Tame inflation to meet growth-enhancing target - Dr. Atuahene

Banking and corporate governance consultant Dr. Richmond Atuahene has called on government to lessen macroeconomic uncertainty by taming inflation to meet growth-enhancing targets while promoting policies to reduce high lending rates.

With inflation currently sitting at 52.8 percent, he said, it is imperative that government takes prudent steps to bring it under control, stabilise the cedi and support the Bank of Ghana (BoG) to reduce its key policy rate.

Reacting to the BoG’s decision to hike its monetary policy rate (MPR) by 150 basis points (bps) to 29.5 percent on the back of high inflation and concerns of moderating liquidity in the system in order to underpin macroeconomic adjustments taking place to drive inflation on a downward path, Dr. Atuahene said the decision will likely increase the cost of borrowing for businesses and individuals.

“The policy rate increase is likely to increase the cost of borrowing for businesses and individuals. This can lead to a decrease in demand for credit, as borrowers may find it more difficult to service their existing loans or may decide to delay taking out new loans. This could have negative consequences for economic growth, as businesses may struggle to access the financing they need to invest and expand,” he added.

In addition, he indicated that the hike in Cash Reserve Ratio (CAR) from 12 percent to 14 percent will affect both banks and Non-banking Financial Institutions negatively. The cash reserve ratio increase means that banks are required to hold a higher percentage of their deposits with the central bank.

He said this reduces the amount of money banks have available for lending to customers, which can lead to a reduction in credit availability – particularly for businesses and individuals that are already struggling due to economic impacts from the domestic debt exchange programme.

Moreover, the combination of these two measures, according to him, will put additional pressure on the profitability of banks and non-bank financial institutions.

“As the cost of borrowing increases, some customers may default on their loans – leading to higher levels of non-performing loans. Additionally, the cash reserve ratio increase will reduce the amount of money banks have available to lend; potentially leading to a decline in their net interest margins. This can have a knock-on effect on their ability to attract and retain customers, as they may be forced to offer less attractive rates or services,” he noted.

He advised that it is important for policymakers and stakeholders to work together on finding solutions that support financial stability and promote sustainable economic growth. He stated that the high cost of borrowing can also discourage customers from taking out loans, which can have negative effects on economic growth and development.