Take a mortgage, for example. Mortgage banks would offer you either fixed interest rate or variable interest rate, in pricing your mortgage finance.
What needs to be understood is that the bank needs to make sure that the value of your future repayments is the same as if you are paying back the money the same day they gave the money to you. That way, they don’t lose out due to the time value of money. So if they give you GH₵1,000 today and expect you to pay back the GH₵1,000 plus interest of GH₵500 over a period of 15 months, they want to make sure that the value of every GH₵100 instalment you pay, whether in the first month or the last month, is exactly GH₵100, not less.
To achieve that objective, they offer you the option of a fixed interest rate but the repayments are then tied to the exchange rate of a stable currency, like the US Dollar. So they would convert your mortgage into USD at a fixed interest rate, so your monthly repayments are in USD but you pay the Cedi equivalent at the prevailing exchange rate, on the date of payment.
The alternative is to offer you the option of a Cedi-denominated mortgage but at a variable interest rate, which changes based on factors such as changes in inflation and the policy rate of the Bank of Ghana. With variable interest rates therefore, your repayments, though in Cedis, change from month to month depending on the interest rate that the bank calculates that is based on the factors mentioned above and more.
Depending on the stability of the macroeconomic environment, and the currency of your personal income, among others, one option may be preferred to the other.
When you hedge on the exchange rate being stable and opt for a fixed interest rate, you will suffer greatly when the Cedi depreciation is as substantial as has been between 2017 and 2024. But those who would have opted for variable interest rates wouldn’t have been spared either, especially when both inflation and policy rates shot through the roof in the last few years.
BoG Interbank Exchange Rate:
A day before NPP/Bawumia took office:
6 January 2017: $1 = ₵4.2129
Yesterday:
12 February 2024: $1 = ₵12.1549
Fellow Ghanaians, this is the exchange that directly affects your life, everything you buy, including fuel and electricity. But Bawumia would not highlight this, because it draws your attention to the failure of his government and its policies. Rather, he will talk about the rate of depreciation, which he knows most average Ghanaians cannot even understand.
Bawumia would gladly tell you that, “…exchange rate depreciation has also slowed down sharply since February 2023. Whereas the exchange rate depreciated by 30% in 2022, between February and December 2023, it only depreciated by 9%”.
What Bawumia deliberately avoids telling you is that, if you had a monthly mortgage of $300, whereas on 6th January, 2017 you would pay GH₵1,264 to the mortgage bank, on 12th February, 2024, seven years after NPP/Bawumia took over power, you would pay the mortgage bank GH₵3,646.
That is an increase of GH₵2,383, which is over 188.5%. So just by the ‘competent’ management of the economy, your life has been made worse under this government. But Bawumia won’t let you know that, so he will deliberately hide behind a slowing RATE of depreciation, which is depreciation nonetheless, to make you think you’re rather better off!
Gaslighting at its best!