At a press briefing in Accra to discuss the mid-year budget review presented by the finance minister on July 31, senior research fellow at the IEA, Dr Eric Osei-Assibey, bemoan the weak transmission mechanism between the policy rates and lending rates.

“We expect that the reduction in the Monetary Policy Rate (MPR) from 25.5 per cent to 21 per cent over the last six months and the fall in the Treasury bill rates from 16.4 percent to 12.08 per cent will cause the banks to reduce their rates”.

“The average lending rate responsiveness to this significant reduction in the MPR has been slow compared to previous times when the rate was adjusted upwards”, he said.

“The high lending rate is inimical to economic growth as it inhibits private sector credit growth, and thereby constrains domestic investment and production expansion of the economy”, he added.

Meanwhile, the IEA, commended the government for its commitment to fiscal consolidation and debt sustainability.

Non-performing loans

The banks have argued that the downward rigidity is due to the rising non-performing loans and the fact that funding costs remain high, which are already locked in and so until such time that the locked-in funds are retired, customers should not expect a fall in the rates.

But the IEA senior fellow of the think-tank dismissed those arguments, describing them as lopsided and unfair to the customers because, according to him the banks do not make the same arguments when the policy and Treasury-bill rates are rising.

“We urge the government to ensure a more transparent, flexible and competitively driven interest rates determination in the banking sector”, Dr Osei-Assibey said.

This he said should not be limited to mainstream commercial banks but non-bank finance houses including savings and loans companies, which quote higher lending rates.

“If these steps are not taken, government’s efforts at bringing interest rates down will not have the desired impact on the real sector of the economy”, he said.

Rising interest rates in Ghana is stoking cost of borrowing and forcing businesses to go bankrupt, research conducted by an international organisation has stated.

Ghana is said to have one of the highest lending rates to the world, placing second in the latest ranking released by Trading Economics, a development which has been identified as a disincentive for the busi­ness community

Some analysts blame competitive government borrowing as a major cause of high lending rates in the country.

Budget deficit

The country's high budget deficit for a long time, which is increased during election years, is financed by borrowing both domestically and internationally. This has driven up the rates for Trea­sury Bills, which has become a de facto- benchmark for banks’ rates.

Also, government is forced to pay relatively high- interest rates, which in turn forces the private sector to pay high rates for credit.

Dr Osei-Assibey was however worried that the directive by the government for all Ministries, Departments and Agencies (MDAs) to transfer their accounts from the banks to the central bank can pose some liquidity constraint to the banking sector and affect their ability to give credit to the private sector.

He said although the Treasury Single Account (TSA) is a measure to control public spending and leakages, he called on the government to find ways of intimidating the effect of the initiative on the banking sector.

The industry average for loans and advances, as at the end of March, dropped to 26.7 per cent from February’s rate of 26.9 per cent was a drop of 0.9 per cent from month- end January 2017.

Meanwhile the average interest offered by banks on customer deposits also dropped from 11.6 percent as at end of February 2017, to 11.2 per cent, representing 3.4 per cent decrease from

February to March this year.