Plans by the government to borrow an extra GH¢1.3billion to finance a larger deficit could crowd-out a private sector already stymied by expensive credit, Dr. Joe Abbey of the Centre for Policy Analysis (CEPA) has warned. Last week, the finance ministry raised this year’s deficit target from 4.8% of GDP to 6.7% in a supplementary budget presented by the Minister, Dr. Kwabena Duffuor, to Parliament in Accra. The Minister asked MPs to approve additional spending of GH¢2.6billion in the current fiscal year, half of which will be borrowed from the domestic economy. “The negative thing about this is that we are going to have to reallocate the available credit against the private sector [in order] for the public sector to secure the necessary net domestic financing to add up and finance the deficit of 6.7% on cash basis,” Dr. Abbey told B&FT in his initial remarks on the move by the government. “The fact that we will have to crowd-out the private sector will mean, unfortunately, that interest rates may have to rise a little bit more. I am worried about that.” The cost of credit is among the most significant concerns of the business community, particularly small- to medium-size enterprises and start-ups. The Association of Ghana Industries (AGI) ranks the problem among the top-three challenges of the country’s business environment. Excessive government borrowing from the banking system has the tendency of increasing Treasury bill rates, often seen as a proxy for bank’s cost of funds. Such a situation leads banks to hike interest rates on loans to private-sector borrowers. In the past six months, T-bill rates have been rising rapidly due to massive sales by the Bank of Ghana (BoG) of short-term government debt as it seeks to mop up excess liquidity to counter the weak exchange rate and resultant inflationary pressure. In June, the 91-day bill was paying more than 20% per annum and the BoG said it had mobilised more than GH¢1.2billion through this strategy. Banks have however held back lending to the private sector. According to the BoG’s June Financial Stability Report, monthly loans and advances by banks contracted in April by 0.22% compared to growth of 4.38% in March. The report said the BoG’s credit survey conducted in May showed banks have “tightened their credit stance” despite increasing appetite for loans by both households and enterprises. From early 2010, the Central Bank was championing the cause of lower interest rates in the banking sector through reductions in its benchmark policy rate and closer engagement with banks to iron out barriers to achieving its objective. But extreme volatility in the foreign exchange market since the beginning of 2012, reflected in sharp falls in the value of the cedi, has caused the BoG to reverse policy towards a tighter stance in a bid to salvage the currency -- which has so far lost more than 18% against the dollar. Apart from ratcheting up the policy rate to 15%, the BoG has directed banks to hold reserves for foreign currency deposits in the local currency only and to provide 100% cedi cover for vostro balances as part of new measures to boost the supply of foreign exchange. Both BoG Governor Kwesi Amissah-Arthur and Finance Minister Dr. Duffuor have said the new measures are beginning to stabilise the cedi, but daily quotations of the exchange rate by banks and other dealers show an unrelenting plunge in the currency’s value.