BoG responds to Togbe Afede XIV’s ‘spurious’ analysis on monetary policy conduct by Ghana and UK
The Central Bank has described as completely erroneous and misleading and spurious analysis the comparison of monetary policy stances by Ghana and the United Kingdom with the use of metrics such as debt-to-GDP ratio and debt per capita by Togbe Afede XIV, the Agbogbomefia of the Asogli State in the Volta Region.
The assertion by the apex bank comes weeks after the revered traditional leader accused the Bank of among other things, engineering and profiting from the country’s high interest rates.
Togbe Afede XIV takes on BoG on high interest rates
Togbe Afede XIV speaking to members of Parliament led by Speaker Alban Sumana Kingsford Bagbin during their stay at Ho for their post-budget retreat in the Volta Region stated, “We want the youth to go into private business, but with what kind of capital? Expensive, highly priced 25% or 30%? Those cannot do it, and we have been victims of this over the years.
“The UK’s debt to GDP ratio is about 104 per cent. Ghana’s is 81 percent. Relatively, we are better. The per capita indebtedness of the UK is $42,000, ours is $1,400. Compared to income per capita, we are much better. Our income per capita is $2,300, that of the UK is $40,000. So UK’s debt per capita, $42,000, is higher than income per capita, $40,000. Our debt per capita $1,400, is much less than our income per capita, $2,300.
“So relatively, the UK is more indebted than Ghana, yet the rate at which the Bank of England lends to banks currently is 0.1 per cent , while Bank of Ghana lends to our banks at 13.5 per cent. That is a whopping one hundred and thirty-five times the Bank of England rate.
“The UK GDP, which reflects the size of the economy, is $2.7trillion, almost 40 times the size of our economy, which is $72billion (GDP). But guess what? Bank of England made a profit of £57million ($76million) in 2020/21, down from £72million ($96million) in 2019/20. Bank of Ghana, on the other hand, made a profit of GHS1.57billion ($270million) in 2020, down from GHS1.8billion ($310million) in 2019. The question is, doing what?!
“Yes, that is the benefit from their 13.5% lending rate. Mr. Speaker, this is where the problem has been, but we don’t seem to know. Bank of Ghana has lost focus, competing with the banks for profits, instead of contributing to the macro-economic objectives of stability, growth and employment creation.”
“We cannot be “targeting” inflation by making past inflation the basis for fixing the bank rate. It should be a question of what expectation you have about the inflation, which essentially is the “target”.
There is something wrong, and I’ve demonstrated it within the context of the relativities, looking at England and Ghana in terms of their respective debt to GDP ratios and their respective debt per capita relative to income per capita. I don’t think that we have to live in this kind of atrocious environment that stifles everything and everybody – stifles government, stifles private sector, stifles industry and stifles initiative. “
BoG schools Togbe Afede XIV on differences between Ghana and UK’s monetary policy and macroeconomic environment
But reacting to the statements made by Togbe Afede XIV, the Central Bank explains that the conduct of monetary policy under these two settings [UK and Ghana] are very different as the UK is a very poor comparator choice for Ghana.
The apex bank opines that the assertion that the UK Government is more indebted than the Government of Ghana using metrics such as debt-to-GDP ratio and debt per capita and yet, the rate at which the Bank of England lends to banks is 0.1 percent, while the rate at which the Bank of Ghana lends to banks in Ghana is 13.5 percent again amplifies the point of a poor choice of comparator, and also demonstrates the oversimplification of the relationship between debt and interest rates.
According to the Bank, while the Overall General Government Gross Debt to GDP ratio is 108.5 percent in the UK and 83.5 percent in Ghana, the debt service cost in the UK is about 5 percent of total fiscal revenues and translates to about 2 percent of GDP, however, in Ghana, our debt service costs is about 79 percent of total revenue and about 10 percent of GDP.
“This is where the incidence on the fiscal is critical and why the Government of Ghana will have to pay a higher interest rate to borrow to service debt compared to the UK. The interest rate floor of the policy corridor are completely different for the two economies. And for that reason, the rate at which the Bank of Ghana’s Monetary Policy rate will be effective in helping manage liquidity and achieve the price stability objective is constrained by the debt service cost and public sector borrowing requirement dynamics on interest rates. It is therefore completely erroneous and misleading and spurious analysis to simplify the monetary policy stances comparison with just the overall debt-to-GDP comparison of two completely different economies with different fundamentals,” remarked the BoG.
Touching on the Bank’s current prime rate of 14.5% and inflation rate, the apex bank asserts inflation which was 15.4 percent at the end of 2016 was brought down significantly to 7.9 percent in 2019, until the disinflation process was dislodged with the onset of the covid pandemic, which saw inflation rising again in 2020 and currently estimated at 12.2 percent at the end of November 2021.
According to the BoG, the gains from this disinflation process has been passed on to the market as the Central Bank reduced the Monetary Policy Rate, which
stood at 25.5 percent at the end of 2016 to 13.5 percent at September 2021, and lending rates have dropped from 28.1 percent at the end of 2016 to 20.2 percent at the end of September 2021.
“This was only raised recently by 100 basis points in November 2021 to address rising underlying inflationary pressures which was becoming embedded. In the process, we have seen growth rebound strongly in the last four years. The ultimate impact has been a relatively stable currency in the last four years, a stability that has not been observed in the last two decades,” it added.
Read details of the BoG’s response to Togbe Afede XIV:
Response to Issues Raised by Togbe Afede on High Interest Rates by Fuaad Dodoo on Scribd
