Rats, Jun 29-Jun 21 P r c n t 15. 5.. -5. - 29:Jun Jul Aug Sp Oct Nov Dc 21: Jan Fb Mar Apr May Jun Ral Lnd. Lnding Rat Rat Ral Savings Rat Ral T'Bill Rat Ral Policy Rat -15. Priod
9 25. Ral Intrst Rats, Jun 29-Jun 21 2. P r c n t 15. 5.. -5. - -15. 29:Jun Jul Aug Sp Oct Nov Dc 21: Jan Priod Fb Mar Apr May Jun Ral Lnding Lnd. Rat Rat Ral Savings Rat Ral T'Bill Rat Ral Policy Rat TABLE 3 & CHART 3 INTEREST RATE SPREADS, JUNE 29-JUNE 21 Priod Lnd-Sav. Sprad Lnd-PR Sprad Lnd-T Bill Sprad 29:Jun Jul Aug Sp Oct Nov Dc 21: Jan Fb Mar Apr May Jun Jun'9-Jun'1 Chang 24.25 23.25 23.25 23.25 22.75 22.75 22.75 22.75 22.38 21.83 21.83 22.83 23.38 -.87 14.25 14.25 14.25 14.25 14.25 14.75 14.75 14.75 16.38 15.83 16.83 16.83 15.63 1.38 6.93 6.85 6.86 6.86 6.92 7.28 9.5 12.62 14.6 15.67 18.12 18.69 17.74 1.81
1 Th Institut of Economic Affairs P r c n t 3. 25. 2. 15. 5.. 29:Jun Intrst Rat Sprads, Jun 29-Jun 21 Lnd-Sav. Sprad Lnd-PR Sprad Lnd.-T'Bill n 9 : Ju J u l Lnd-T Bill Sprad A ug S p O ct N ov D c n : Ja F b M ar A pr M ay J un 1 2 2 Priod Jul Aug Sp Oct Nov Dc 21: Jan Fb Mar Apr May Jun 3. Intrst Rat Sprads, Jun 29-July 21 P r c n t 25. 2. 15. 5.. 29:Jun n 9 : Ju 2 Jul l Ju Aug g u A Sp S p Oct c t O Nov Dc 21: Jan v c o n N D : Ja 1 2 Priod Fb F b Mar a r M Apr p r A May a y M Jun n Ju Lnd-Sav. Sprad Sprad Lnd-PR Sprad Lnd-T Bill Lnd.-T'Bill Sprad
11 2.4 Th Montary Authoritis Whil commrcial banks may hav to tak considrabl flack for high intrst rats in th country, th policy actions of th montary authoritis could also contribut to th problm. Th montary authoritis us intrst rat policy as a tool for managing inflation, somtims th xchang rat, and conomic activity. Whn inflation is high and if this is considrd a gratr risk than a slowing conomy th authoritis will rais th PR to signal a highr cost of funds that it lnds primarily to banks. This mssag is supposd to b passd on by banks in th form of highr lnding and dposit rats, which, in thory should rduc crdit dmand and attract savings. Th rsult is to rduc mony supply and aggrgat dmand in th conomy and thrby hlp dampn inflation prssur. On th othr hand, if th authoritis considr th balanc of risk to li mor with a slowing conomy than with inflation, thn thy will rduc th PR to stimulat crdit dmand in ordr to bolstr conomic activity. In Ghana, inflation has bn a prsistnt problm, drivn, primarily, by dmand prssurs associatd with high govrnmnt xpnditur and dficit financing, costpush ffcts manating from cyclical food supply shocks, and th impact of a dprciating currncy on import prics. Facd with prsistnt inflation, th montary authoritis had to pg th PR high for a considrabl lngth of tim. In rcnt months, howvr, th PR has bn rducd rpatdly in lin with falling inflation. Th PR may also b usd as a tool to support th domstic currncy. Kping th PR and, in sympathy, othr rats high incrass th attractivnss of domstic currncy-dnominatd assts. Th dampning ffct of high intrst rats on domstic crdit and mony supply also rducs dmand for forign xchang. In th nd, high domstic intrst rats hlp to attract forign currncy into th conomy and to rduc outflows, thrby strngthning th xchang rat. It will b saf to infr that th PR has bn usd as a tool not only for fighting 8 inflation but also for protcting th xchang rat. It follows, thrfor, that if th Ghanaian montary authoritis had long bn proccupid with fighting inflation and also protcting th currncy, thn it could b infrrd that thy might hav bn contributing to th prvalnc of high intrst rats in th country. Th qustion of whthr th PR has bn xcssivly high or not, howvr, cannot b considrd in isolation, bcaus that is a mattr of rlativity. A rlvant masur in this rgard is th ral rat, i.. th nominal rat discountd for inflation. As Tabl1and Chart 1 show, th ral PR was ngativ btwn Jun-August 29, bfor turning positiv thraftr. Th ngativ or low positiv ral PR would suggst that montary policy was not sufficintly tight during th priod. Also, to th xtnt that th PR is chargd on lnding to banks, it implis that th banks 8 This is not information that is normally put out in th public domain but rquirs a carful rading of th montary authoritis' intrvntion actions to discrn. For instanc, if against th run of conomic fundamntals, th currncy holds stady or vn apprciats, th chancs ar that th authoritis may b intrvning havily in th forign xchang markt, which may show in falling intrnational rsrvs.
