CMYK Table 6: Summary of Base Rates across Commercial Banks BANK BASE RATES 31ST JANUARY 2011 29TH APRIL 2011 30TH AUGUST 2011 9TH 11TH NOVEMBER JANUARY 2011 2011 6TH JANUARY 2012 ADB 21.95 21.95 20.00 20.00 16.75 16.75 Bank of Africa 25.95 23.95 23.95 23.95 23.95 Bank of Baroda 23.00 -- 17.95 17.95 Barclays Bank 22.00 22.00 18.00 18.00 18.00 18.00 Cal Bank 26.00 26.00 24.00 24.00 24.00 24.00 ECOBANK Energy Bank 24.25 24.25 22.25 22.25 18.00 23.00 18.00 23.00 Fidelity Bank 25.90 25.90 25.90 25.90 25.90 25.90 First Atlantic Merchant B 25.95 25.00 25.00 25.00 25.00 25.00 GCB 21.50 20.50 20.50 20.50 20.50 20.50 Guaranty Trust Bank 25.50 25.50 25.50 25.50 25.50 25.50 HFC Bank 25.75 25.75 24.75 24.75 24.75 24.75 Intercontinental Bank 24.50 24.50 24.50 24.50 24.5 24.50 Int. Commercial Bank 25.25 25.25 23.25 23.25 23.25 23.25 Merchant Bank 25.5 25.50 23.55 23.55 23.55 23.55 NIB 24.00 24.00 21.00 21.00 21.00 21.00 Prudential Bank Sahel-Sahara 26.00 26.00 26.00 24.00 24.00 24.00 25.25 24.00 25.25 SG-SSB 24.50 24.50 24.50 24.50 22.50 22.50 Stanbic Bank 23.95 21.95 21.95 21.95 17.50 17.50 Standard Chartered B 22.00 22.00 22.00 16.95 16.95 16.95 The Trust Bank 25.00 25.00 23.00 23.50 23.50 23.50 UNIBANK 24.95 24.95 24.95 24.95 23.95 23.95 UBA(Ghana) Ltd 23.00 23.00 23.00 23.00 23.00 23.00 UT Bank 26.9 25.90 25.90 25.90 25.90 25.90 Zenith Bank 23.95 23.95 23.95 23.95 23.95 23.95 Source: http://www.businessghana.com/portal/finance/index.php?op=getBankRates Table 7: Bank of Ghana Prime Rates, Average Interbank Base Rates July August September October November December 24.50 21.50 18.50 15.50 12.50 13.50 17.00 18.50 18.00 18.00 16.00 16.00 15.00 15.00 15.00 13.50 13.50 13.50 13.50 13.50 13.50 13.50 13.50 13.50 13.00 13.00 13.00 12.50 12.50 12.50 12.50 12.50 12.5 20.023 17.67 16.19 10.23 12.56 11.98 19.03 22.47 16.53 16.07 16.11 15.11 14.74 14.06 13.36 13.06 12.64 12.32 12.07 11.67 11.65 11.65 11.65 11.59 11.57 11.67 11.63 11.38 10.51 10.59 10.53 9.72 6.98 29.25 29.00 25.00 21.45 20.85 18.77 27.25 30.52 31.40 31.29 30.92 29.90 29.25 28.71 28.63 28.50 27.10 26.46 26.17 26.03 25.79 24.69 24.63 23.54 24.43 24.16 23.95 23.46 23.46 23.26 22.98 22.82 22.47 2012 12.5 6.16 X 13.5 8.78 X 13.5 11.05 X 14.5 12.69 X 14.5 12.83 X 15 14.7 X Source: Bank of Ghana Statistical Bulletins, 2009/2010 Note: X-Data not Available. Figures from October 2011 –June 2012(Average Interbank Rates are authors calculation based on weekly rates from BoG website.) Balance of Payments The Balance of Payment(BOP) is a record of a country's transactions with the rest of the world in a specific time period, usually a year. It reflects all payments and liabilities to foreigners(debits) and all payments and obligations received from foreigners(credits). According to the International Monetary Fund(IMF) “Balance of Payments” is a statistical statement that summarises transactions between residents and non-residents during a period. The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP comprises the current account, the capital account, and the financial account. Together, these accounts balance in the sense that the sum of the entries is conceptually zero. The Current Account The current account is one of the two major components of the balance of payment, the other being the capital account. It is the sum of the balance of trade(export minus imports of goods and services), net factor income(such as interest and dividends) and net transfer payments(such as foreign aid). Mathematically, the current account is expressed as follows: Current Account= Balance of Trade + Net Factor Income from abroad + Net Unilateral Transfers from abroad A current account surplus(or deficit) is the amount by which exports of goods and services plus inward transfers exceeds, or