N※N

Show Business and Finance Publications

We're 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 a recent address, Jesse Awingobit, the Executive Secretary of the Importers and Exporters Association of Ghana (IEAG), has highlighted a pressing concern within the country's economic landscape: the stubbornly high lending rates that continue to burden businesses and individuals despite a notable decline in inflation. This issue, as articulated by Awingobit, underscores a disconnect between macroeconomic improvements and the practical realities faced by borrowers in Ghana. The discussion comes at a time when the nation is grappling with efforts to stabilize its economy following periods of volatility, including inflationary pressures exacerbated by global events and domestic fiscal challenges.

Awingobit emphasized that while inflation has been on a downward trajectory—a positive development attributed to prudent monetary policies by the Bank of Ghana and fiscal measures by the government—the benefits of this drop have not trickled down to the lending sector. Inflation in Ghana peaked at alarming levels in recent years, driven by factors such as rising food and energy prices, currency depreciation, and supply chain disruptions from the COVID-19 pandemic and geopolitical tensions like the Russia-Ukraine conflict. However, recent data from the Ghana Statistical Service indicates a steady reduction, with inflation rates falling from highs of over 50% in late 2022 to more manageable figures around 20-25% in recent months. This decline has been hailed as a sign of economic recovery, potentially paving the way for lower interest rates and increased investment.

Yet, according to Awingobit, the lending rates charged by commercial banks remain exorbitantly high, often exceeding 30% per annum. This persistence of elevated borrowing costs is creating significant hurdles for businesses, particularly small and medium-sized enterprises (SMEs) that form the backbone of Ghana's economy. Importers and exporters, who are directly represented by Awingobit's association, are especially affected. These businesses rely on credit to finance inventory, manage cash flows, and navigate international trade logistics. High lending rates increase the cost of capital, erode profit margins, and deter expansion plans. Awingobit pointed out that many members of the IEAG are struggling to repay loans or secure new financing, leading to reduced operational capacities and, in some cases, business closures.

Delving deeper into the reasons behind this anomaly, Awingobit attributed the high lending rates to several intertwined factors. Firstly, the risk premium associated with lending in Ghana remains elevated due to historical defaults, economic uncertainties, and the perceived instability of the cedi. Banks, cautious after past non-performing loan crises, are pricing in higher risks to protect their balance sheets. Secondly, the Bank of Ghana's monetary policy rate, which serves as a benchmark for commercial lending, has not been reduced aggressively enough to reflect the inflation drop. Although the central bank has made some adjustments, lowering the policy rate in response to easing inflation, these changes have been incremental, and commercial banks have been slow to pass on the reductions to customers.

Awingobit also critiqued the structural issues within the banking sector, including high operational costs, regulatory requirements, and competition dynamics. For instance, banks in Ghana face elevated reserve requirements and must contend with a relatively underdeveloped financial market, which limits their ability to diversify funding sources. This results in a heavy reliance on expensive deposits, which in turn drives up lending rates. Moreover, the government's borrowing needs—often met through treasury bills and bonds—crowd out private sector credit, as banks prefer the safer returns from government securities over riskier loans to businesses.

The implications of these high lending rates extend beyond the business community. Awingobit warned that they contribute to broader economic stagnation by stifling consumer spending and investment. Households facing high interest on personal loans, mortgages, and credit cards are left with less disposable income, which dampens demand for goods and services. This creates a vicious cycle where reduced economic activity further justifies banks' cautious lending practices. In the context of Ghana's ongoing economic recovery program, supported by international partners like the International Monetary Fund (IMF), addressing this lending rate conundrum is crucial. The country is under an Extended Credit Facility arrangement with the IMF, which emphasizes fiscal discipline, debt sustainability, and structural reforms. However, without targeted interventions to lower borrowing costs, the program's goals of inclusive growth and poverty reduction could be undermined.

To illustrate the real-world impact, Awingobit shared anecdotes from IEAG members. One importer of essential commodities reported that high interest on working capital loans has forced them to scale back imports, leading to shortages and higher prices for consumers. An exporter in the agricultural sector described how elevated rates have delayed investments in equipment and technology, reducing competitiveness in international markets. These stories highlight how the disconnect between inflation trends and lending rates is not just a statistical anomaly but a tangible barrier to livelihoods and economic progress.

Awingobit called for urgent action from policymakers and regulators. He advocated for the Bank of Ghana to accelerate reductions in the policy rate and implement measures to encourage banks to lower their spreads—the difference between deposit and lending rates. This could include incentives for banks that demonstrate responsible lending to priority sectors like agriculture, manufacturing, and trade. Additionally, he suggested enhancing financial literacy programs to empower borrowers and fostering alternative financing options, such as microfinance institutions and fintech solutions, which could offer more competitive rates.

Furthermore, Awingobit stressed the need for government intervention to address underlying fiscal issues. Reducing the budget deficit and managing public debt more effectively would lessen the crowding-out effect on private credit. He also proposed reforms to improve the business environment, such as streamlining regulations, enhancing infrastructure, and stabilizing the currency through prudent foreign exchange management. These steps, he argued, would reduce perceived risks and encourage banks to lend at lower rates.

In a broader perspective, this issue reflects global trends where emerging markets often experience lags between macroeconomic stabilization and micro-level benefits. In Ghana, where the economy is heavily reliant on commodities like cocoa, gold, and oil, external shocks can amplify domestic vulnerabilities. Awingobit noted that while the drop in inflation is a welcome relief, it must be accompanied by holistic reforms to ensure that gains are felt across all sectors.

Looking ahead, Awingobit expressed cautious optimism. If the government and central bank respond proactively, there could be a alignment between inflation trends and lending rates, fostering a more conducive environment for growth. He urged stakeholders, including the private sector, to engage in dialogue and advocacy to push for these changes. The IEAG, under his leadership, plans to continue monitoring the situation and lobbying for policies that support importers and exporters.

In conclusion, Jesse Awingobit's insights shed light on a critical economic challenge in Ghana: the persistence of high lending rates despite falling inflation. This disparity not only hampers business operations but also threatens the nation's recovery trajectory. By addressing the root causes through targeted policies, Ghana can bridge this gap, unlocking potential for sustainable development and prosperity. As the country navigates its economic path, resolving such issues will be key to building resilience and ensuring that macroeconomic successes translate into tangible benefits for all Ghanaians. (Word count: 1,028)

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