A group of ten farmers came together to form a cooperative in order to access some financial assistance through a bank loan. This move, to them, was a necessity which was to enable them employ better and more modern machines and methods to increase their productivity.
In their calculations and the documents they had prepared to present to the said bank, the loan if acquired, was to enable them acquire a tractor, spraying machines, a harvester and an average of 5 acres each in addition to the present acres they were cultivating. This in particular was lauded by the chief of the locality since it meant that jobs will be created, even if it was seasonal for the young men and women who were unemployed. With all of these in place, they envisaged an average increase in productivity of 40% over their current productivity.
All things being equal with this level of productivity, they would be able to pay off the amount borrowed and any reasonable interest and still have enough to enable them to invest into the following year's production.
However to their utter dismay, they were informed that the interest rate for such loans stood at 40% per annum. This meant that if they requested ¢50,000,000.00, they will be paying back a total amount of ¢70,000,000.00 which would be the principal amount and the accumulated interest of ¢20,000,000.00.
Secondly, taking into consideration their current level of incomes and more importantly the interest rate, it would be impossible for the bank to give them the exact amount they were requesting for. According to the bank's policy, if they still wished to take the loan at the said interest rate then they would have to settle for a lesser amount of ¢28,000,000.
To these poor farmers who wanted not only to better their own lot but the lot of the entire community, 40% was too much a price for them to pay even if they wanted to. Also ¢28,000,000.00 could not acquire for them even half of the things they required. Day after day, they met to deliberate on bank after bank with the lowest rate being 39%. Before long, planting time was past and gone and none of what they had envisaged came into being, neither the dream of lower unemployment level and better standard of living for the community.
This is the effect of the level of interest rates within any economy. The interest rates largely influence the supply and demand of money. In order to achieve economic growth in an environment of stable prices, there is the need for lower interest rates which could come in the bank rates, Treasury bill rates, the prime rates among others.
Where interest rates are low like what is currently being experienced in the country (please see table below), investors like our farmers above are more willing to borrow money to invest. This means that with lower borrowing rates, there will be increase in investments, which means increase in employment levels which also means a rise in the standard of living.
Year Average Lending Rate (%)
Dec 2000 47.00
Dec 2001 43.75
Dec 2002 38.50
Dec 2003 32.75
Dec 2004 28.75
Dec 2005 26.00
Dec 2006 24.25
Source: Bank of Ghana.
By Victoria AMOO-QUAYE
Ministry of Finance and Economic Planning