Corporate Ghana is understandably unhappy that the Monetary Policy Rate has only fallen by 100 basis points, from 17 percent to 16 percent since mid-2018. After all there are several economic factors that support a deeper reduction in the benchmark interest rate, which influences the direction of both deposit and lending rates in the economy.
Most importantly, inflation is now at its lowest level in six years currently at 9.0%. This is well within the Bank of Ghana’s target band of eight percent plus or minus two percent, and provides room for significant positive real interest rates on deposits. Just as importantly economic growth has been significantly slower in 2018 than it was in 2017 and a deeper reduction in lending rates would have provided a much needed boost for economic output levels and consequent economic growth as we enter 2019.
However, not only has the BoG’s Monetary Policy Committee been very cautious about making further, deeper cuts in the MPR, but its chairman, BoG Governor Dr Ernest Addison has served notice that it stands ready to tighten monetary policy if it sees fit, which would mean an increase rather than a decrease in the benchmark policy rate. This signals a slow- down in monetary easing for now after two years of gradual, but consistent monetary easing during which the MPR was slashed from an all-time high of 26 percent to the 16 percent where it now stands. stood for over six months now.
This is for good reason though. Simply put, corporate Ghana needs to realize that it cannot at its cake and still have it. The choice is simple enough : either cheaper credit or a more stable cedi than has been the case since the second quarter of 2018.
Monetary tightening in the United States is fuelling rising interest rates on dollar denominated financial assets, even as monetary easing in Ghana has been lowering interest rates on cedi denominated assets. This has inevitably persuaded foreign portfolio investors on Ghana’s financial markets to move their monies out which in turn has led to increasing demand for dollars as they exit cedi denominated investments and go for dollar denominated investments.
The BoG as an inflation targeting institution has opted for monetary policy that will stem this trend by restoring the competitiveness of interest rates on cedi denominated assets and thus reduce pressure on the cedi’s exchange rate, which in turn would ease inflationary pressures in Ghana’s import dependent economy. The alternative would have been to keep lowering interest rates, thus making borrowing cheaper but in an economy where the cedi would keep on depreciating.
This newspaper believes the BoG has taken the better option. Lower interest rates would favour borrowers, both enterprises and households, who need more money than they have currently, while penalizing those who are saving and thereby mobilizing the savings required for new investment in the economy. Thus lower interest rates would result in a debatable gain.
On the other hand, a depreciating cedi would clearly be bad for everyone, the only exceptions being exporters of primary goods and processed products with heavy local value added, and who make for a minute minority. Even enterprises now fretting that that borrowing rates are still too high would have been worse off if lending rates fell and the cedi depreciated much further, this increasing their operating costs and consequently their working capital borrowing needs.
The only way out of the quagmire that Ghana now finds itself in is to mobilize more domestic financing and thus remove its fortunes from those of foreign portfolio investors. This is a task for economic policy makers and a responsibility – and opportunity – for local institutional investors