Economist and Professor of Finance at the University of Ghana Business School (UGBS) has remarked that monetisation of government’s budget deficit by the Bank of Ghana is undermining the effectiveness of its own monetary policy.
Speaking on NorvanReports Twitter Space Conversation titled “Analysing the 2022 Banking Sector Results and its Effects on the Economy”, on Sunday, May 7, 2023, Prof Bokpin quipped that fiscal dominance by the Government has become problematic for the Central Bank and rendering its inflation targeting framework ineffective against driving down inflation in the country.
“The key requirement for inflation targeting to be effective is for fiscal policy to be properly managed, but when you deny the BoG that, then it can’t use monetary policy to bring down inflation to desirable levels to engineer growth,” he remarked.
“Fiscal dominance by the government has been a big problem for a long time, fiscal policy creates the problem and monetary policy is used to fix it and so monetary policy becomes more like a subordinate to fiscal policy instead of being complementary,” he added.
Speaking further during the Twitter Space Conversation, Prof Bokpin noted that he has a sense that the Central Bank Governor, Dr Ernest Addison, is not happy with how fiscal policy is being managed by government.
This he noted, is evident from the MPC press releases by the Governor in recent times.
“I may be wring and so I stand to be corrected, but I get the sense that the BoG Governor has not been very happy with how fiscal policy is being managed in the country. The BoG has not been comfortable with it as clearly the fiscal dominance of government undermines monetary policy,” he posited.
The BoG is reported to have financed in total a budget deficit of GHS 77bn created by the government, the financing of the huge budget deficit induces fiscal dominance by government which distorts the Central Bank’s ability to effectively implement its inflation targeting framework to reduce inflation as increased spending by government in itself is inflationary and adds to rising inflation.
To mitigate government’s fiscal dominance and put an end to the budget deficit financing by the BoG as well as secure the $3bn IMF programme, the IMF and the BoG have signed a MoU to implement a zero-budget deficit financing regime.
Source: norvanreports