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Heated Debate On Interest Rates   
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Indeed, the Citi FMs roundtable discussion on interest rates yesterday was a heated one as participants who were mostly from industry, academia, private and financial sectors of the economy expressed concerns over the high level of interest rates.

They noted that the situation was hampering the productive sectors of the economy. Professor Cletus Dordunoo, who spoke on historical perspective of interest rate spread in Ghana, admonished that while ridiculously low savings rate discouraged savers, the exorbitantly high lending rates choke investors, thus hindering the growth of industries.

He said that the high spread between lending and savings rates has culminated in the decline in industrial growth, which has forced government to borrow from the bretton wood institutions such as the Institute of Monetary Fund (IMF).

Ghana has the highest spread and lending rates in Africa and the second to Brazil globally. It also has the highest lending rates in Africa, averaging from 37.2 percent in November 2009. While the Prime Rate was 18 percent in November 2009, lending rates were 37 percent and 31 percent in June 2006 when the Policy Rate was 14 percent.

According to him, the high lending rates have affected the growth of the economy since the productive sectors of the economy had been stifled and worsened unemployment rate. He challenged the Bank of Ghana (BoG) to consider adopting the open market policy to force the banks to cut their base rates.

The Bank of Ghana reduced its policy rate, the Prime Rate from 18 percent to 16 percent last month but the commercial banks have reduced their base rates slightly. In addition, Professor Dudornu said the reduction in the base lending rate would not proportionally cause reduction in base lending rates.

Wilson Atta-Krofah, President of the Ghana National Chamber of Commerce and Industry (GNCCI), on his part, expressed worry over the high lending rates, saying that it would not support industrial growth. It is important for the Bank of Ghana to find the relationship between inflation and prime rate. It is not the best to use the prime rate to fight inflation but rather look at the causes of inflation, he added.

Speaking on implications on high lending rates for the macro-economy, Fifi Kwetey, Deputy Minister of Finance and Economic Planning, took a swipe at the banks for charging high rates, explaining that the decline in cost of funds does not commensurate to the base rates of banks which is still high.

He called for critical analysis of the profit margin of banks vis--vis loans granted. He rejected calls that inflation should not be used to determine the prime rate, adding that the issue of inflation is critical in determining lending rates. It would be unwise for a bank to borrow 91-day T.Bill at 5 percent while inflation is 15 percent.

The BoG cut down its prime rate by 200 basis points on February 19, 2010, with the annual inflation rate dropping to 14.23 percent on Wednesday. The Ghana Cedi has also stabilized against the US Dollar after the country received a $1.02 billion loan from IMF in mid 2009.

Notwithstanding these developments, lending rates for most banks range from 30 to 35 percent depending on the various sectors.
South Africa and Nigeria have interest rates of seven and six percent respectively.

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