falls short of, imports of goods and services. A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit reduces the net foreign assets. It is called the current account because goods and services are generally consumed in the current period. Capital Accounts The capital account is a record of a country's inflows and outflows of payments and transfer of ownership of fixed assets(capital goods). The capital account records all transactions between a domestic and foreign resident that involves change of ownership of an asset. It is the net result of public and private international investment flowing in and out of a country. This includes foreign direct investment, portfolio investment(such as changes in holdings of stocks and bonds) and other investments(such as changes in holdings of loans, bank accounts, and currencies). Overall Balance of Payment Account This is the sum of the current account and the capital account. As stated above, the overall balance of payment is expected to balance out. In other words, the sum of the entries conceptually equals zero. Table 8 gives the summary of the annual balance of payment from 2010 to 2012. Table 8: Annual Balance of Payments(in millions of US Dollars, unless otherwise stated) 2010 2011 Annual Q1 Q2 -2,646.82 -443.4 2012 Annual Q3 Annual Jan-May Projections -2,840.82-2,630.00 Cocoa Beans& Products Oil exports 7,960.09 2,219.54 3,803.52 189.47 1,747.56 3,104.30 940.91 1,151.47 40.99 482.29 488.64 3,353.12 745.13 1,257.34 43.37 704.69 602.59 3,339.30 12,841.50 6.6(US$billion) 658.64 2,619.60 1.6(US$ billion) 1,310.77 5,307.90 2.7(US$ billion) 44.59 785.67 2,557.70 1.2(US$ billion) 539.63 2356.3 768.2 14,857.00 2,606.00 6,656.00 3,123.00 2,472.00 -10,922.1-3,295.12 -8,686.18-2,650.90 -2,235.93 -644.22 -4,120.43 3,143.74 -976.69 -4,045.78-15,348.30 7.5(US$ billion) -16,768.00 -3,497.66-12,136.10 6(US$ billion) -13,382.00 -548.12 -3,212.20 1.5(US$ billion) -3,386.00 -2,962.02 -190.82 -767.31 -706.48-2506.8 -937.3 -1,474.28 -760.9 -233.27-331.14 -3,173.23 X -532.95 -249.04-162.02 -237.84 2,322.43 757.36 676.2 571.67 2,839.21 X 3,539.80 367.62 3,357.79 X 2,527.36 781.56 963.58 1,047.72 2,748.90 X Capital Transfers 337.47 124.9 66.66 70.92 94.98 X 1,420.68 -538.84-363.26 -811.81 299.97 X -176.02 -78.43-35.85 118.29 0 X 1,462.67 -154.21 144.73 -278.67 517 X Source: Bank of Ghana Monetary Policy Report Vol.4 No.4/2010 Pg 15 * Annual Estimates from Budget 2012, Note: X- Data not Available -1,911.00 -3,728.00 3,009.00 3,383.00 3,113.00 270.00 0.00 753.00 Government Spending or the Fiscal Balance Governments generate revenue through taxation and grants. Governments also obtain some amount of revenue from non-tax sources such as fees and fines imposed at the courts. The revenues raised in a particular year are used in financing government expenditures programmed for the year. In other words, in implementing its budget, government is primarily involved in raising revenue and using the revenue to finance expenditures. If in a particular year, the revenue raised is exactly the same as the expenditure incurred, we say the government budget is balanced. If on the other hand, government revenue exceeds its expenditure in a particular year, the budget is said to have recorded a surplus. A budget deficit occurs if government revenue is less than its expenditure. Either way there is fiscal imbalance. Fiscal surplus is when revenue exceeds expenditure. Fiscal deficit occurs when revenue is less than expenditure. Table 9 presents government fiscal stances for the first half of 2011 and 2012. Table 10: Government Revenue& Expenditur(in millions of GH¢) 2011 2012 2012 Yr-on-Yr Jan-May Jan-May Jan-May 2011-2012 Outturn Outturn Budget Target% Change Tax Revenue 3,014.7 4,410.2 4,186.3 