The government, once forced to return money to investors due to overwhelming demand for treasury bills, is now struggling to meet its targets, missing the mark for the second week in a row.
Earlier this year, beginning on January 10, following the swearing-in of President John Mahama, the government experienced consistent oversubscription for treasury bills, occasionally returning up to GH¢8.4 billion in one instance to investors due to excessive demand. This strong demand allowed the government to lower the interest rates on treasury bills significantly. The rates dropped sharply from 28.33% (91-day), 28.96% (182-day), and 30.17% (one-year note) to 15.71%, 16.73%, and 18.84% respectively, by March 28.
The government celebrated this rapid decline, hinting at the possibility of reducing rates to single digits. Lower rates could lead to reduced borrowing costs, which would be a welcome relief for businesses. However, the Governor of the Central Bank, Dr. Johnson Asiama, expressed concern, warning that the sharp decline could have unintended consequences. He feared that if treasury bill rates dropped too quickly, investors might turn away from them and instead invest in foreign currencies like the US dollar, which would put pressure on the cedi and lead to its depreciation.
Not long after the Governor’s warning, the heavy demand for treasury bills started to fade, turning oversubscription into undersubscription. Investors, being rational, are likely reacting to the fact that the current returns on treasury bills are below the inflation rate of 23.1%, which means their real returns are negative. It’s no surprise, then, that the government is now missing its targets.
Despite the drop in demand, the government has continued to lower interest rates. In the past two weeks, even as the government failed to meet its target, treasury bill rates still fell from 15.86%, 16.92%, and 18.96% to even lower levels for the 91-day, 182-day, and one-year notes. With these continued declines, the concern that investors may turn to foreign currencies, particularly the dollar, is becoming more apparent, and quick action is needed.
The cedi has already depreciated by 5.3% against the dollar, 8.2% against the pound sterling, and 9.2% against the euro. The Central Bank is keen to prevent further significant depreciation of the local currency.
Lack of Coordination Between Key Institutions?
A drop in treasury bill rates could have been good news if it led to lower lending rates for businesses and individuals. However, this outcome is uncertain. Lending rates are determined by the Ghana Reference Rate (GRR), which is influenced by three factors: the 91-day treasury bill rate, the interbank lending rate, and the monetary policy rate. While the 91-day bill rate is falling, the Central Bank has chosen to increase its policy rate, offsetting any potential reduction in lending rates that could have come from lower treasury bill rates.
The government is focused on reducing borrowing costs by lowering treasury bill rates, but the Central Bank, concerned about rising inflation, has increased the policy rate, which surprised many observers. This has created a perception that the Ministry of Finance, which manages fiscal policy, and the Bank of Ghana, responsible for monetary policy, may not be on the same page. Dr. Gideon Boako, a Member of Parliament and former spokesperson for former Vice President Dr. Mahamudu Bawumia, has already pointed out this disconnect.
While the Central Bank has the right to maintain its independence in making decisions to safeguard the economy, any perceived lack of coordination between key institutions could hurt investor confidence and affect the exchange rate.
Former Governor Dr. Ernest Addison was often seen as being too close to the Finance Ministry, especially with former Finance Minister Ken Ofori-Atta, raising concerns that he might be influenced by them. The current leadership, however, seems to be taking a different approach. Still, market observers caution that it may be too early to draw conclusions, especially as Governor Asiama has stated that he aims to work closely with fiscal authorities. In managing an economy, perception is however crucial.
