Question

The President of Ghana launched the COVID-19 business alleviation program in the collaboration with the National Board for Small Scale Industries (NBSSI), Trade Associations, and some selected banks. Under the program, the government is giving funds without interest to selected financial institution for onward lending to businesses at a rate a 3% interest. The program is aimed at helping beneficiaries to sustain their business during COVID-19 pandemic. Use this information to answer the following questions.

a) Explain in your own words, the monetary policy tool being used by the government under this program.

b) if the government has pegged the interest rate under the program at the monetary policy rate, will this have been a better way of setting the rate? Explain the advantages and disadvantages of each scenario.

c) Explain the expected impact of the low-interest rate program on gross domestic product (GDP), articulating the possible pathways.

Answer 1

a). The monetary policy tool used by the government here, is the discount rate, which is the rate central bank charges to commercial banks . This tool will enable the financial institutions to borrow funds from the central bank at zero interest rate, thus leaving them with more loanable funds which they will lend to businesses at 3% interest rate. with more money available with banks, they provide loans at lower interest to businesses to help them expand.

b). If the government would have pegged the interest rate under the program at the monetary policy interest rate, then banks will not be available with extra liquidity and will not pass on the benefits to businesses. Therefore, limited businesses will be able to borrow from the available funds and hence there will not be as much recovery as required. On the other hand, it's benefit would be that loans will be provided to credible businesses and the plausible defaulters will not be provided the loan and hence, Non-performing Assets would be comparatively less.

The current scenario where government is providing funds at zero interest rate, the banks will be available with surplus funds and will loan out this fund to various businesses, thus increasing the risk of defaults. Whereas, it will be more beneficial for recovery of the economy from the ill-effects of this pandemic.

c). The low - interest program will help various businesses to recover and expand (from the shutdown due to pandemic) at a lower cost. This will increase the employment opportunities and unemployment will reduce. As more and more hands get wages, this will boost the aggregate demand in the economy.This will lead to a higher GDP. Whereas looking at the economic condition due to the pandemic, inflation will not rise much, also people will save more instead of consumption. And if this saving turns into investment, then GDP will rise. But if this is household saving, then GDP will not rise much.

In a nutshell, the program will boost demand and thus increase GDP and help economy revive.