46.3 % of GDP Non-Tax Revenue 6.0 7.2 6.8 390.9 121.4 370.6 -68.9 Others 212.9 279.6 0.0 Grants 179.2 298.3 458.3 66.4 % of GDP 0.4 0.5 0.7 Total Domestic Revenue 3,405.7 4,531.6 4,556.9 33.1 % of GDP 6.8 7.4 7.4 Total Revenue& Grants 3,797.8 5,109.5 5,015.2 34.5 % of GDP 7.56 8.30 8.15 Total Expenditure 5,192.9 7,574.5 4,633.9 45.9 % of GDP 10.3 12.3 7.5 OVERALL BALANCE (cash) -1,395.1-2,465.1 -836.2 76.7 % of GDP Wages& Salaries, Pensions&SSP -2.8 1,746.6 -4.0 4,010.1 -1.4 2,473.9 129.6 % of GDP 3.5 6.5 4.0 Source: Bank of Ghana Monetary Policy Report Volume 2: No.3/2012(June 2012) ©Friedrich-Ebert-Stiftung Ghana, 2012 International Reserves These are assets of the central bank held in different reserve currencies, mostly the Dollar and to a lesser extent the Euro, Pound and the Yen. In a flexible exchange rate system, official international reserve assets allow a central bank to purchase the domestic currency, which is considered a liability for the central bank(since it prints the money itself as IOUs). This action can stabilise the value of the domestic currency. In essence, buying and selling official international reserves is one way the central bank influences the exchange rate. In Ghana, international reserves are mostly held in the US Dollar. The international reserves position of the country is often expressed in terms of months of import cover. That is, the number of months of imports reserves can cover. The Gross International Reserves of the Bank of Ghana declined to US$4.3 billion as at June 8, 2012, from U$5.4 billion in December 2011. This is equivalent to 2.5 months imports cover of goods and services. Conclusion In this newsletter, we have explained in the simplest language possible some of the technical jargons often used to describe the economy and its performance. We have also provided data on real sector growth, inflation, the exchange rates, and the interest rates, the balance of payment, and government revenue and spending as well as the international reserve position of the country. We encourage users to provide feedback in case any issue is not so clear to them. References 1. Bank of Ghana Monetary Policy Committee Reports, Various Editions 2. Bank of Ghana Monetary Policy Report,(fiscal developments) Volume 1 NO. 2/2009, May 2009& Volume 1 NO 1/2009, July 2009,May 2011. 3. Bank of Ghana Monetary Policy Committee Press Release, July 21, 2009 4. Bank of Ghana Monetary Policy Committee Press Release, August 2009 5. Bank of Ghana Annual Report, 2008&2009 6. Bank of Ghana Quarterly Bulletins, April –June 2008, Jul –Sept.2008 7. Bank of Ghana Monetary Policy Report Vol.2 No 3/ 2010 8. Source: Bank of Ghana Monetary Policy Report Vol.4 No.4/2010 Pg 15 9. Bank of Ghana Monetary Policy Report Volume 2: No.3/2012 (June 2012) 10. Government, 2009, The Budget Statement and Economic Policy for the 2011 Financial Year 11. Government, 2009, The Budget Statement and Economic Policy for the 2010 Financial Year 12. Government, 2009, The Budget Statement and Economic Policy for the 2009 Financial Year. 13. Government, 2008, The Budget Statement and Economic Policy for the 2008 Financial Year. 14. Ghana Statistical Service, Newsletter, Consumer Price Index, Various editions for 2009 15. Institute of Statistical, Social and Economic Research 2009, 2007, 2006, 2005, The State of the Ghanaian Economy 16. Aryeetey, E. et.al in Economic Reforms in Ghana: The Miracle & Mirage, 2000 17. Various editions of Business and Financial Times New Papers 18. http://www.businessghana.com/portal/finance/index.php?op= getBankRates CMYK CMYK Vol. 8 date: CMYK

