Resumption of debt service payments to keep interest rates high – Prof Lord Mensah
Senior Lecturer at the Department of Finance of the University of Ghana Business School (UGBS), Professor Lord Mensah, has told businesses in the country not to expect a decline in interest rates on loans in the country anytime soon.
This, according to him, is because of the continuous need for Government to borrow on the domestic debt market (at high-interest rates) particularly, in the latest development that Government would have to resume its debt service payment obligations to external creditors as a requisite to accessing the $600m second tranche under the $3bn IMF bailout programme.
The resumption of the debt service payments by Ghana, Prof Mensah noted during NorvanReports’ X Space discussion on Sunday, will impact the country’s exchange rate thereby putting pressure on the local currency and causing it to depreciate.
A depreciation in the cedi will result in a hike in inflation and consequently an increase in monetary policy by the BoG which leads to high interest rates on loans to businesses.
“We shouldn’t expect interest rates to come down so we (businesses and households) can borrow cheaply, because we (Government) will still be on the domestic debt market to borrow to finance its debt service payments.
“And so, we shouldn’t be really happy about securing the second $600m tranche under the IMF as that means a full scale resumption of debt service payments.
“And this is expected to impact our exchange rate stability as there will be pressure on the cedi, causing a rise in inflation and consequently in the policy rate,” he remarked.
The debt service payment by Ghana, he however noted, is expected to resume at a much lower rate compared to the rate prior to the suspension of the debt service payments by Government.
Average lending rate rises to 31.78%
Average rates on loans given to individuals and businesses by banks in the country stood at 31.78% at end-August 2023.
This is on the account of increments in the Bank of Ghana’s policy rate which subsequently leads to an increase in the Ghana Reference Rate (GRR) and risk assessment charges on borrowers.
The rise in the average lending rate marks a 3.82% (382bps) year-on-year (YoY) increment in interest rates when compared to the 27.96% average lending rate at end-August 2022.
The 382bps increment in the average lending rate is primarily driven by increments in the benchmark monetary policy rates set by the Bank of Ghana (BoG) and subsequently the Ghana Reference Rate (GRR).
Bank of Ghana’s monetary policy rate currently stands at 30% following a 800bps (8%) increment in the prime rate by the apex bank.
On the back of the increment in the prime rate, the GRR also on a YoY basis grew from 24.23% at end-August 2022 to 29.28% at end-August 2023.
The rise in average lending rate means high cost of borrowing by individuals and particularly businesses which translates into high cost of doing business.
The high average lending rate also makes it difficult for businesses and individuals to pay back loans taken from banks thereby potentially increasing gross non-performing loan ratios of banks in the country.
