You and the economy

We often hear so much said about the ‘economy’. Statements like: “The economy is not doing well”; “we should expect an economic upturn or downturn”; “the economy is in tatters” and so on, dominate news headlines as well as our conversations with one another.

But the reality is that most people do not really understand what ‘economy’ really means and therefore have referred everything good or bad about the economy to a group that, to them, are responsible for fixing the economy.

Yes, l am referring to the overbearing references to the Government as the sole institution responsible for dealing with the economy- again, good or bad.

There is no doubt about the role that the Government plays, or is expected to play in developing an effective and vibrant economy.

No doubt about that. But it is also worth knowing that individuals also have a role to play in ensuring the sanctity of an economy.

So, what indeed is the economy? Well, the simple explanation given to what an economy is, is the reference to activities relating to the production and distribution of goods and services in a particular geographic region.

These activities, which could be about employment creation, financial services and so on, involve you and l. People play the central role and therefore drive these activities.

Often times, however, the individual role within an economy are less emphasised, preferring rather to call on a few institutions to fix economic problems.

In fact, the other day, in a conversation with a friend who has been a banker for several years, l got another twist to the whole ‘government must fix the economy’ mantra that encouraged me.

He saw things differently, which was refreshing, prompting me to share his insight in this column.

Lamenting on the poor attitude of some bank customers in fulfilling their loan obligations to banks, he concluded by saying : “It is for this reason that most banks would prefer to also invest in other securities than giving out money to individuals to either support their household incomes or to start a business.

Indeed, the activities of members of society are more crippling and gripping, causing damage to the economy than what a government is doing or not doing.

Borrowing money and not paying, engaging in corruption and other vices, for example, all contribute to the good or bad health of an economy”.

Yes, indeed, our actions matter and therefore there is the need for you to ensure that, at all times, your actions contribute to the promotion of a good economy and not a bad one.

Did you know that it is because of the actions of most people that we have a very high cost of borrowing in the country?

Well, if you didn’t know then let me explain it to you: Banks will normally have to calculate the full cost of funds to them, before they can also charge you interest on using those funds.

The primary function of a bank, which is to accept deposit from customers and to pay them on demand enjoins them to be prudent in their financial management so as to be able to fulfil their obligations.

Therefore, in the process of calculating the cost of funds to them, they will have to look at all kinds of possible risks, including credit, market and operational activities that could prevent them from doing their job effectively.

The credit risk, which is the risk of a possible default by a customer who has a credit facility with a financial institution, is one factor that has contributed to the high cost of borrowing in the country, and not necessarily because financial institutions are just greedy and want more profit at all cost. That action is, surprisingly, driven by you.

What this means is this: If you have borrowed money from a bank and have not been able to pay back the principal and interest as agreed, or often default in fulfilling that obligation, you contribute to the general high cost of borrowing because the bank, taking your actions into consideration, will now have to charge the next borrower a higher interest to compensate for the possible loss of funds caused by bad borrowers like you.

This is one clear example of how individual actions could affect the whole economy adversely.

The net effect is that when it gets difficult, either because the banks are charging high interest on loans or there is no credit in the system for household loans or business financing, we blame it all on the ‘economy’ and those we think ‘must fix it’ forgetting that we are an integral part of the economic system and that just a simple change in attitude and a recognition of that function could cause an upturn in the economy.

Recognise your role in the economy and work towards promoting a better economy at all times.

By Bernard Otabil/The Mirror/Ghana
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