Monetary Policy Measures by BoG Positive and Welcoming

At the 115 Monetary Policy Meeting of the Monetary Policy Committee (MPC) of the Central Bank, Governor of the Bank of Ghana read that “headline inflation has risen to 15.7 percent in February 2022, and both headline and core inflation are significantly above the upper limit of the medium-term target band. The uncertainty surrounding price developments and their impacts on economic activity is weighing down business and consumers’ confidence. The risk is the outlooks for inflation are ion the upside and include petroleum price adjustments and transportation costs, and exchange rate depreciation”

Dr Mark Yama Tampuri in a post copied from his linkedin.com page has described as welcoming, the measures taken by the Bank of Ghana. He wrote: “…The Bank of Ghana (BoG) has indicated in its strongest commitment to implement important monetary policies to salvage the worsening economic indicators of the country. Per the Bank of Ghana Monetary Policy Press Release on March 21, 2022, the policy rate has seen a benchmark gauge raise by 250 to 17%, as a measure to curb the high inflation which has been caused by especially exchange rate volatility and global financial conditions.  Again, the cash reserve rate has been increased to 12% while the capital adequacy ratio has been increased to 13%.

…The measures by the BoG are welcoming. The increment in the policy rate would make cedi denominated investments attractive to hold, therefore could help squeeze monies circulating in the economy towards savings and investment products that financial institutions and BoG offer. This could then stabilize the staggering inflation rates. But while the current monetary policy measures by the Monetary Policy Committee of the Bank of Ghana are out, the fiscal measures on the other hand by the Governments of Ghana, however, are even more expected should we have hopes of turning around the economy which has a long term debt assessment currently in the Junk territory, a situation that has further made its dollar-denominated loans not only unattractive to hold but also unworthy of holding, inflation at a record high of up to 15.7% as recorded in February 2022, and facing peculiar challenges in debt servicing and sustainability.”

The Economist also believes that the government is equally under pressure especially to commit to rolling out saving-economic-policies and cushioning Ghanaians against the hardship they face amid high inflation, increasing petroleum prices and diminishing disposal incomes.

“Many are counting on what expenditures the government cuts as well as which of its flagship programs will be affected in a  review, possibly leading to discontinuation of some.  Noteworthy to mention is arguably the government’s most ambitious program yet, christened “The Free SHS” which had to be funded in the preceding years by up to 2.2 billion of funds inclusive of debt financing schemes which suggest  sustainability of the program is in question and should be coming up strongly for review.”

Dr Tampuri when subsequently reached out and asked if Ghana going under an International Monetary Fund (IMF) program is a possible way out of its economic situation and whether Ghana is capable of doing without going on an IMF for assistance this time, he opined that

“…Well, the government has assured that it would not opt for the IMF program at least until any other correspondence suggests otherwise. If it wouldn’t opt for the IMF program, then an important question to ask rather is “what then are the alternatives it has and will the government be disciplined enough to implement them. You see, whiles IMF may offer technical support and provide support for the balance of payment, IMF also relies much on the implementation of “homegrown solutions” developed by the host country itself. This implies that, if a government can be disciplined under its economic uncertainties and is able to implement its homegrown solutions that the market is confident of, then that may is a rationale to avoid seeking the help of IMF. If the Government can do that, then, why not.

However there could be a huddle which needs to be crossed anyway;  The other issue has to do with whether external partners like ADB, World Bank, and other agencies  (who help finance the country’s budget) are in the position to finance the current deficit we have (with its specific characteristics of domestic revenues not being able to cover some portion of compensations and interest, revenues not covering some recurrent expenditures, and even not covering some capital expenditure) to which government currently borrows to support its expenditures.  Are these external agencies going to support the current deficit at a time when also the country is also shut from the international bond market?

If the Government of Ghana believes that the second huddled can be crossed through its homegrown policies, fiscal consolidation (including reducing expenditures, scrapping off flagship programs, raising revenues innovatively etc), and fiscal discipline, that the markets would be confident of, and then it may have its perspectives right to not going on an IMF program.  Again it’s early days yet for us all to suggest as we wait on the Government of Ghana on what fiscal measures it considers pursuing and their potential impacts on  the economy. “

Dr Tampuri has however advised the government to correct the supply side influence of forex which has a direct implication on rising inflation too. “They need to consider having a dual exchange rate price regime for importers and banks exclusively. He observed that the BoG should work out a scheme where exchange rates for importers are priced lower than those of banks… At this point, one could recommend the Bank of Ghana to revise its exchange rate policies. Importers who need to trade in currencies such as the Chinese Yuan and the US Dollar among others shouldn’t be exchanging at the same rate as firms in extractive and services sectors who are repatriating those Dollars to foreign countries. Whiles banks could have their competitive exchange rate for such foreign companies repatriating funds in foreign currencies, importers, on the other hand, should be exchanging for foreign currencies at the Central Bank rate, thus the same rate the Bank of Ghana offers to Banks or even lower rates”.