What Mahama, Inflation and Interest Rates have in Common.

Thu, 21 Apr 2011 Source: Akoto, Akwasi A. Afrifa

I don’t know whether it is intentional or not but the Mills administration seems to always designate Vice President Mahama to deliver and initiate the most devastating economic news and acts. Or the Vice President is easily influenced by foreign companies to act against the interest of his country.

Take the Amajaro UK LTD case, for example, whereby a ban placed on the Cocoa purchasing Company for smuggling was lifted after a dinner meeting in London between our Vice President and an executive of the said company. Then you have the STX deal. A deal so bad that the wife of the founder of the Vice President’s own party wants to take a second look if she is elected as the party’s flagbeareship. Then you have the announcement made by the Vice President at this year’s independence celebration - at Tamale – that the contract for the revitalization of the Cotton industry has been given to Amajaro, the same company that was banned by an oversight committee but got the ban lifted after a dinner meeting earlier referred to.

Now comes the worst news of them all, that the Mills – Mahama government would longer issue licenses to new banks in the country. This announcement was, as usual, given by the Vice President. Among the ‘shady’ reasons given by the Government is that it was vital to strengthen the banks already in operation than to open the market for competition. The Veeps said that ‘as a small country’, 27 banks were too many for the country ( 27, on the average meant that 3 banks per region, is that too many?)

It would have made more sense, spin- wise, if government had given the high rate of Inflation – although in reality it doesn’t make sense- as the excuse for the freeze. That is, more money in the system with fewer goods, would lead to increases in prices, resulting in higher Inflation. Thus, the lesser the banks, the less money would be available to borrowers, the less money would be pumped into the system. Then, I remembered that Inflation is mainly caused by government spending, something which the Mills- Mahama administration - in order to score political points - have embarked on with the zeal of a Beverly Hills house wife on a shopping spree. But as we shall see later on, the Mills- Mahama government has their own dubious reasons why they have to put a hold on the issuance of licenses.

As at now, Ghana’s Inflation stands out 9.13%, according to the latest report released by the Statistical services. The Discount rate – the rate at which the Bank of Ghana issues loans to the banks - is at 13.5 % while the lending rate- the rate at which the banks offer loans to borrowers – “ is at 30 to 35 percent depending on the sector in which the borrower operates”. On the surface, it would seem that the banks are greedy or are fleecing borrowers. But that is not the case. The Discount rate - at 13.5% - in itself is very high. ( US interest rate , for example is at 0.25% with Inflation at 2.5%; no comparisons here, I m just putting things in perspective). As such, the banks are forced to charge higher interest rates, a situation necessitated by their absolute lack of confidence in the economy, which in itself, is an indictment on the policies of the P-ndc government.

The higher interest rates have therefore led to a stagnation of the private sector, the engine of every successful economy. Prospective businesses are scared away by the rates; businesses already in existence can’t afford to expand. Unemployment rises as a result of the failure by existing businesses to absorb the ever increasing work force. When one factors in the higher taxes - imposed on citizens since the P-ndc came to power- Ghana becomes a graveyard for businesses and individual empowerment and initiative.

So with these high interest rates, a freeze on new banks should have been the last thing on the governments’ mind. Government should have concentrated more on promoting healthy economic conditions beneficial to businesses and private enterprise. More competitive and not less competition should have been the policy. More competition - of course, backed by favorable business environment created by a business friendly government -like NPP and Property Owning Democracy - would have been a partial measure to bring interest rates down. For every economist worth his salt knows that, no matter what the conditions are , more competition is far better that less competition; unless the economist is ‘a communist’ or is under the influences of his political bosses bent on manipulating the system for political gain, which by the way, seems to be the case under the Present administration.

Left to themselves, cartels, syndicates, combines or corporate tend to recoil and stifle competition to protect their market share. Naturally, such bodies tend to monopolize when ‘no one is watching’. It makes it easier for them to manipulate rates and prices leading to more profits at the expense of consumers. As such many free market societies have laws in place to check such tendencies. But in our case, it seems it is the government itself that is directly helping the banks to monopolize to the detriment of citizens.

