IT IS difficult to see how policy rate increases can fight cost-pushed inflation resulting from food or crude oil price increases or increased taxes on petroleum products. Sadly, even at the height of the COVID-19 pandemic, when income levels had fallen worldwide, and stimulus packages were being implemented everywhere to boost economic activity, BoG still ensured that we suffer under strangulating high-interest rates.
While BoG’s monetary policy over the years has succeeded in maintaining a growth-stifling “high inflation–high-interest rate” environment, it has also created the most profitable banking sector in Africa, if not the world, all with disastrous consequences for the cedi.
The size of the UK’s economy, as reflected by its GDP, was about $2.7 trillion in 2019, almost 40 times Ghana’s GDP, $72 billion. But the Bank of England (BoE) made a profit of £57 million ($76 million) in 2020/21, down from £72 million ($96 million) in 2019/20. BOG, on the other hand, made a profit of GH¢1.57 billion ($270 million) in 2020, down from £1.8 billion ($310 million) in 2019. Thus, BoG made almost 4 times as much profit as BoE. Incredible!
Over the years, our commercial banks have made enormous profits while the real sectors, including manufacturing, have been in trouble.
BoG claimed that “The banking industry’s performance has defied the general economic downturn with strong growth across key metrics including total assets and deposits, as well as sustained improvement in profitability within the industry during the first half of 2022.”
And that, “The sector’s total assets increased by 22.8 per cent to GH¢200 billion at end of the period, representing a 17.2 per cent growth over the previous year. The domestic component of total assets recorded a higher growth rate of 23.5 per cent in June 2022 compared to a growth of 18 per cent in June 2021.”
They added further that “…the higher growth in the industry’s assets by mid-year was primarily on the back of an upsurge in deposits and borrowings during the review period.”
But the undeniable truth is that all these “growths” were fueled by high-interest rates, and represent a transfer of assets from the government and the real sectors to the banking sector. BoG and the commercial banks’ huge parasitic profits put a lot of stress not only on the private sector but on the public sector as well. They impose a huge burden on those outside the banking sector and frustrate the realisation of the needed structural change.
The use of the wrong inflation variable accounts for the failure of BoG’s inflation-targeting policy. When in December 2021 BoE increased its prime rate from 0.1% to 0.25%, to meet a 2% inflation target, BoG, on the other hand, increased its policy rate from 13.5% to 14.5%, while targeting inflation of 8%. BoG’s policy rate was more related to the reported year-on-year (past) inflation of 12.2% instead of its target (expectation) of 8%. BoG sought to keep their policy rate above year-on-year inflation to maintain a “positive real interest rate” based on their awkward understanding of real interest rate.
It is worth noting that Zambia’s November 2021 inflation was 19.3% but the Central Bank of Zambia’s prime rate was as low as 9% in December 2021. Today, while Ghana’s inflation in October 2022 stood at 40.88%, Zambia recorded 9.7% inflation in October 2022.
Our high inflation and interest rate statistics naturally feed into external market perception of our outlook. We cannot through our policy rate give an impression of a high inflation risk outlook and expect the external financial markets to think differently. So, BoG’s approach has been costly for us in the international financial markets too.
Speaking during a press briefing on Friday, October 7, 2022, in Washington, DC, on the 2022 edition of the Babacar Ndiaye Lecture, Dr. Hippolyte Fofack, Chief Economist and Director of Research at Afreximbank, elaborated on the importance of this year’s theme, “The Developing World in a Turbulent Global Financial Architecture”: “Africa’s total external debt is about $726 billion. That makes it less than a third of Italy’s debt estimated at about $2.8 trillion. And expressed as a percentage of GDP, Africa’s total external debt is 27%, compared to 130% in Europe. Yet African countries are more at a risk of debt distress than their European counterparts largely as a result of large spreads and default-driven borrowing rates assigned to African sovereign and corporate entities.”
Thus, BoG cannot justify the astronomically high monetary policy rates that have burdened our economy over the past 20-plus years. It has not only increased money supply over the years, fueling price increases but has also undermined the cedi. Contrary to their claims, we cannot use “higher interest rates to maintain exchange rate stability”, and more so when they have failed to protect the cedi as the only legal tender in Ghana. High-interest rates have not and will not help us “maintain exchange rate stability.” Parity laws tell us the opposite.
On November 1, 2007, GH¢1 was equivalent to GH¢1. GH¢1 invested in Ghana government’s 91-day treasury bill on that day and rolled over for 15 years would grow to about GH¢12 on October 31, 2022. Coincidentally, the price of $1 on October 31, 2022, was about GH¢13! Obviously, this huge return on the cedi has been inflationary, and also aided cedi depreciation.
As I pointed out, inflation was 40.4% in October 2022. Along with it, the dollar went up 141%, from an average GH¢6 in October 2021 to GH¢14.47, implying a cedi depreciation of 58.53%.
Most importantly, it must be realised that the high monetary policy rates will not help efforts to remove the “structural bottlenecks” that BoG often alludes to. On the contrary, they have been the stumbling block to creating an enabling financial market where businesses can source debt capital for growth and expansion. They have made the cost of capital excessive, aggravated the supply problems in the economy and increased our import dependence.
Today, we are locked in the same, growth-stifling, demand-side approach to the inflation problem, and find ourselves in a vicious circle of high inflation and high-interest rates.
The mere fact that after over 100 years of producing cocoa, we still go abroad to borrow money to finance its purchase is ample evidence of how our banking system has failed the real sectors of our economy. The Bank of Ghana has been at the centre of this problem.
Private Sector and Crony Capitalism
We have failed to give genuine support to private initiative and create conditions for all to participate in the development process to reduce the burden on government, reduce the national debt and minimise public sector corruption.
The few initiatives in support of the private sector have been politicised. Tax waivers, duty exemptions and other incentives have become a privilege reserved for loyal party supporters instead of being targeted at sectors of the economy that need support to become globally competitive.
Great ideas and initiatives have not been supported merely because of selfish or political reasons. Crony capitalism has spelt doom for genuine entrepreneurs, ensuring the happiness of a few, and the discontent, misery and suffering of the majority.
Pretentious, poorly planned initiatives like NABCo have been the preferred short-term political reaction to the unemployment problem. But these, we all know, do not create real jobs, and thus cannot provide sustainable solutions to the youth unemployment problem.
Weak Institutions
Many of the above issues and challenges are the result of the virtual bastardisation of many of our institutions. Parliament, for example, has been very ineffective, while the judiciary has been perceived to be politicised, leading to mistrust. These have contributed to the creation of a chaotic and toxic political environment.
Many have lost faith in the courts, and their ability to ensure justice when rights are trampled upon. And when at the same time Parliament has been weak and toothless, freedom and justice became imperiled, making a complete mockery of our democracy.
Many of our other institutions have also failed us because they have been weakened by the loss of their independence, with adverse consequences for the nation’s development. The Council of State, Electoral Commission, National Media Commission, Public Services Commission, Commission on Human Rights and Administrative Justice, National Commission on Civic Education, Lands Commission and even the military, the police service, and chieftaincy have all become politicised.
The following words of Nobel Prize laureate, Rigoberta Menchú, are quite instructive: “Without strong watchdog institutions, impunity becomes the very foundation upon which systems of corruption are built. And if impunity is not demolished, all efforts to bring an end to corruption are in vain.”
BY Togbe Afede XIV