Dr Eric Osei-Assibey
The Institute of Economic Affairs (IEA) has disclosed that although macroeconomic developments this year point to a recovery in GDP growth, declining inflation, declining interest rates, narrowing fiscal gap, relatively stable currency and increasing foreign exchange reserves, challenges and downside risk to fiscal sustainability and economic growth remain.
Dr Eric Osei-Assibey, Senior Adjunct Research Fellow at the IEA, who addressed the media at a press conference in Accra on Thursday, also said although the targeted growth of 6.3 percent was attainable on the back of rising oil production and the benefits from macroeconomic stability, downside risk persists, particularly from the non-oil sector growth.
High chance of missing target
“According to the Ghana Statistical Service, in the first quarter of 2017, non-oil sector growth was weaker turning in at a modest 3.9 percent, against 6.3 percent recorded for the same period of last year (2016). Government projects 4.6 percent non-oil sector growth at the end of the year 2017.
“However, we think that the chances of missing this target is high, because of the possible negative effects of government’s plan to cut expenditure by 1.1 percent of GDP from GH¢58.1 billion to GH¢55.9 billion. The key revisions include a cut in capital expenditure by 0.3 percent of GDP and Good and Services by 0.4 percent of GDP.”
Reduction in capital expenditure
Dr Osei-Assibey explained that government expenditure on infrastructure in particular was a key driver of growth in the economy and a reduction in capital expenditure was likely to negatively impact on growth.
“Also, the delay in arrears clearance can reduce liquidity in the economy and slow economic activities. Another downside risk to growth is the halt in small-scale mining activity, which is known to contribute about 15 percent to the total gold production). Although this may be marginal, it could have some negative effect on gold exports, foreign exchange earnings and ultimately impact on our growth projection for 2017.”
Interest rate and credit developments
He said: “It was our expectation that the reduction in Monetary Policy Rate (MPR) from 25.5 percent to 21 percent over the last six months and the fall in Treasury Bill (TB) rates from 16.4 percent to 12.08 percent in the same period would cause banks to reduce their lending rates significantly. However, the average lending rate’s responsiveness to this significant reduction in MPR has been slow compared to periods when MPR is adjusted upwards. This situation has resulted in wider interest rate spreads in the country, particularly between lending rate and MPR.”
“The high lending rate is inimical to economic growth, as it inhibits private sector credit growth, and thereby constrains domestic investments and production expansion of the economy. The banks argue that the downward rigidity is due to the rising non-performing loans and the fact that funding costs remain high, which are already locked-in, and so until such time that these locked-in funds are retired, Ghanaians should not expect lending rates to fall.”
Unfairness
He said such rationalization was very lopsided and unfair to banks’ customers since banks did not make the same argument when the MPR and TB rates were rising.
“One major underlying factor to the high lending rates in the country is the downward rigidity embedded in the formula for calculating the average base rate. We are aware that last year the Bank of Ghana constituted a technical committee to review the formula. However, the revised formula is yet to be adopted.”
He called on government to ensure a more transparent, flexible and competitively driven interest rate determination in the banking sector, adding that that should not be limited to mainstream commercial banks only but also non-bank financial institutions, including the savings and loans companies and microfinance institutions which even quoted much higher lending rates.
“If these steps are not taken, government’s efforts at bringing interest rates down will not have the desired impact on the real sector of the economy.”
TSA
Dr Osei-Assibey revealed that the combined effect of delays in settling arrears and the government’s new directive, which enjoined all public institutions to transfer public sector deposits and cash assets from commercial banks into a Treasury Single Account (TSA), could pose a serious liquidity constraint to the banking sector and affect their ability to give credit to private sector businesses.
“Although the introduction of the TSA as a measure to control public spending and leakages is laudable, government should find ways of mitigating the effect of this initiative on the banking sector.”
By Samuel Boadi