The Bank of Ghana (BoG) has explained that it raised the prime rate at which it lends to commercial banks because the current inflationary pressures in the economy are related to the high prices of crude oil. The Director of Research at the Bank of Ghana, Dr Ernest Addison, contributing to a mid-year economic review by the Private Enterprise Foundation (PEF), said assessments by the Monetary Policy Committee (MPC) of the economy and the consumer price index (CP)l showed that the increases in prices did not only affect oil-related items, but every item in the consumer basket. "This is a clear indication that there are demand problems which affect the entire economy," he explained. The PEF mid-year review, which was sponsored by the United Nations Development Programme (UNDP), assessed the macroeconomic performance of the economy and also invited presentations from associations and organisations in the agricultural industry and services sectors in order to also assess the microeconomic environment. Dr Addison added that the central bank's decision was also anchored on the fact that the real sector of the economy was robust and had a brighter outlook, saying "we couldn't have done this if the real sector was weak". He said inflation targeting, which allows the central bank to be guided by inflationary forecasts as opposed to monetary targeting which entails working to check money supply, was the best tool to check inflation because it was most flexible. "If we were doing monetary targeting, money supply will not grow to the current levels of about 40 per cent, with credit to the private sector growing by 50 per cent," he said, adding that on all occasions, the BoG did a thorough assessment of the causes of the monetary gaps before raising the prime rate. The head of research also reacted to arguments that raising the prime rate would increase the cost of borrowing and hence the cost of doing business, especially for small and medium-scale enterprises, saying that "cheap credit to them is important but this should be a policy option financed through the budget". Dr Addison does not believe that government spending deviations constituted a problem, especially when it was used to resolve or remove an economic bottleneck such as was the case last year when the government budget deficit was directed towards resolving the energy crisis. Reviewing the half year economic performance, Mr Felix Tettey-Fio, a consultant said it was a healthy development that the banks did not only increase lending to the private sector, particularly to the SMEs, but also found households as a credible lending market. Credit by banks to the private sector alone increased by GH¢1.2 billion, that is 50.3 per cent, compared with GH¢l776.5 million (47.8 per cent) during same period in 2007. "This is good news for the private sector and they should position themselves to take advantage of it,” he said. Credit to households, on year-on-year basis, increased by 89 per cent to GH¢856.3 million, compared with 49 per cent increase for the same period in 2007. The share of households in the total increase in credit over the 12-month period to May 2008 rose to 33.4 per cent, up from 19.2 per cent for the same period in 2007. Mr Tettey-Fio also commended the performance of the Ghana Stock Exchange whose year-to-date change closed June at 60.13 per cent, saying it was important for the private sector to take a look at the capital market as a good source of financing its operations. The Director-General of PEF Dr Osei Boeh-Ocansey, said the recommendations would be collated and presented to policy makers and manager of the economy after the roundtable conference. Source: Daily Graphic