BOG Must Cut Interest Rate To Stimulate Growth

By Margaret Jackson

March 6, 2013

It is the business of every government to put in place credible measures to stimulate growth. That is why we often hear that, governments have no business trying to generate employment but rather have the responsibility to put in place actions to assist the pillars of growth – the private sector.

The private sector in Ghana is a sleeping giant. Past governments have not done a deeper dive to put in place those bold measures to help lift up the private sector to where it needs to be. Therefore, most of the measures that have been floated in the past to lift up the private sector have turned out to be cosmetic and not geared towards making the private sector the main engine of growth and sustainability in the country.

Throughout the world, the private sector, especially those in the small and medium scale industry, largely relies on heavy borrowing to finance their activities. Therefore, when the cost of borrowing becomes prohibitive, it naturally inhibits the activities of the private sector and stunts its growth.

And if the private sector hits that snag of financial difficulties, unemployment naturally follows, because the private sector employs more people, or has the capacity to employ more people than the government when it thrives in the right environment under good comprehensive measures.

Borrowing and the ability to finance borrowing are the two main issues that often confront the private sector. That is why in the United States the Federal Reserve never sets or changes the interest rate without seriously taking into account the paramount interest of the private sector. There can never be any serious growth recorded in any country if interest rate is pegged too high.

We are all too familiar with the 2007-2008 global financial crises, considered as the worst financial crises since the Great Depression of the 1930s. The financial crisis that engulfed the world led to the collapse of large financial institutions, the downturns in stock markets, the bailouts of banks by national governments, the bubble in the housing market, huge unemployment, foreclosures and evictions. Those were terrible times that millions of people went to bed without any hope of whether there would be another tomorrow.

The global financial crisis also led to the failure of strategic businesses, significant drop in consumer wealth and the downturn in major economic activities which led to the global recession from 2008 through 2012. Ghana experienced the ripple effect and to date we have not recovered fully just like all other countries. The US, Germany, Italy and Britain among others have recorded insignificant GDP growths for the past three years.

It was as a result of the global financial tumble that the US Federal Reserve did the onerous thing by repeatedly cutting down on the interest rate to help boost the US economy. Between 1971 and 2013, the interest rate of the US has historically averaged between 6.18%. The rate was however cut down repeatedly from 2007 until it got to 0.25 percent where it has been for more than a year now. I do not want to belabour anyone by stressing that the Federal Reserve brought down the interest rate with two focal interests in mind – the private sector and job creation.

We are in Ghana always talking about making the private sector the main engine of growth, yet the Bank of Ghana’s (BOG) prime rate (interest rate) is very prohibitive. At 15 percent, the cost of borrowing by the commercial banks from the BOG is nothing to write home about. Between 2002 and 2013 Ghana’s interest rate has averaged 16.61 percent reaching an all-time high of 27.50 percent in March 2003. It simply does not make sense and does not help businesses especially the smaller ones to borrow from the commercial banks at a higher interest rate of 30 percent or more.

Ghana can never make any strides as far as the private sector is concerned if the BOG does not bring the interest rate down to as low as 5 percent. If we are today talking about a lower single inflation digit why do we still keep the interest rate so high? Why is the cost of borrowing so high and unaffordable? Businesses in Ghana are suffering because apart from not having the collateral security, many of these companies would not want to go out there and borrow so that they will use their little margins to service the loans.

If even advanced countries like the United States have cut their interest rates down to nothing in order to stimulate growth and employment, I do not see how Ghana can make any headway with her interest rate still hitting the roof. We are simply not going to help any business to grow but largely hurt them if the government as a matter of urgency and prudent policy does not cut down on the interest rate.

We can do all the talking and make all the arguments about helping the private sector, but if we do not apply the right medication by way of cutting down on the interest rate to make borrowing less costly and attractive, the private sector which is a sleeping giant will continue to doze off.

Currently, the private sector in Ghana is bleeding very badly with most industries especially manufacturing concerns folding up due to higher production costs and their inability to compete with foreign goods. As a result, most of the private entrepreneurs have resorted to buying and selling of finished products from China, Dubai and Turkey among others. Is this the kind of Ghana we want to see in the next four, ten and twenty years down the road?

The BOG must take the lead to help the private sector. Cut down the interest rate by 66 percent! And more banks will borrow from the BOG. Cost of borrowing by the private sector from the commercial banks will be lower and enticing. More businesses will be able to borrow to turn their businesses around. Competition with foreign goods will be keep and at par. Industries will have the confidence to hire more people. Finished products will have ready markets because cost of production would be less costly. Industries will be able to service their loans and pay their taxes to government. This is the way forward.

Ghana has reached a stage where pragmatic decision/s ought to be taken in order to move the country forward. Somebody has to forcefully drum home the point that the cosmetic approach of helping the private sector is not working, and that we need to adopt the right approach in order to see the right results. Over to you, President Mahama!

magjackson80@yahoo.com http://majjacks80.blogspot.com