REDUCTION IN BANK OF GHANA POLICY RATE– THE FEARS & HOPE

“When a resolute young fellow steps up to the great bully, the world, and takes him boldly by the beard, he is often surprised to find it comes off in his hand, and that it was only tied on to scare away the timid adventurers” – Ralph Waldo Emerson

For the past two years, the Bank of Ghana has been consistent in increasing the policy rate in a bid to curb inflation and exchange rate fluctuations. The jury is still out as to whether this policy worked or otherwise. Whilst still at the verdict, the current governor has taken a bold step to decrease the rates by 100 percentage points. Explaining the reason for the above decision, the new governorn stated the following in part…

“the Committee judged that the downside risks to growth outweigh the upside risks to inflation in the outlook and therefore decided to reduce the policy rate by 100 basis points to 22.5 percent. “

With that announcement, the new governor indicated a clear path towards growth than fighting the twin enemies of inflation and exchange rate hikes. However, we need to ask: “what are the fears and hopes as the policy rate is decreased?”

The arguments against a reduction in policy are the fear of increased inflation; increase in exchange rate and general micro economic instability. High inflation rates reduce purchasing power and resulting in erosion of real incomes. Closely related to the high inflation rates are exchange rate fluctuations. Ghana being a net importer faces serious economic crises whenever there is an uncontrolled exchange rate hike. The effects of both exchange and inflation hikes are synonymous and one has been noted to fuel the other in the economy.

Because of their undesirable effects on the economy, various governors and governments have considered using several monetary policy tools to control their hikes. With these fears in mind, one shivers to hear a reduction in the policy rate. A tool that has been used to curb inflation and exchange rate hikes. The question that arises therefore is this: Is the current Bank of Ghana governor stirring up hornets’ nest?

The argument as to the effectiveness of the Bank of Ghana’s Policy rate as a tool to ensure economic stability is one that is still ongoing and not the subject of this narrative. But to set the tone for this narrative, it is safe to say that a reduction in the policy rate gives hope on various counts and will at least lead to an economic growth if not a paradigm shift. These are the reasons:

1. The reduction is a clear confirmation of government’s intention to allow private enterprises to The government has stated through its policy documents that it intends to have an enabling economic environment that is private sector friendly. These intentions will be rhetoric without a clear indication of what happens to interest rates in the country. The reduction in the policy rate is thus walking the talk of creating an enabling economic environment.
2. The reduction in the Policy rate will stimulate growth in the This is the natural consequences of the reduction inducing borrowing at a cheaper rate to finance business expansions. This will however be possible only if the reduction is sustained over a long period rather than a short gimmick. As rightly indicated by the Monetary Policy Committee, the benefits of growth prospect far outweigh the risk of reducing the Policy rate.
3. The reduced rate will also mean increase in government revenue in the long run. As Businesses experience growth in sales and revenue, whilst borrowing at lower interest rates, profits will grow and this growth in profit will increase taxable incomes for government to make more revenue to finance important government projects.
4. The reduction in policy rate will also influence general cost of doing As this reduction takes place, business entities will explore opportunities to manufacture goods locally. This will reduce the countries dependence on imports and reduce its import bill which will in turn lead to stable exchange rates.
5. Contrary to the believe that an increase in the Policy rate induces sound economic environment, it rather brings hardship and severe austerity that is inimical to economic growth. The reduction will rather induce sound economic environment because as businesses and the economy in general expands, more opportunities are created for business and individuals in terms of employment. This opportunities increase purchasing power and results in higher living standards

It must however be stated that the reduction in policy rates alone is not a panacea to sound economic environment and private sector friendly. There are other elements that must be given serious attention. Ensuring an enabling economic environment involves continues effort and series of actions geared towards all sectors of the economy. As starters the following must be given attention in the short term to bring about a clear paradigm shift:

• Borrowing in the domestic market must reduce As it stands now, government borrows in the domestic market to the expense of businesses, in the end, businesses are crowded out. Whilst reduction in the policy rate is a good omen, it must be said that treasury bills rate influence interest rates even more than policy rate and must therefore be in check. Besides influencing rates, it also serves as incentives to both individuals and banks in the economy to use it as a save ground for investment and thus stifling the private sector of critical credit.
• Banks must work to improve their loan books so as to reduce the default High default rates contribute significantly to cost of borrowing in Ghana. As Banks seek to make profit, they find ways to reduce their losses by increasing interest rates to earn more income to cover the bad loans provision. When this happens, good customers end up paying for bad customers. Banks will be able to reduce default rates significantly if information on individuals and address systems are enhanced. Government must therefore aggressively resolve the inadequate address system and also enhance individual identification.
• Law and Regulations- Ghana has beautiful laws sleeping on the pages of it books…so the saying goes. These laws must be made to work. To ensure an enabling economic environment, property rent must be regulated. Businesses and start ups doll out huge sums of money to invest in rentals before starting a In the process, their businesses are denied the capital to channel into value generating activities to ensure growth.

Every long journey begins with a step. The journey of ensuring an enabling economic environment is a long one. The one step of reducing the policy rate is a step in the right direction. If the current government and governor are successful with it, it will be beautiful to say what was quoted at the beginning of this narrative by Ralph Waldo Emerson and credit the architects of it: When a resolute young fellow steps up to the great bully, the world, and takes him boldly by the beard, he is often surprised to find it comes off in his hand, and that it was only tied on to scare away the timid adventurers.

To that end, the bully of high policy rate would have been conquered and that is the hope we eagerly look forward to.