CMYK Introduction The Economy Watch is designed to provide unions with user- and unionfriendly information on the national economy. This is to help the unions in their collective bargaining negotiations. Information is provided on real sector performance, inflation, exchange rates, interest rates, the balance of payment, and government revenue and spending. Real Sector Performance The provisional estimates of the value of output of goods and services produced in Ghana as measured as the real Gross Domestic Product(GDP) and released by the Ghana Statistical Service shows an increase on a yearon-year rate of 8.7 percent in the first quarter of 2012. The sectors that contributed to this growth were mainly the Industrial sector which recorded the highest growth of 21.7 percent and followed by Services sector(5.7%). The Agricultural sector continues to show decline recording a year-on-year growth in GDP of negative 2.9 percent(see Figure 1). Since the industrial sector contributed the highest growth, a breakdown by sub sectors(Figure 2) shows positive growth for the first quarter 2012. Strong growth in gold and bauxite production and crude oil extraction led to a 49.2 percent increase in the Mining and Quarrying subsector. Manufacturing subsector grew by 22.6 percent, with the main contributors being Manufacture of Wood; Manufacture of Furniture; Manufacture of Paper; and Manufacture of Food and Beverages. Electricity production increased by 16.9 percent, Water and Sewerage by 3.0 percent and Construction by 3.7 percent. Figure 1: Year-on-year growth in GDP(%) Source: Ghana Statistical Service Quarterly GDP 2012 Fig 2: Industrial sub sectors Figure 3: Annual GDP Growth Rates by Sectors, 2007-2011(%) Source: Ghana Statistical Service CMYK Analysis of inflation Inflation is a measure of aggregate price movements in an economy. It measures changes in the prices/costs of a fixed basket of goods and services patronised by the typical or average Ghanaian household. It therefore, gives an indication of the cost of living in the country. Consumer Price Index Inflation is measured as a percentage change in the consumer price index (CPI). The CPI is the ratio of the total current expenditure on a fixed basket of goods and services to total expenditure on a similar basket of goods and services in a selected base period or year 1 . Price Index is a statistical indicator that expresses the percentage value change of prices for a particular bundle(basket) of goods and services in different periods. CPI measures the rate of change in the prices of goods and services bought by the average consumer. The CPI is one of several price indices calculated by national statistical agencies. The goods and services included within the scope of the index can be figuratively thought of as a'shopping basket.' Since the quality and quantity of the goods and services in the'shopping basket' do not change over the life of the basket it is also referred to as a'fixed' basket of goods and services. In Ghana, the consumption or shopping basket(CPI) consists of the following major commodity groups: food and non alcoholic beverages, alcohol and tobacco, clothing and footwear, fuel& light, housing and utilities, household goods, operations and services, medical care and health expenses, transport and communications, recreation, entertainment, education and cultural services, and miscellaneous goods and services. Every item in the basket is given a weight based on the proportion of income the average household spends on the items (consumption expenditure). There are two broad measures of inflation. These are the inflation over twelve(12) months also referred to as the year-on-year inflation and the average annual inflation. These are explained below. Inflation Over 12 Months Inflation over 12 months also referred to as year-on-year inflation or pointto-point inflation, measures the percentage change in