06.04.2005 Business & Finance

Prime Rate of 18.5% A Hoax -Lens

By Lens Financial Desk
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By the statute setting up the Central Bank of Ghana, (i.e. Bank of Ghana), it is stated inter alia that the BOG is an agency that is supposed to perform a number of key functions that include 1) issuing of the nation's currency, 2) regulating the supply of credit in the economy, 3) managing the external value of the currency in the foreign exchange market, 4) hold deposits representing reserves of other banks and other central banks, and 5) acts as a fiscal agent for the central government, when the government sells new issues of securities to finance its operations.

Another key function of the Bank of Ghana, which any rookie economics student must know, is that it is supposed to act as a lender of last resort. By acting as a lender of last resort, the Bank of Ghana is the ultimate source of credit to the banking system.

In other words, in the event of the banks (as well as the Discount Houses) not meeting their daily funding requirements via their money market operations on the interbank market, the central bank is mandated to provide them with the needed credit mostly on overnight basis. In Ghana, the credit that is provided by the Bank of Ghana is referred to as REPOS (Repurchase Agreements).

The prime rate is therefore the rate at which the Bank of Ghana lends to the banks and it is actually supposed to be a penal rate and is always higher than the normal interbank lending rates.

However since the NPP took over the reins of government, and appointed Paul Acquah, a personal friend of Osarfo Marfo, and who has never been in mainstream banking and was only a desk officer at the human resource section of the International Monetary Fund (IMF), as the governor of the central bank, the BOG ceased to be a lender of last resort thereby shirking one of its key responsibilities.

The maintenance of the prime rate at 18.5% in spite of the hike in petroleum prices to create the impression that the market has not responded as well as create an impression of macro economic stability, is a hoax and veil behind which the Bank of Ghana is aiding the government to hide the true picture.

The truth of the matter is that the central bank can afford to keep its prime rate superficially low because the BOG is no more lending to the banks and hardly puts any premium on that source of income. It is rather depending heavily on income made from the penalty that it charges the banks whenever they are unable to meet their reserve requirements.

So while the banks are suffering by way of penalty charges – which of course benefits the Bank of Ghana, the Bank of Ghana is painting a very false picture by maintaining a prime rate, which is totally meaningless and inaccurate.

Lens sources within the Bank of Ghana are not too sure why the BOG board took the decision to stop the Bank from acting as a lender of last resort. Word in the BOG corridors have it that Paul Acquah, who is completely at sea when it comes to running the affairs of the central bank, may perhaps be only doing the bidding of his paymasters.

It would be recalled that sometime last year staff of Bank of Ghana embarked on a sit down strike in protest against some of the obnoxious policies of Paul Acquah and accused him of being insensitive to their plight because he has no wife and kids and spends all the money that he makes by way of his fat salary and per diem (he hardly spends a month in the country) on his whisky, fags and dog.

The question is, what is the Association of Bankers, which is headed by Mr.Albert Essien, the MD of ECOBANK doing about this? What about Mr. Asiedu Mante and Mr. Vanlare Dosoo, the two Deputy Governor's who are more experienced bankers?

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