Domestic borrowing causes high cost of lending – Addison

Governor of the Bank of Ghana, Dr. Ernest Yedu Addison, has said that the main reason for high lending rates in the country is largely due to government’s huge borrowing from the domestic debt market to support the budget; hence, any hope of affordable lending will depend on fiscal consolidation.

Dr. Addison’s comment comes on the back of concerns raised by businesses about the disconnect between policy rate, currently at 13.5 percent, and lending rates which average 21 percent. For him, even though a multiplicity of factors is accountable for the huge gap, key among them is government’s borrowing appetite from banks – which comes at attractive risk-free interest rates to the banks.

For example, as of August 2021 the 91-day bill was selling at 12.5 percent; the 182-day bill sold at 13.27 percent; the 364-day bill sold at 16.2 percent; the 2-year note also sold at 17.25 percent; the 3-year bond went for 17.7 percent; and the 5-year bond sold at 18.3 percent. So with government borrowing at such rates, there is no way banks can lend to businesses at lower rates then these; especially when businesses and individuals are at high risk of default in this pandemic atmosphere.

So, until the domestic revenue situation improves for government to pull out of the debt market, Dr. Addison posits the gap between lending and policy rates will continue to be wide.

“I think that if you look at the macro side, one of the lingering problems that we have is the strong demand from the side of the budget. If we are seeing greater fiscal consolidation, and the demand for loans or bonds were going down, you would expect that lending rates follow. I use the example of countries that run balanced budgets.

“If we run a balanced budget in Ghana with our revenues equal to our expenditures, the banks are holding GH¢80billion in government bonds. Where do you think that money will be and what do you think would happen to interest rates in that context? So, the issue of fiscal consolidation is also very key in addressing this issue of high lending rates.

“Hence, we should expect that as the budget consolidates we will be able to see reallocation of the resources which are released in financing the budget to the private sector. If we want the private sector to be the engine of growth for our economy, this is really where the resources should be going,” he said at a press conference in Accra on Monday.

Data supports the Governor’s comments as – according to the statistical bulletin (May 2021) report – out of the total domestic debt of GH¢171.7billion as of May 2021, the banking sector – which s the Bank of Ghana and the commercial banks – holds GH¢86.5billion, representing 50 percent of the debt and an increase of GH¢20billion from May 2020.

When further broken down, of the GH¢86.5billion the Bank of Ghana holds GH¢34.6billion while the commercial banks hold GH¢51.8billion – indicating that commercial banks are very active in the bond and Treasury bills market. In fact, their holding in the domestic debt is bigger than the GH¢51.5billion held by the non-bank institutions which include SSNIT, insurance companies, firms and institutions, and individuals. The rest of the debt, GH¢33.6billion, representing 20 percent, is held by non-residents.

The structure of the domestic debt further reveals a whopping GH¢104.8billion is made up of investments in government’s medium-term bills; such as two-year Treasury notes and 10-year bonds. Then again, GH¢22.6billion is made of up short-term bills such as the 91-day Treasury bill to one-year Treasury notes. The remaining GH¢44.2billion went into long-term bonds such as 15-year and above bonds.

Despite the Governor suggesting the solution to high lending rates primarily depends on fiscal consolidation, he said the regulator will continue to introduce policies that will free-up some capital for banks to lend to the private sector.

“We have made a lot of progress from 2016 when the average lending rate was 27 percent, and today we are closer to 20 percent; and that is more than a 600 to 700 basis points reduction in the lending rate over the past four years, and so there has been a lot of improvement.

“You have to understand that the reasons for high lending rates are varied. The macro conditions contribute to it; the structure of our banking system contributes to it, in terms of efficiencies of the banks. As you know, we increased the capital requirement for banks, and that led to some mergers and acquisitions. Because of the economies of scale which come with larger banks, the unit cost goes down. And hopefully when the unit cost goes down, it translates into lower lending rates. So, this is really the thinking behind reducing the minimum capital requirement.

“So, we are working at it; government is working at it to do their part in bringing down the budget deficit. We are ensuring that banks are becoming more efficient so they will be able to pass some of their efficiency gains into lower lending rates. We have put in place the credit infrastructure which is supposed to help, so that the banks will use them. All of these infrastructure are supposed to help them reduce the risk associated with lending, and all of these measures should help in bringing lending rates down.