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By Monday, the Ghana cedi had tumbled to a record 35% low against the US dollar since the beginning of the year, leaving businesses and consumers anxious in the import-dependent west African economy.
Data from the country’s statistical authority pegged July inflation at a record 31.7% amidst a junk status downgrade by international ratings agencies S&P and Moodys.
After a meeting on Wednesday, the Bank of Ghana explained that “under the circumstances, and considering the risks to the inflation outlook, the Committee decided on a 300 basis points increase in the Monetary Policy Rate to 22%”.
It explained that its intervention was needed to ease pressures on the country’s currency.
Global investment and research firm Goldman Sachs had earlier predicted that the Bank of Ghana will raise its policy rate by 200 basis points from the current 19% to 21%.
“In our view, inflation and financial stability risks, stemming from this FX weakness, combined with the challenging domestic financing environment for the government, which has led the BoG to begin monetising the deficit, have prompted the call for this meeting. We expect the MPC to announce a 200bp policy rate hike to 21%,” it said in its 16 August research update.
Third time lucky?
The central bank has already intervened twice this year – in March and May – to curb inflationary pressures and promote macroeconomic stability. The market however has barely responded.
The Bank is hopeful that it will be third time lucky, but some analysts insist that there must be an emphasis on fiscal policy interventions to truly stabilise the economy and restore the market’s confidence in Ghana.
“What is missing is the fiscal side. The Bank of Ghana has exhausted its policy measures needed to keep things on track. They need to put pressure on the economic management team. While they have increased the policy rate and are expecting some respite, they should know that the way we manage the fiscal side will also play a role,” Prof. Lord Mensah, an economist at the University of Ghana, tells The Africa Report.
The founder of mPedigree, Bright Simons, says the government must “take the crisis seriously and embark on credible short-term remedial strategies” and the Bank of Ghana must join in to force the government to take action.
“The current spate of inflation is entirely driven from the fiscal side. Even if banks respond and hike rates for borrowers and depositors, the effect on inflation expectations are unlikely to change, especially when economic actors are sensing fiscal monetisation and thus anticipate rising inflation,” he says.
It is something that has been tried before, but I don’t know how the timing will favour them [investors]
Monetising the deficit is akin to the quantitative easing performed by many countries after the 2008 financial crisis and the more recent Covid-19 crisis. A form of money creation, it is pejoratively called ‘printing money’ by those concerned with runaway inflation.
Finance Minister Ken Ofori-Atta’s fiscal interventions have so far failed to turn the situation around.
A domestic economic recovery plan, which included the implementation of the controversial 1.5% tax on electronic financial transactions (e-levy) earlier this year, did not meet the stated target.
The government has since begun discussions with the IMF for a bailout.
The Bank of Ghana, whose overdraft is helping close the country’s financing gap, says an IMF program will bring immediate relief to the economy.
“The ongoing policy discussions with the IMF are expected to address the underlying macroeconomic challenges and restore fiscal and debt sustainability, and provide sustained a balance of payment cushion,” the bank’s release said.
Ghana has DOUBLED its loan request from the IMF to $3 billion. SPOILER ALERT: Requesting more money won’t change a thing. Like Ghana’s past 17 IMF programs, a new one will fail. Instead, Ghana must mothball its central bank & install a currency board.https://t.co/3gYlECQ2ND
— Steve Hanke (@steve_hanke) August 13, 2022
As an additional measure, the central bank will increase the primary reserve requirement of commercial banks from the current 12% to 15% by November.
To strengthen its foreign exchange auctions, it also plans to purchase foreign exchange arising from voluntary repatriation of export proceeds from mining and oil and gas companies.
Prof. John Gatsi, the dean of the University of Cape Coast’s business school, says he’s not uncertain the plan will succeed.
“It is something that has been tried before, but I don’t know how the timing will favour them [investors]. You cannot force them midstream to suspend the planned repatriation of their hard-earned foreign exchange out of the country,” he told the Accra-based Joy News.
The Bank of Ghana’s monetary policy committee is expected to assess the impact of its new raft of measures next month.
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