Poor fiscal consolidation contributing to high interest rates – Dr. Addison

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Governor of the Bank of Ghana, Dr. Ernest Addison has highlighted the country’s poor fiscal position as one of the reasons for the high lending rates in Ghana.

According to him, among other things, the disparity in the country’s revenue and expenditure forces government to borrow from banks, leading to a crowding out of the private sector as well as the prevalence of high-interest rates.

Data from the Bank of Ghana’s Summary of Economic and Financial data shows that average lending rates have dropped from about 31 percent in 2016 to about 21 percent in 2021.

Despite the improvement in the cost of credit in Ghana over the years, businesses in peer economies enjoy cheaper lending rates.

Research conducted by International advisory firm, Konfidants showed that cost of credit is one of Ghana’s weakest points.

According to the research the country ranks at the bottom of the list when compared to the top African exporters.

The 14.5% policy interest rate in Ghana as of January 2021 was double the African average of 7%, and also compared unfavourably to 1.5% in Morocco, 3.5% in South Africa, 4.5% in Côte d’Ivoire.

In response to questions on the high lending rate at the recently held Monetary Policy Committee press conference Governor of the Bank of Ghana, Dr. Ernest Addison noted that improved fiscal consolidation will help in reducing the cost of credit in the country.

“If you look at the macro side, one of the problems we have is the strong demand from the side of the budget. If we were seeing greater fiscal consolidation, you would expect that lending rates will also follow. I use the example of country’s that run balanced budgets. Currently, the banks are holding GH¢ 80 billion in government bonds. If Ghana’s revenues were equal to its expenditures, where do you think that money will be and what do you think will happen to interest rates in that context.”

“So the issue of fiscal consolidation is also very key in addressing this issue of the high lending rates. We are working at it, government is doing its part by trying to reduce the budget deficit. It’s not easy, but work is being done,” he added

By:Citi Business News