the CPI in the same months in consecutive years. For example, the percentage change in the CPI between June 2012 and June 2011 is a year-on-year inflation. As shown in Tables 2 and 3, the CPI for June 2012 is 409.5 and the CPI for June 2011 is 374.13. The rate of inflation over these 12 months(i.e. from June 2011 to June 2012) is calculated as follows: Year-on-Year-Inflation CPI for June 2012- CPI for June 2011 = x 100 CPI for June 2011 409.5- 374.13 = x 100 374.13 35.37 = x 100 374.13 = 0.094 x 100 = 9.4 Therefore, the year-on-year inflation for June 2012 is 9.4% as shown in Table 3. The year-on-year inflation is also referred to as the Headline Inflation 2 because it is placed in the public domain and is quoted in the media as the level of inflation for a particular period. That is why inflation over 12 months in June 2012 was quoted as 9.4%(Table 3). 1 Base year 2002=100 2 In addition to the Headline Inflation is the Core Inflation. The Core Inflation is obtained by stripping out price changes of energy and utility items from the consumer basket(i.e. excluding energy& utility items) because of their volatility. Monthly Inflation/Change Monthly inflation measures the percentage change in the CPI from one month to another in the same year. In other words, it is the percentage difference between the CPI for one month and the CPI for another month. For example, the CPI for July 2012 is 412.4 and the CPI for June 2012 is 409.5. The percentage change between these 2 months is calculated as follows; Monthly Change CPI for July 2012-CPI for June 2012 = X 100 CPI for June 2012 412.4- 409.5 = X 100 409.5 2.9 = X 100 409.5 = 0.007082 X 100 = 0.71 Therefore, the monthly change in the CPI from June 2012 to July 2012 is 0.71 as shown in Table 3 Table 1: Inflation Rates from Jan. 2010-Dec 2010 (Average Prices of 2002=100 i.e. Base Year) 319.83 1.59 14.78 324.66 1.51 14.23 328.35 1.14 13.32 332.99 1.41 11.66 339.21 1.87 10.68 344.52 1.57 9.52 347.35 0.82 9.46 344.87 -0.71 9.44 339.66 -1.51 9.38 336.43 0.96 9.38 338.01 0.47 9.08 341.83 1.13 8.58 Source: Ghana Statistical Service& BOG,*** Projection in Budget 2011 19.64 11.55 17.7 17.46 16.82 15.76 16.05 14.64 13.47 12.46 11.56 10.75 Table 2: Inflation Rates from Jan. 2011- Dec 2011 (Average Prices of 2002=100 i.e. Base Year) 348.87 2.06 9.08 354.41 1.59 9.16 358.34 1.11 9.13 363.02 1.31 9.02 369.41 1.76 8.90 374.13 1.28 8.59 376.5 0.63 8.39 373.88 -0.70 8.41 368.18 -1.52 8.40 365.22 -0.80 8.56 366.9 0.46 8.55 371.2 1.17 8.60 Source: Ghana Statistical Service 2011 11.55 10.75 10 10.36 9.78 9.09 9.57 8.29 9.38 9.17 8.93 8.73 Table 3: Inflation Rates from Jan. 2012-July 2012 (Average Prices of 2002=100 i.e. Base Year) 379.3 2.2 8.7 8.7 385.0 1.50 8.6 8.66 389.8 1.25 8.8 8.63 396.1 1.62 9.1 8.64 403.9 1.97 9.3 8.68 409.5 1.39 9.4 X 412.4 0.71 9.5 X Source: Ghana Statistical Service/Bank of Ghana Note: X- Data not Available Exchange Rates The term exchange rate refers to the monetary value of one currency in terms of another currency. In other words, the exchange rate, also referred to as the foreign exchange rate, between two currencies describes how one currency is worth in terms of the other. For example, an exchange rate of GH¢1.5 to the United States Dollar(US$) means that GH¢1.5 is worth the same as US$1. The medium or avenue where currency trading takes place is called the foreign exchange(forex) market. Any currency that can easily be traded or exchanged for other currencies, without special authorisation from the appropriate central bank, is referred to as a convertible currency. Transactions typically involve banks, corporations, governments, currency speculators(retail brokers), and other institutions. However, individuals can also deal in currencies. In the