Reduce prime rate To ensure access to credit
THE Bank of Ghana’s (BoG’s) prime rate fixed at 24.5 per cent is a contributory factor in keeping interest rates unduly high, Dr Augustine Fritz Gockel, a lecturer at the Department of Economics, University of Ghana, has said.
He said the BoG’s prime rate of 24.5 per cent as compared to the deceleration of inflation appears to be too high, adding that this affects the flow of funds to the private sector by deposit money banks.
Dr Gockel has, therefore, called on the BoG to reduce the prime rate to ensure that the private sector has access to credit from the banks.Dr Gockel said that “ if the BoG is convinced that inflation management is on course and credit should go to the private sector at lower lending rates, then it could signal the banks by reducing the prime rate”.
Dr Gockel made this known when delivering a paper on the Review of the Budget Statement and Economic Policy of the Government of Ghana for the Financial Year 2002.The workshop was organised by the United Nations Development Programme, in collaboration with the Private Enterprises Foundation (PEF), in Accra last Thursday.
“Since the prime rate is the minimum rate at which BoG would lend to any banks, it stands to reason that banks would also lend at rates not lower than the prime rate”, he said.
Dr Gockel said a higher prime rate creates a sense of money tightness in the market and makes businesses examine more closely their credit requirements.
In the same vein, the banks take the prime rate as a signal for increasing monetary stringency and will accordingly exercise stricter supervision in lending credit to the private sector. The prime rate, he stressed, influences both the supply and demand for credit.
Dr Gockel said the government was the main beneficiary of credit between the periods of January 2001 and August 2002 and added that although the trend changed in favour of the private sector, the fact remains that heaviest borrowers from the private sector were quasi-government institutions, in particular, Tema Oil Refinery (TOR).
He said indications are that Ghana Commercial Bank (GCB) is largely exposed to TOR again, the latter having borrowed about ¢800 billion to meet the shortfalls in its operational cost as a result of inappropriate pricing policies.
This situation, he said, threatens the financial sector, since GCB is the largest single bank with about 40 per cent market share and called on the authorities to rectify the problem with a sense of urgency.
He said stabilisation has been achieved on the fiscal side by strictly limiting the government’s borrowing requirements and on the monetary side by shifting its financing from banks to non-bank sources through co-ordinated open market operations.
of government Treasury Bills increased from 37.4 per cent of total holdings at the end of December 2000 to 47.5 per cent by the end of December 2001.He said by this action intermediation has reduced, crowding the private sector out from having access to capital.