My thoughts after the Press Release on the "Rebasing of the GDP Estimates of Ghana".

I have come to learn that "rebasing" is replacing the old base year used for compiling the constant price estimates to a new and more recent base year. It's worth noting that Ghana had relied on 1993 as the base year till date, implying our GDP had been estimated based on 1993 prices eg. we all recall how expensive mobile phone chips were in those days and are now going for practically nothing, and for me, I was in JSS or something and we could buy a whole waakye meal with ¢1,000 which is GHp10.

I bet you, it's good we have stepped into realism and this "rebasing" has been done. It's unthinkable (a must watch movie) to have used a 1968 methodology all these years when a new methodology was formulated in 1993.

It's revealing....

The new estimate implies Ghana has a GDP size which is 60.3% bigger than we thought and knew, (if you don't know where you are, you wont know where you must go or how to get there). Imagine your tailor or seamstress takes your measurement and sews a dress which is 60.3% smaller than your true measurement. I guess you will look hot and it will be dressing to kill, i mean you'ld strangle yourself to death in those clothes!!..lol

Secondly, it's worth noting that despite all what we knew and i have been thought and read, that agriculture is the greatest contributor to our GDP, i was being misdirected. Ok may be just me! But what about the various government who have relied on such data? 3 different administrations and "as many as you can count" number of parliaments (anyway JJ has no excuse since the data maybe applicable more to his time 1992 to 2000).

This second point is what really lingered in my mind for long. I wondered if our nations policies had not been based on wrong diagnosis and we may be moving in the wrong directions over these various governments. "eeeiii...ey3 m)b) eeiiii", meaning it's unfortunate! walking in the dark....

Then i started wondering what will all these revelations do to us, we have oil now. I then wondered again what the Gold and all those minerals were contributing to our GDP. Mining & Quarrying contributed to 2.68% of the GDP whereas Cocoa 2.32%, Other crops excl. cocoa 17.20%, banking and insurance 3.19 %, Transport and Storage 12.15%, Trade, repair of Vehicles and household Goods (our Abossey okai oo) 6.10%. Don't be disturbed, i'me done with numbers. It's worth thinking and rethinking about our expectations of the Oil industry. Combining the cocoa and all mineral, we barely get 5% of GDP, noting that most investments made in cocoa are from Ghana and thus the returns stay in Ghana, whereas that of Mining is from foreign investors and dividends are repatriated. How much has Ghana invested in the Oil and thus my question, What good will it bring to our GDP (overall pocket). Aside recouping the capital investments as allowed by laws everywhere, most human resources to be employed will be foreigners who will send part of their income to their respective countries. Do we then need to make noise about the Oil? Or we need to resource our Abossey Okai traders who are adding 6% (more than the total of cocoa and mining)? or equip our few manufacturing firms which are contributing 7.81% and growing at 2.1%?

before i take a break on this issue, let me test my eroding mathematical brains. If all these years we thought our GDP was 60.3% smaller and we projected our year on year GDP growths at 9% 6% etc and we claimed we were growing, then what does this new data mean? Does it mean that our GDP growth is a suspect and we may not be growing at all?..lol i doubt. tofiakwa!

I rest my case now.....

Should Bank Lending Rates Reduce just because the Prime (Policy) Rates of the Central Bank has been reduced?

Like a small boy who once asked, how can 22 grown men chase one small ball?; so are the many questions that often boggle my mind. Often they are issues concerning the economy and finance. I guess my inadequacy in the knowledge of Finance and Economy may be the cause. The child further asked, Dad why do you sometimes try joining the 22 men chase the ball? You move your leg and scream when passes go wrong. Children ask the most down to earth questions and a careful thought of those will make us rethink and their faith is unwavering. Daddy can answer all questions. I come again with some questions about this issue on Prime rate (Policy rate) and Bank Lending rates. Most of these questions emanated from the latest MPC report, and without referring to any other document, I would like to ask some questions, Daddy.

What is a Prime or policy rate? Per my friend Wikipedia, the term originally indicated the rate of interest at which banks lent to favored customers, i.e., those with high credibility, though this is no longer always the case. This was articulated by the Governor of BoG in his speech as well. This is often adjusted due to changes in the macroeconomic situation of the country. Generally, Banks respond to adjustments to the prime rate as other risks may be valued and added to the prime rate (since prime rate is regarded as lending rate to a riskless person). When the prime rate thus increases, most banks increase their base lending rates and vice versa. Again base lending rates imply the prime rate+ bank admin charges+ bank interest any other the bank may wish (Wikipedia says Base Lending Rate (BLR) is a minimum interest rate calculated by financial institutions based on a formula which takes into account the institutions cost of funds and other administrative costs.)

From the above, if the prime rate is reduced, but the administrative cost is rising and the cost of funds is high, then should the bank base lending rate be reduced? If one side of the equation reduces but the others are rising, should the rate fall?

I just remembered I owned shares in some of the banks listed on our Stock Market. This means some banks are public companies, and to be listed on the Ghanaian Bourse, you must have attained a healthy financial record. Good profits resulting in favorable return on equity and others.

From discussions I have heard and read concerning the reduction of the prime rate, it’s likely many will demand for credit. But the other question is, will the increase in prime rate result in an increase in the supply of money for credit? Won’t a rise in demand for credit without a corresponding increase in supply make the cost of credit go high? Then again, the question of supply of credit arises. A bank can only supply credit based on the capital that it has. How many banks have been able to attain our $60 million capitalization requirement? Do we have the supply of credit to balance the demand for it?

Finally, I would quote from the MPC Report that announced the glorious reduction of the Prime Rate. Section 11 of the report talked about the Banking Sector Developments states that, “Non-Performing Loans continue to rise, posing some risks to the overall delivery of credit to the economy”. Section 14 also states that “Commercial Banks Real Credit to the private sector declined by 0.2% in 2009”. If Non-Performing loans rise, then there will be a negative impact on the financial health of the bank. The bank will thus reduce it’s credit and rather invest in risk free instruments like the Treasury Bills. What the MPC didn’t state was the increase in bank investment in treasury instruments as compared to the amount given as credit. That information will show the direction that the banks are heading to, and their reluctance to give out credit, hence supply of credit is reducing, whilst demand is high. It’s worth noting that bankers are smart, and they factor the amount of Non-Performing loans into the pricing of credit to customers. A high non-performing loan portfolio may increase the lending rate as we have seen the past quarters. What is causing the rise in non-performing loans? I read in the section 10 of this report about the reduction in public sector borrowing and in previous sections about the reduction in public sector spending. If suppliers of goods to the government are not paid for their services, then they won’t be able to pay for credits that they have taken on, and hence will be bad borrowers. Will the reduction of prime rate do anything much to them? Will it make them look better in the eyes of the banks that they owe?
Well, so should the reduction of the Base rate emerge due to the reduction in the Prime Rate?