past, the exchange rates of the Cedi to other currencies such as the Dollar were fixed by law. For example in 1973, the exchange rate between the Cedi and the Dollar was fixed at 1.15. This means that to buy US$1, one needed to pay ¢1.15. In that sense, the exchange rate is said to be fixed. In a fixed exchange rate system or regime, the currency such as the Cedi is tied to another currency, mostly a more widely used currency such as the United States Dollar. However, since about 1983 Ghana adopted what is called the floating exchange rates system. By this system the exchange rates of the Cedi to the other currencies is allowed to vary and is determined by the market forces of demand and supply. In a floating system, the exchange rate of a currency is likely to change almost constantly. Floating rates are the most common exchange rate regime in most parts of the world today. However, since central banks frequently intervene to avoid excessive appreciation/depreciation of the currency, the floating system is often called managed float or a dirty float. The change over from the fixed or pegged exchange system to the free-floating system saw the introduction of forex bureaus in Ghana. As indicated earlier, even though in the end currency prices are a result of demand and supply forces, they are nonetheless affected by economic conditions(government economic policy, budget deficits or surpluses, trade deficits or surpluses, inflation levels etc); political factors(Internal, regional; and international events-stability or instability) and market psychology(traders perceptions). Table 4 gives a summary data on exchange rates of the Cedi for three major currencies on the local foreign exchange market. In 2011, the first quarter estimates by the Bank of Ghana shows that the Cedi had depreciated by 5.4 percent, 12.9 percent and 15.6 percent against the US Dollar, Pound Sterling and the Euro respectively in year-onyear terms. By the third quarter of 2011 the Cedi had depreciated by 6.3 percent, 8.1 percent and 8.8 percent against the Dollar, Pound and Euro respectively. In 2012, the Cedis has witnessed rapid deprecation against all the major currencies. In the first five months of 2012, the cedi depreciated cumulatively by 15.1 per cent against the US dollar, compared to 1.9 per cent depreciation in the same period of 2011. Table 5 gives the year-on-year depreciation of the Cedi for 2011-2012. Table 4: Interbank Foreign Exchange Rates for 3 most convertible currencies from 2000-2012 0.7048 0.7322 0.8439 0.8852 0.9051 0.9131 0.9236 0.9376 1.2000 1.4340 1.0190 1.0597 1.3305 1.5296 1.7412 1.5673 1.8103 1.8872 1.8100 2.3115 0.6343 0.6500 0.8512 1.0986 1.2309 1.0815 1.2145 1.2944 1.6900 2.0687 1.4245 1.4264 1.4190 1.4173 1.4186 1.4233 1.4355 1.4332 1.4326 1.4335 1.4421 1.4833 2.3063 2.2440 2.1427 2.1678 2.1342 2.0572 2.2442 2.2458 2.2719 2.2699 2.2574 2.2687 2.0385 1.9577 1.9311 1.8998 1.8293 1.7214 1.8719 1.8143 1.9146 1.9911 1.9151 1.9453 July August September October November December 1.5024 1.4975 1.5031 1.4972 1.5018 1.4941 1.5014 1.4990 1.5203 1.5300 1.5380 1.5486 1.6475 1.6735 1.6888 1.7030 1.8103 2012 2.3473 2.4048 2.4419 2.4771 2.4401 2.3717 2.4326 2.4531 2.4223 2.4624 2.4348 2.4690 2.6233 2.6764 2.7646 2.8846 2.9178 2.0485 2.0631 2.1643 2.2213 2.1506 2.1582 2.1387 2.1604 2.0910 2.1690 2.1650 2.0825 2.1781 2.2736 2.3025 2.3916 2.3814 Source: Bank of Ghana Statistical Bulletins, 2009, 2010/ Bank of Ghana Monetary Policy Report Volume 4- No 2.(2011), World Economic Outlook and External(BoG June 2012) Table 5: Year-on-year changes(%)(Depreciation rate) of the Cedis -5.0-1.6 -4.7 -9.2 -5.7 -12.8 -5.4 -12.9 -5.4 -16.1 -5.2-12.8 July -4.6-8.9 August -5.4 -11.4 September -6.3 -8.1 October -6.7-9.8 November -6.8-12.5 December -5.0-10.5 2012 -8.8-10.5 -10.5-10.1 -11.0 -11.7 -12.1-14.1 -17.0-16.5 Source: Bank of Ghana Monetary Policy Report Volume 4 No 5.