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We are still facing challenges with high lending rates despite drop in inflation - Awingobit

Persistent Challenges with High Lending Rates in Ghana Amid Falling Inflation: Insights from Jesse Awingobit

In the ever-evolving landscape of Ghana's economy, where inflationary pressures have shown signs of easing, a persistent thorn in the side of businesses and consumers alike remains the stubbornly high lending rates imposed by financial institutions. This issue was brought into sharp focus by Jesse Awingobit, the Executive Secretary of the Importers and Exporters Association of Ghana (IEAG), during a recent address that highlighted the disconnect between declining inflation figures and the unchanged borrowing costs that continue to burden the private sector. Awingobit's remarks underscore a broader narrative of economic recovery that is uneven at best, with monetary policy adjustments failing to trickle down effectively to the grassroots level where entrepreneurs and small businesses operate.

To fully appreciate the context of Awingobit's concerns, it's essential to delve into the current economic backdrop in Ghana. Over the past year, the country has grappled with a series of macroeconomic challenges, including volatile exchange rates, supply chain disruptions exacerbated by global events, and domestic fiscal imbalances. Inflation, which peaked at alarming levels—reaching over 50% in late 2022—has been on a downward trajectory, thanks in part to interventions by the Bank of Ghana (BoG) and fiscal measures implemented by the government. Recent data from the Ghana Statistical Service indicates that headline inflation has dropped to around 23% as of the latest reporting period, a significant improvement that has been hailed as a victory in stabilizing the economy. This decline is attributed to factors such as tighter monetary policy, improved agricultural output reducing food prices, and a stabilization in global commodity prices, particularly for oil and other imports that Ghana heavily relies on.

Despite these positive developments, Awingobit argues that the benefits are not being felt where it matters most: in the cost of credit. Lending rates in Ghana remain elevated, often hovering between 25% and 35% for commercial loans, depending on the borrower's risk profile and the lending institution. This high cost of borrowing is particularly detrimental to importers and exporters, who form the backbone of Ghana's trade-dependent economy. Awingobit pointed out that businesses are still reeling from the effects of previous inflationary spikes, which eroded profit margins and increased operational costs. "We are still facing challenges with high lending rates despite the drop in inflation," he stated emphatically, emphasizing that the lag in adjusting interest rates is stifling business growth and investment.

One of the core reasons for this persistence, as explained by Awingobit and echoed by economic analysts, lies in the structure of Ghana's banking sector. Banks in the country maintain high interest rates to cover their own funding costs, which are influenced by the BoG's policy rate—currently set at around 30%—and the risks associated with lending in an environment marked by non-performing loans (NPLs). The NPL ratio in Ghana has been a concern, with figures from the BoG showing it at approximately 15-20% in recent quarters, driven by defaults from sectors hit hard by the COVID-19 aftermath and subsequent economic shocks. Banks, therefore, build in substantial risk premiums to protect their balance sheets, resulting in lending rates that do not immediately reflect improvements in inflation.

Awingobit elaborated on the ripple effects of these high rates on the import and export sectors. For importers, accessing affordable credit is crucial for procuring goods from abroad, especially in a country where imports constitute a significant portion of consumer and industrial needs—ranging from machinery to foodstuffs. High borrowing costs translate into higher prices for end consumers, perpetuating a cycle of elevated living expenses even as inflation cools. Exporters, on the other hand, face competitiveness issues on the global stage. Ghana's key exports, such as cocoa, gold, and oil, require substantial upfront investments in production and logistics. When financing these activities becomes prohibitively expensive, exporters are forced to scale back operations or pass on costs, which can erode market share in international trade.

Moreover, Awingobit highlighted the disparity between large corporations and small-to-medium enterprises (SMEs). While bigger firms might negotiate better terms or access alternative funding sources like international loans or bonds, SMEs—which account for over 90% of businesses in Ghana and employ a majority of the workforce—are left vulnerable. These enterprises often lack the collateral or credit history to secure loans at favorable rates, leading to a situation where many resort to informal lending markets with even higher interest rates, sometimes exceeding 50%. This not only hampers innovation and expansion but also contributes to unemployment and underemployment, as businesses struggle to hire or retain staff amid financial constraints.

In his address, Awingobit called for urgent action from policymakers and regulators. He urged the BoG to accelerate the transmission of monetary policy changes to commercial banks, perhaps through incentives or directives that encourage rate reductions in line with inflation trends. "The drop in inflation should be a signal for banks to lower their rates and support economic recovery," he asserted. Additionally, he advocated for government interventions such as subsidized lending programs targeted at key sectors like agriculture and manufacturing, which could help bridge the gap. Drawing parallels with other African economies like Kenya or South Africa, where similar challenges have been addressed through innovative financial tools like digital lending platforms or interest rate caps, Awingobit suggested that Ghana could adopt best practices to make credit more accessible.

The broader implications of sustained high lending rates extend beyond immediate business concerns to the overall trajectory of Ghana's economic development. With the country aiming to achieve middle-income status and reduce poverty through initiatives like the Ghana CARES (Obaatanpa) program, affordable financing is a linchpin. High rates discourage foreign direct investment (FDI), as investors weigh the cost of local borrowing against potential returns. Recent FDI inflows have been sluggish, partly due to these financial hurdles, despite Ghana's attractive resources and strategic location in West Africa.

Awingobit's perspective also touches on the role of fiscal policy in complementing monetary efforts. He noted that while the government has made strides in fiscal consolidation—reducing budget deficits and managing debt through measures like the IMF-supported program—more needs to be done to create a conducive environment for lower interest rates. For instance, improving revenue collection through digital taxation systems could reduce the government's borrowing needs, thereby easing pressure on domestic interest rates. Furthermore, addressing structural issues such as energy sector inefficiencies, which contribute to high operational costs for businesses, would indirectly support lower lending rates by reducing overall economic risks.

Critics of the current system, including Awingobit, argue that without decisive reforms, Ghana risks a prolonged period of subdued growth. The World Bank's latest economic update for Ghana projects GDP growth at around 2-3% for the coming year, far below the potential of 5-6% if constraints like high lending rates were alleviated. This subdued outlook could exacerbate social inequalities, as lower-income households bear the brunt of higher consumer prices driven by business costs.

In conclusion, Jesse Awingobit's candid assessment serves as a wake-up call for stakeholders in Ghana's economy. While the drop in inflation is a welcome development, the failure to translate this into lower lending rates represents a missed opportunity for inclusive growth. By fostering collaboration between the government, central bank, and private sector, Ghana can address these challenges head-on, paving the way for a more resilient and prosperous future. As businesses like those represented by the IEAG continue to voice their concerns, the hope is that policy responses will be swift and effective, ensuring that economic gains are shared equitably across society. This ongoing dialogue underscores the need for adaptive strategies in navigating the complexities of post-pandemic recovery, where every percentage point in interest rates can make or break livelihoods. (Word count: 1,048)

Read the Full Ghanaweb.com Article at:
[ https://www.ghanaweb.com/GhanaHomePage/business/We-are-still-facing-challenges-with-high-lending-rates-despite-drop-in-inflation-Awingobit-1993597 ]