ModernGhanalogo

FEATURED: Why Yaoh Hates Your Marriage So Much!!...

body-container-line-1
21.10.2001 Feature Article

Interest rate, inflation and the Ghanaian economy

Listen to article

By Kwame Appiah-Yeboah Lexington, KY

The ruling NPP government is doing a great job in trying to stabilize the cedi and at that same time keep inflation in check. These are noble objectives and the finance and economy ministers deserve all the credit. There have been a series of calls by individuals within and outside the government calling for the lowering of interest rates in the country. This writer wants to add his voice to those calls. Interest rates have marked effect on investment, saving, consumption and economic activity in general. The direct effects of interest rates on investment, saving and consumption has been well documented and this writer will not go into any of them. However, the less documented effect of interest rates and speculative behavior will be discussed with respect to the situation in Ghana. The NPP government is targeting an inflation rate of 25% by year’s end. A headline in the GRi noted this as such “Gov’t dreams of 25% inflation”. This paper will not go into how feasible or not that ‘dream’ is but will assume that it is achievable. This assumption is not naïve, as given a tight reign on government expenditure (the behemoth that generates inflation), coupled with monetary discipline, government can and should be able to control inflation. This low inflation rate and the ‘stability’ of the cedi (we are waiting to see if the stability of the cedi is a mirage or it is for real) present real opportunities for speculators to make money out of Ghana. One can change say one million dollars into cedis and invest in Treasury bills yielding over 42%. After 90 days, 120 days or 360 days one only has to change the cedis back into dollars and walk away with a hefty return without breaking sweat or taking on any risk. Local investors can also make positive returns of 17% (42-25) without undertaking any productive activity. Rates of returns in the US and other developed countries range from between 3% to 20%, depending on the riskiness in the asset. Interest on saving and government bonds (the less risky of the lot) is not more then 5%. Thus someone with millions of dollars to spare can invest risk free in Ghana and earn 40% or more returns. As the country remains politically and financially stable, speculators will recognize that the riskiness in investing in Ghana is less than the returns. If all these sound too theoretical, one can only look at the Asian crisis and recognize that such a crisis can happen in Ghana. Western investors poured money into the Asian markets because they could earn higher returns than they were doing in their home countries. Some of the investments were in productive activities and others in the money and stock markets. This made the currencies of the Asian countries appreciate, as there was a greater demand for their currencies than the dollar. When these investors pulled their monies out of the countries, the effect was devastating in what is now known as the Asian crisis. (The exact factors that set off the crisis is not mentioned, as there is some debate on it.) One must recognize that different countries suffered differently. Countries that had a significant portion of its investment in productive activities and also had sound macro-economic policies in place did fairly well compared to those that did not. Countries like Malaysia and Indonesia were affected more than Singapore, Hong Kong or even South Korea. This writer strongly recommends that as the inflation rate falls, interest rate should actively fall alongside. Apart from encouraging productive activities in Ghana, this will prevent Ghana falling prey to speculators. The central bank should take the lead and cut its rates. It can index its Treasury bill rate to the inflation rate. Thus, as inflation falls, the interest rate on T-bills also falls. This will tend to drag all lending and interest rates in the country as most of the banks actively invest in T-bills and government bonds. In conclusion this writer urges the government to actively pursue the policy of managing inflation but should also gradually lower the interest rate to reflect the lower inflation in the country.

Kwame Appiah-Yeboah
Kwame Appiah-Yeboah, © 2001

The author has 13 publications published on Modern Ghana. Column Page: KwameAppiahYeboah

Disclaimer: "The views/contents expressed in this article are the sole responsibility of the author(s) and do not neccessarily reflect those of Modern Ghana. Modern Ghana will not be responsible or liable for any inaccurate or incorrect statements contained in this article."

Reproduction is authorised provided the author's permission is granted.

BetPlanet 300x600
body-container-line