(2011) World Economic Outlook and External(BoG June 2012) -2.2 -6.3 -11.4 -15.6 -19.1 -18.8 -13.8 -17.2 -8.8 -10.0 -13.8 -7.6 -6.0 -9.3 -6.0 -7.1 -9.3 CMYK Interest Rates Interest is a fee paid on borrowed money or capital. Interest is the yearly price charged by a lender to a borrower in order for the borrower to obtain a loan. It is the price a borrower pays or has to pay to enjoy the use of money or cash he does not own, and the return or reward a lender enjoys for differing or postponing his consumption or parting with money. The amount lent, or the value of the assets lent, is called the principal. This principal value is held by the borrower on credit. The percentage of the principal that is paid as a fee(the interest), over a certain period of time, is called the interest rate. This is usually expressed as a percentage of the total amount loaned – the principal. Interest rate can be calculated as simple interest rate or compound interest rate. Simple interest rate is calculated only on the principal or on the portion of the principal that remains unpaid. In compound interest rate unpaid interest is added to the balance due. It is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The borrower is charged interest on previous interest charges. The act of declaring interest to be principal is called compounding. A loan, for example, may have its interest compounded every month: in this case, a loan with GH¢1000 principal and 1% interest per month would have a balance of GH¢1010 at the end of the first month. Interest rate on a loan can be fixed or floating. In a fixed rate regime, interest rate on a loan does not change over the entire life of the loan. In a floating rate, however, the interest rate on a loan changes over the life of the loan. An example would be a loan that uses specific periods of time to dictate specific changes in the rate, such as a rate of 5% in the first year, 6% in the second, and 7% in the third. Like the exchange rates, the interest rates in Ghana used to be fixed 3 by the Bank of Ghana(BoG). The BoG fixed low interest rates as a way of inducing investment, which was expected to increase output and employment, and ultimately lead to higher saving. The practice was for the BoG to set minimum rates for deposits and to place ceilings on lending rates. Today, the interest rates have been liberalised. It is determined by demand for money by those who do not have it, and supply from those who do have it and are willing to surrender it for a price or a fee. The interest rate is expected to be high if demand for money exceeds supply. The reverse is true. The major interest rates are deposit rates, lending rates or base rates and the Bank of Ghana prime rates. Lending rates refer to the interest rates banks and non-bank financial institutions charge the public on loans and advances. It reflects the cost of borrowings and includes the charges and commissions levied by banks. The deposit rate is the interest paid by banks on deposits. The Bank of Ghana prime rate is the interest rate charged by the Bank of Ghana for credit or loans to the commercial banks. Other forms of interest rate are the 91-day treasury bill rate(i.e. the rate at which government borrowers from the commercial banks) and the interbank interest rates(i.e. the rate at which the banks lend to one another). 3 Interest rate fixation is one of the tools used by the Bank of Ghana in its attempt to shape the economic landscape. Whether it is effective or not, so far as it reflects the cost of capital, it conveys important information to investors& dealers on the financial market. CMYK