THE Bank of Ghana announced an unprecedented 300 basis-points (bps) increase in its benchmark policy rate to 22 percent late Wednesday after annual headline inflation had accelerated to 31.7 percent in July.
In a statement after an emergency Monetary Policy Committee (MPC) meeting, the central bank said the measures were targeted at taming the soaring inflation and arresting the continued deprecation of the local cedi currency.
The rate hike, which followed a cumulative 550 bps hike in the rate since last November, is the highest since 2002
The statement said that the further acceleration of inflation for the eleventh consecutive month to 31.7 percent in July 2022, driven mainly by both food and non-food price pressures, gave clear signals of inflationary pressures on the horizon.
Moreover, it said, the continued depreciation of the local currency against the major international currencies reflected a continued heightening of uncertainties in the global economy and elevated demand pressures in the foreign exchange market.
‘The execution of the budget for the year has remained challenging. Revenue has not kept pace with projections and created financing challenges,’ said the central bank.
The MPC statement added that the central bank had been aiding the government with overdrafts to bridge the financing gap. ‘But the Bank of Ghana is working with the Ministry of Finance to place a cap on the overdraft.’
Amid the ongoing global challenges, the statement said Ghana’s specific situation worsened due to the downgrading of its sovereign credit rating by international rating agencies, non-residents’ disinvestment in local currency bonds, and loss of reserve buffers.
‘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 percent,’ the statement added.
The central bank also announced an increase in the primary reserve requirement of banks from 12 percent to 15 percent to be implemented in a phased manner from September to November as an additional measure to complement the expected impact of the policy rate.
‘The Bank of Ghana is working in collaboration with the mining firms, international oil companies, and their bankers to purchase all foreign exchange arising from the voluntary repatriation of their export proceeds to boost the supply of foreign exchange to the economy,’ added the statement.
The bank decided at its last MPC meeting late July to maintain the policy rate at 19 percent to allow the previous rate hikes to have their full effect.
The central bank’s move followed the call by a local think tank for stronger measures to rein in Ghana’s fiscal crisis and stabilise the macroeconomic environment.
The Institute of Fiscal Studies (IFS) told the media at a press briefing Tuesday that the fiscal measures being applied by the government were weak and would not deal with the crisis confronting the West African country.
‘The fiscal problems fundamentally imposed by compensation of public sector employees and debt service costs have been compounded by the government’s pursuit of numerous revenue-consuming initiatives,’ Said Boakye, a senior research fellow at IFS, told the media.
Boakye added that the downgrading of the country’s economy by international rating agencies was a direct consequence of the negative developments in the country’s public finance management.
‘The key trigger for the rapidly worsening macroeconomic instability in Ghana was the downgrade in the country’s credit ratings by Fitch and Moody’s in January and February 2022, and not the Russia-Ukrainian crisis,’ the economist stated.
He added that the downgrade caused a rapid deterioration in Ghana’s balance of payment, ‘since it caused the government to lose access to the international capital market, as Ghana was priced out of the market.’
Boakye said the government should seek the buy-in of all major stakeholders, including civil society and other socioeconomic constituencies, to restore fiscal consolidation and confidence in the economy.
‘The government should also think critically about ways to improve its revenue mobilization to bring the country’s tax revenue as a ratio of Gross Domestic Product in line with its peers in the subregion,’ added the economist.
He urged the government do this in a way that would not overburden the private sector.
The economist also urged the government to consider minimising the quantum of wages and the level of the debt service expenditure as ratios of total revenue and grants, and review all social intervention programs with the goal of helping to reduce government spending.
In a related development, Alex Mould, A former Chief Executive Officer of state-run Ghana National Petroleum Corporation, cautioned last Monday that the country risked shortage of petroleum products if the government does not intervene in providing foreign exchange to the banking sector immediately.
‘The banks are crying out that the Bank of Ghana is not able to provide enough foreign currencies (especially the US dollar), through its forex auctions, to meet their trading partners’ needs,’ Mould stated on Monday.
Mould, also a banking expert, said the development compelled Bulk Distribution Companies to max out on their credit-line limits with their banks, ‘and the implication is that the banks will no longer be able to finance fuel imports by October.’