What is, thus, going to happen is that the the quality of the banks which seems to be one of the main reasons – ostensibly- for the freeze is going to drop significantly. Inertia would set in when the banks are no longer threatened with further competition. They would not have to look behind their backs for upstarts that would have pressured them with innovations. The situation will further get worse when the mergers which the Mills-Mahama administration expects among the banks become a reality. Interestingly, the government and the banks seem to be in agreement that mergers BACKED BY GOVERNMENT SANCTIONS/FREEZE would help improve the quality of its operation. But that is a slight of hand.

Rather, they should allow the self correcting mechanism of the market to work. Some banks will merge. Some would be bought out. Others would fail. Many more would come into existence. Banks that would not be able to live up to the standards set by the market - and not by the government- would not survive, thereby assuring constant quality. And consumers, in the end, would benefit greatly.

As for the high rates of Inflation and interests rates, the P-ndc government can curb the increases if only it would cut its spending. In fact that is the only way to stop Inflation and reduce the deficit. But the P-ndc has evidently lost the memo. Instead, our budget deficit continues to rise. Yet we do not see the results of the spending.

O f course it is true that the P-ndc government has commissioned many projects but that alone cannot account for the increase in spending. For as it well known, more than 60% of the projects commissioned were started by the NPP. So how is the P-ndc government spending our money? It couldn’t provide money in time for the District elections and the Census. Yet, it was able to spend more than enough on Nkrumah’s nine month long birthday celebration; they spent by putting the President Mills’ image on cups; by organizing party youth forums across the length and breadth of the country; they spent by sending the party’s youth wing abroad; by dishing out tens of thousands of Dollars to pro government newspapers; by putting up mansions in record numbers and time etc.

And now with a tough congress approaching, the spending is just going to accelerate due to vote buying, as has been correctly stated by the PNDC Chairman. This would definitely leads to higher Inflation in the coming months and it would spill over when we enter election year in 2012. For the P-nc government would have to spend even more on campaigning to convince voters that they did the job.

This, finally, brings us back to Mahama, the most corrupt Vice President of the 4TH Republic. It seems to me – judging from his record cited in the second paragraph – the Mills – Mahama government has once again sold out the country to foreign entities, just as they did in the case of STX and Amajaro UK LTD. For in whose interest do a freeze and less competition benefit? It certainly does not benefit citizens. Only the banks stand to benefit because it only through open competition that rates and prices can be brought down. In the absence of competition, prices and rates simply go up.

So to me, it seems that the banks have succeeded in influencing the Mills-Mahama government by feeding on their materialistic weaknesses, just as STX and Amajaro LTD did. For the reasons given for the freeze, economically, do not ‘jive’. With oil on the horizon, companies worldwide are clamoring for a piece of the pie. So I suspect, that the banks, in anticipation of the country’s bright economic future, are simply trying to monopolize our market. Fortunately for the banks, they have had a vulnerable administration, materialistically, and an anti business government in power to contend with and take advantage of.

I'm therefore of the belief that just like the STX deal and the Amajaro ban, the government through Mahama has struck a deal with the banks. And no one can confidently say that the P-ndc government did not benefit from under the table deals with these foreign companies; and that it simply struck such deals with no personal benefits. With Mahama, once again, directly involved in all these deals, it is not an exaggeration to christened him the most corrupt Veeps of the 4th Republic. It is just too much of a coincidence for the Vice President to be at the forefront of all these shady deals.

‘Two articles’ ago I wrote a piece concerning the VP titled ‘Mahama, the most corrupt V.P of the 4th Republic’. Quite a few people wrote rejoinders praising the credibility of the V.P. But I can only reply that Mahama might be the honorable man that his supporters seem to claim. But as long he continues to front these deals, citizens would continue to think otherwise. Indeed, it is quite possible that he may be unaware of the implications of these deals when he gets involved with them. If that is the case – if we are to give him the benefit of the doubt - then the VP must realized that he is being used by the handlers of the Mills government –like a puppet, a stooge -. And that, if he wants to salvage his reputation, I suggest he stays away from such deals. ( We have a Trade Minister, a finance minister, Agric minister etc. Let one of them play the 'stooge' for once) Otherwise, he would truly go down in history as the most corrupt VP of them all.

Akwasi A. Afrifa Akoto.

Columnist: Akoto, Akwasi A. Afrifa