The War on Interest Rate - Does the Language Matter?

Recently the Trade and Industry Minister, Dr. Ekow Spio-Garbrah, declared “war” on interest rates, sparking debate and controversy on policy feasibility.

The purpose of de-archiving this position paper, is to weigh in on the urgent matter of asset price responsiveness on the money market and buttress the proposition that history may be the best teacher on this particular matter.

At the macro-level, the Public Sector Borrowing Requirement (PSBR), Prime Rate and fiscal position of government may have tremendous sway on interest rate setting by the Monetary Policy Committee (MPC). At the firm level, portfolio quality (non-performing loan ratios), reserve requirements, capital adequacy and operational cost that the banks carry, also holds sway on asset prices. Any “war” effort therefore, that does not take into consideration these variables as ammunition is bound to yield vanity, desolation and wasted effort. Sound strategy must be aligned with noble intent and clear goals. In furtherance of the ongoing debate, this position paper as first published in 2006 will be republished as a two-part series. I enjoin readers to consider the arguments as one more perspective in this very important policy debate on how to lower borrowing cost for businesses in Ghana.

Introduction
Throughout the world, no nation is known to have developed without a strong and supportive financial system which provides real credit to businesses, especially the SME sector. Such SME sector being the biggest in all economies seems to bear the full brunt of underdevelopment, by virtue of insufficient financing and other factors as well. A worldwide study conducted by World Bank, Shiffer and Weder (2000), which drew on 10,090 firms from 80 countries analyzed the nature of business obstacles facing such firms. Read More...