Bedu-Addo explains high interest rates
The Chief Executive Officer of Standard Chartered (Stanchart) Bank, Ghana, Mr Kweku Bedu-Addo, has explained the high interest rates prevailing in the country, saying: “This is a reflection of the prevailing macroeconomic conditions.”
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He noted for instance that at a time when the government was borrowing heavily from the domestic market at higher rates, the banks had no option but to price their money to reflect the rate the government was offering on its bills.
Mr Bedu-Addo said this in an interview on the sidelines of the just-ended Africa Summit hosted by Stanchart in Accra.
The summit, which attracted economists, bankers and politicians from many parts of the world, was meant to provide a platform for participants to discuss the way forward to transform the African continent.
“It’s important to understand how banks work and the way banks’ liquidity is managed. First of all you find the deposits and you have to find a way of investing those resources. Your first choice is to lend that money into the economy and if you have surplus you invest such in TBills.
Government notes
According to the February 2015 Bank of Ghana monetary policy report, the rate on the 91-day instrument increased to 25.8 per cent during the year 2014 from 19.2 per cent in the previous year and still persists at the same rate.
For instance, as of the end of April, this year, the BoG policy rate stood at 21 per cent while the 91-day Treasury-Bill was quoted at 25.12 per cent.
Similarly, the rate on the 182-day bill is quoted at 25.81 per cent while the one-year note is going for 22.50 per cent and the two-year note is quoted at 23 per cent.
Effect on private sector
This high interest rate offered by the government on its bills is crowding out the private sector which is seen as the engine of growth.
Many companies are reluctant to borrow to expand their businesses and to contribute more meaningfully to the economy because the interest rates offered by the banks are too high.
The question is are you finding enough bankable propositions out there such that you are not going to lose depositors and investors’ money? So there is a balance there and that is what people are not willing to understand.
There are many others concerns raised regarding the nature of the government borrowing from the domestic market.
According to the Bank of Ghana’s (BoG) Monetary Policy Committee report in February this year, the country’s domestic debt stood at GH¢34.6 billion, representing 30.5 per cent of GDP at the end of 2014, up from GH¢26.7 billion (28.4 per cent of GDP) in 2013.
The Chief Economist for Africa of Standard Chartered Bank, Ms Razia Khan, said most of the debts were short term which was not the best.
Banks not the cause
Mr Bedu-Addo said: “The high interest rate is not the making of banks,” adding that: “Why would we want interest rates that high?”
According to him what is presently prevailing “is a function of the economic environment.”
“If the government is borrowing at 21,22, 23, 24 per cent, basic economics is that government is risk-free because it is a collective” adding that: “Anything is a government rate plus something so if the government rate is 25 how should a bank lend below that.”
He said: “So it is not us. We will love to see interest rates come down but it will come down if the macro side improves and there is less demand from the government, then the rate will drop.”
Mr Bedu-Addo recalled the period in 2011 when the rates dropped to 11 per cent “and our rates came down to 16 per cent, the lowest on the market.”
He said the environment had become very difficult and noted that the “banks are not making money at the expense of clients but you are forced into an interest rate regime that is very high.”