12 Th Institut of Economic Affairs wr rciving rlativly chap funds from th Cntral Bank. This is spcially th cas sinc it was happning at a tim whn th banks wr charging much highr ral rats on thir lnding to th public (S th attachd Tabls and Charts). It is also obsrvd that from Jun 29 through Fbruary 21, th PR was lowr than th (intrst quivalnt of) 91-day Trasury Bill rat. Could this not hav pavd th way for th banks to roundtrip to th xtnt that thy could purchas T-Bills at highr rturns and us thm to collatraliz thir borrowing from th Cntral Bank at th lowr PR? Whil still on th PR, th MPC communiqués indicat that th montary authoritis hav bn asing policy from Octobr 29 consistnt with falling inflation by rducing th PR. Ironically howvr, th fact that th ral PR has bn incrasing sms to suggst, rathr, a procss of policy tightning in th ral sns. Th infrnc from all this is that, on th on hand, th montary authoritis did not sm to hav had in plac a PR that was sufficintly high in th arlir priod whn it was ndd to stm inflation, whil, on th othr hand, in th lattr priod, th authoritis might hav bn tightning policy in a ral sns rathr than asing it, which is currntly ndd. Th two rsults appar to suggst som kind of instrumnt-goal inconsistncis. Th montary authoritis' commnts on ths obsrvations would, of cours, b wlcom. 3. Effcts of High Intrst Rats Probably, nobody has a bttr apprciation of th ffcts of high intrst rats than industrialists who ar at th forfront of production in th country. It is not surprising, thrfor, that th Association of Ghanaian Industris (AGI) along with th Unitd Tradrs Association of Ghana (UTAG) and th Ghana Chambr of Commrc (GCC), has bn th most vocal in dcrying th high lvl of intrst rats. As ths various bodis will tll you, high intrst rats rduc th incntiv to invst and thrby slow down not only industrial growth but also conomic growth. Indd, Ghana's rlativly high intrst rats and high cost of crdit mak th country lss comptitiv in attracting invstmnts, which inhibits its growth. High cost of crdit ranks among th top concrns oftn citd by invstors as impding businss in Ghana. If intrst rats, and th cost of crdit, ar brought down significantly, Ghana would b abl to attract highr lvls of invstmnts which would add svral notchs to its growth rat. By incrasing th cost of crdit and production, high intrst rats also rsult in high prics of goods and srvics that consumrs hav to pay. It is known that th montary authoritis tnd
to rais intrst rats to try and dampn dmand prssurs in fighting inflation. Howvr, th irony of such action is that it may also caus mor inflation if production costs incras significantly as a rsult of th high cost of crdit. Such an outcom is mor likly in an conomy lik ours whr production constraints ar substantial. High intrst rats can, thrfor, both inhibit conomic growth and caus inflation. Ghana's conomy has probably long bn caught up in this undsirabl scnario. Whil growth rats of 5-6 prcnt achivd in th past lookd rspctabl to us, to achiv th Millnnium Dvlopmnt Goals (MDGs) would rquir much highr growth rats of 8-1 prcnt. This is, howvr, not possibl whn ral intrst rats, at last on bank loans, ar so high. Similarly, th prsistnc of th stubbornly high inflation in this country could not b unrlatd to th cost-push ffct of highr production costs associatd with high intrst rats. Lowring intrst rats should thrfor b a top national priority. 13 4. Rmdial Masurs Masurs rquird to rduc intrst rats follow dirctly from th causal factors numratd abov. Primarily, macroconomic stability is critical to rducing th markt's prcivd risks for which it sks compnsation in high intrst rats. As a principal dtrminant of macroconomic stability, fiscal policy has a ky rol to play in rducing risks. In th sam vin, govrnmnt must curb its spnding and borrowing to rduc th prssur on intrst rats and crowding out of th privat sctor. Political risks, including thos rlatd to policy uncrtaintis, corruption, and lack of institutional protction for invstmnts and privat proprty, should also b minimizd in ordr to improv invstor confidnc and trust. Rducing intrst rats will rquir addrssing som structural waknsss in th banking industry. Dspit th fast growth of th industry, comptition rmains low, an indication that siz alon may not b sufficint in gnrating comptition. Primary among th structural waknsss is th domination of th industry by th Ghana Commrcial Bank (GCB) along with th National Invstmnt Bank (NIB) and Agricultural Dvlopmnt Bank (ADB) which dos not oprat indpndntly and fficintly. It is as if ovr 3 prcnt of th banking industry is not contributing to th xpctd comptition and fficincy. This calls for privatization and/or rstructuring in a mannr that rmovs official intrfrnc in th running of ths banks such that thy can oprat comptitivly and fficintly. This will b bnficial to th industry as a whol. For xampl, th dcision by
