“I am pleased to report that our government’s proactive fiscal management has yielded a significant reduction in treasury bill (T-Bill) rate,” this was the Minister for Finance, Dr. Cassiel Ato Forson proudly announcing on the floor of parliament during the presentation of the 2025 Budget Statement. He went further to state that, “this achievement is a testament to the positive shift in investor confidence regarding our country’s economic outlook.
Like any other government in the world that heavily relies on the treasury bill market, a drop in treasury yield rate is a song to their ears since it has enormous benefits.
But hold on, while the central government is rejoicing, the Bank of Ghana might also be bleeding. “Currently, T-bill rates are coming down and it is good to see that. However, there is an emerging risk that if we are not careful, we will see pressure on the cedi going up as a result,” these were the sentiments expressed by the Bank of Ghana Governor, Dr. Johnson Asiam, a few days to the presentation of the budget to parliament.
This is a clear indication that the Bank of Ghana appears not to be too happy with the rate at which the T-bills are dropping. Rightly so, this is because the rate of decline has serious repercussions on Ghana’s not-too-strong and not-too-resilient cedi.
Developments on the Treasury Bill Market in the Last Three Months
The development on the short-term market has been very drastic within the last three months. The government bills for most part of the period have been massively oversubscribed partly confirming the minister’s claim of a boost in investors’ confidence. The government had no choice but to reject most bills and return them to investors in line with its fiscal discipline and consolidation agenda.
The excess demand for the limited bills and their rejection forced a reduction in the interest rate on the instruments. Checks by The High Street Journal reveal that the rate has drastically declined since President Mahama’s swearing-in.
As of Friday, January 10, 2025, the week of the swearing-in of President John Dramani Mahama, the average interest rate on all three bills stood at 29.16% higher than the monetary policy rate of 27% and then inflation rate of 23.5%.
Specifically, the rate on the 91-day bill stood at 28.34% and that of the 182-day bill was 28.96% while the 364-day also hovered around 29.16%.
Within a period of three months, the rates have significantly declined by a little over 40%. As of March 14, when the last auction was held, the average interest rate on the three bills stood at 17.25%. The 91-day instrument has significantly dropped to 15.86% and the 182-day bill has also declined to 16.93% while the 364-day bill is 18.97%.
The Good Side – Why the Minister for Finance is Rejoicing
The interest rate on the bills, for the avoidance of doubt, is the cost of borrowing for the government. It is the additional cost the government will have to pay in addition to the principal on the maturity of these bills.
This significant drop in the rate means the cost of borrowing these bills has also significantly reduced for the government. This has far-reaching implications on the government’s rate of debt accumulation as a lower interest rate results in a slower rate of debt accumulation and vice versa.
The government currently relies heavily on the short-term market since it has no access to the international capital market and its domestic long-term market (bonds) has been suspended due to the debt default and the subsequent domestic debt exchange program. This means a significant drop in the interest rate on short-term bills is definitely a song to the ears of the government.
One other potential benefit, though yet to be seen, is the reduction in the crowding out effect. Lower interest rates on government instruments mean less incentive for banks and other investors to hold the bills. This will push them to be more willing to lend to private-sector businesses. This could propel economic activity in the real sectors of the economy creating jobs and expanding the economy.
This is the dream of every government hence the finance minister will definitely be elated.
The Ugly Side – Why the Governor of the Central Bank is Concerned
One of the primary mandates of the Bank of Ghana is to ensure price stability. One way to achieve this is to ensure that the local currency is stable against major trading currencies.
However, the ongoing development on the treasury bill market is a threat to this mandate hence the worry of Dr. Johnson Asiama. The obvious question is how?
It is a no-brainer that every investor wants to maximize the returns on his/her investment. This drastic reduction in the interest rate on the bills makes investing in them less attractive and hence both foreign and local investors will withdraw and find other alternative sources of investment.
The situation is more worrying since the average interest rate of 17.25% on the bills is far less than the inflation rate. This means that investing in T-bills offers no real returns and makes no economic sense to continue to hold investments in government instruments.
Moreover, because there is no long-term market currently (bonds market), investors who may want to try different investment options will have very limited options.
This is where the cedi stands at risk. Many investors will choose to hedge their funds in dollars and begin to demand more foreign currency. As has always been the case, a hike in demand for forex is a tumble for the cedi causing it to lose ground and fall freely.
Aside from investing in dollars, foreign investors may want to pull out their funds. This will cause a capital flight and put pressure on the cedi. As it is well known, a weaker currency is a threat to the cost of living. This is because it will lead to higher imported inflation and hence drive overall inflation.
What might be deepening the concern of the Bank of Ghana is the period we find ourselves in which the rapid decline in the T-bill rate is happening. This is the period when multinationals operating in the country declare their profit after the financial year and repatriate them.
So already, there is this longstanding situation which is being exacerbated by the development of the T-bill market.
The Seeming Disconnect between Gov’t’s Fiscal Policy & Central Bank’s Monetary Policy
Despite the fear of the Governor of the Bank of Ghana, a high-ranking official within the government has told The High Street Journal that it is the vision of the administration that the T-bill rates continue to fall to hit a single digit. This means that measures will continue to be implemented to ensure that the rates continue to fall.
This suggests that there is a divergence between the objectives of the central government and the Bank of Ghana in the management of the macroeconomic environment.
The seeming contradiction in policy direction has far-reaching implications for the economy. It is also worth noting that the seeming difference in policy direction between the Bank of Ghana and the central government is not new. It is something that has existed over the years between BoG governors and the finance ministers. It appears each one wants to exert its independence hence leading to divergence in policies which play a role in the unstable macroeconomic environment of the country.
The Need for Collaboration
Financial Analyst, Dr. Richmond Atuahene confirms the impact of the development to The High Street Journal.
“The decline of the interest rate has a broader economic implication. Positively, increases consumption and investment and possibly stimulates growth. However, the fast decline can have a bigger impact on foreign exchange and at the same time capital flight. With the banks and the telcos declaring profit, as we move to the end of this month, the cedi will depreciate more than the 5.3% experienced this year,” he explained.
Given the situation at hand, the Minister for Finance and the Bank of Ghana have an obvious choice, and that is to collaborate to salvage the situation.
It must be emphasized that despite their independence, none of them is working in isolation as every policy implemented has far-reaching implications on the same economy they seek to reset.
A strong collaboration between the Bank of Ghana (BoG) and the government is essential to managing the impact of lower treasury bill (T-bill) rates while ensuring economic stability. By aligning monetary and fiscal policies, they can prevent excessive government borrowing, control inflation, and stabilize the cedi in a manner that does not jeopardize the mandate and objectives of the other.
