Newscenta
Life-changing News

High interest on govt’s domestic borrowing creating capital shortage

Deputy Minister of Trade and Industry, Dr Stephen Amoah, says the situation where governments borrow from the domestic market at very high interest rate than the private sector must be reversed.

He cited the example of interest rates of government securities such as Treasury Bills being higher than what instrument of commercial banks offer in the country.

This incentive banks to invest in government instruments rather than providing credit to the private sector.

Ghana’s domestic borrowing costs have soared as interest payments were consuming between 70 and 100% of government revenues.

According to the Member of Parliament (MP) for Nhyiaeso Constituency in the Ashanti Region, government’s penchant for borrowing from the local market at higher rates has made it difficult for local businesses to access funds at reasonable rates, an effect that is consequently felt by citizens.

Dr Amoah made these assertions at the second edition of the Financial Economic Summit that was held yesterday, under the theme, ‘Impact of socioeconomic policies on trade and Industries in developing countries.”

The MP noted that this love for dabbling in the local market at higher interest rates defeats some of the most fundamental principles of finance, like “the higher the rate, the higher the cost of return.

He asserted, “Over the last few decades, most of the time, interest rates from private securities such as the banks, are less than those from government.”

He pointed out that no one who is given such terms by commercial banks will pick that over the lucrative government instrument.

In view of this, the banks are more comfortable lending to government, and this creates a capital shortage that adversely affects businesses and stunts their growth.

“There is a fundamental challenge with some of policies that we are pushing through,” he said.

He also chided the Bank of Ghana (BoG) for its decades-old practice of increasing the policy rate as a means of tackling inflation.

He noted that inflation keeps rising as a result of cost-push generated from the policies of the Central Bank.

He suggested that rather than applying global principles broadly, the implementation of these economic principles should be tailor-made to bring the desired results locally.

The Deputy Minister also advised citizens to fulfil their civic duties and pay the right amounts of taxes to help government bring about the needed development.

Dr Amoah said, “our country runs what I describe as a negative effective tax rate economy.

This means when government’s total expenditure for a year is divided by households, the amount each household gets is more than the amount government receives in taxes from each household in the country.

He continued, “so far as we don’t pay realistic taxes, so far as we don’t work on the leakages in our tax system, so far as we don’t include other stakeholders in paying taxes, we’ll continue to borrow.”

Managing Director (MD) of GCB Bank PLC, Kofi Adomakoh, who was one of several speakers at the summit, suggested that more needs to be done to provide reasonably priced and patient capital to support innovation.

He called for an evolution away from the current practice of providing funding for on-lending by commercial banks to the financing of merchandise and value-added products.

“Ghana continues to be heavily import dependent despite various interventions by governments over the years. It’s clear that trade liberalisation based on the export of primary commodities has not delivered the expected goods,” he said.

The MD urged the nation’s development banks to help mitigate some of the risks commercial banks bear in this regard.

He also called for the establishment of a comprehensive capacity building framework to enable private sector compete internationally.

Adomakoh expressed the belief that inclusive industrialization through the implementation of policies that promote equitable access to employment “will benefit all segments of society, particularly marginalised groups.”

 



 

Leave a comment
error: Content is protected !!