14 Th Institut of Economic Affairs GCB to lnd to TOR, or othr parastatals, should b motivatd by commrcial considrations and not by political prssur ovrt or covrt. Banks lik NIB and ADB hav a rol to play in supporting th stratgic sctors of industry and agricultur. But thy should b mad to oprat fficintly in ordr to limit fiscal risks and risks to th ntir financial systm. Coupld with low comptition in th banking industry is th problm of banks' own high oprational costs, including administrativ costs, th costs associatd with inadquat financial infrastructur, and th high costs of administring numrous small dposits and borrowrs who lack sufficint idntity and crdit rfrnc. Thr ar also costs to th industry associatd with montary policy. In particular, whil th obligation to kp 9 prcnt of banks' dposits in th form of rsrvs at th Cntral Bank srvs an important prudntial objctiv, spcially in our systm whr thr is no dposit insuranc, th fact that th rsrvs ar unrmunratd constituts a cost to th banks, as thy hav to pay intrst to 9 customrs howvr low that may b. This is not to say, howvr, that th rsrv rquirmnt alon can b usd to justify banks' larg sprads. In fact, if Ghana did hav a dposit insuranc schm, th banks would b askd to mak financial contributions to it. That said, a rduction of th primary rsrv ratio to svn prcnt(7%) initially and furthr to fiv prcnt (5%) subsquntly is rcommndd. On th othr hand, th Cntral Bank may dcid to pay a minimal rturn on th rsrvs to hlp banks offst part of thir costs. Th Cntral Bank must act dcisivly to curb th high lvl of banks' lnding rats and sprads, which cannot b justifid on th basis of thir costs, spcially in light of thir continud high profitability. Th us of moral suasion by th Bank has nvr workd and a nw approach is warrantd. An option will b to cap intrst rat sprads at 1 prcnt initially, to b rviwd aftr a yar or two. Th banks should b allowd to continu to st th lvls of thir lnding and dposit rats. Sinc dposits rprsnt banks principal sourc of funds for lnding, imposing a limitd markup of lnding rats ovr dposit rats would not appar to b out of ordr. If this masur vn rsults in both lnding and dposit rats rmaining high, it will at last achiv th usful purpos of nsuring that du rturn is paid on savings. It should b known that capping th sprad is in no way intndd to rturn to th old systm of controlld intrst rats. Such intrvntion can b justifid as ncssary in corrcting an obvious markt failur in th crdit systm, somthing that is don vn in th most capitalist conomis. This cas should b mad strongly to our multilatral partnrs th IMF and World Bank who ar likly to b th first to rais th issu of a rturn to controls, which
15 1 thy considr an anathma to thir fr markt conomic philosophy. It is worth mphasizing that it is th collctiv rsponsibility of all rlvant partis, in particular govrnmnt, banks, and th montary authoritis, to bring intrst rats down. This will b mutually bnficial. It is in this vin that th rcnt indication by banks that thy will rduc thir lnding rats following rductions in thir bas rats, which wr considrd by many popl to b inadquat, is a vry wlcom dvlopmnt. In fact, thr ar ampl 11 rsourcs in this country to tap for dvlopmnt. But somtims a cas is mad for looking 12 to th outsid bcaus of th high cost of crdit in this country. Bringing intrst rats down should mak domstic rsourcs affordabl for th govrnmnt, municipalitis, utility companis, housing providrs, tc. to tap for conomic and social projcts.
IEA Ghana THE INSTITUTE OF ECONOMIC AFFAIRS A Public Policy Institut P. O. Box OSI936, Osu, Accra, Ghana. Tl: +233-32-244716/ +233-37-1714, Fax:+233-32-222313 Email: ia@iagh.org/iaghana@yahoo.com www.iagh.org