OPINION: Challenging times for Bank of Ghana’s monetary policy

The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) will hold its 123rd three-day meeting starting from Monday 24 March 2025, after which the committee will announce its decision on the benchmark Policy Rate (PR).

At its last two meetings held in November and January, the MPC kept the PR unchanged at the previous rate of 27%, decisions that the committee indicated were in response to higher inflation risks. As was to be expected, the opinion of the public was divided as to the justification for these decisions, depending on where they perceived the relative risks to lie with respect to economic instability, on the one hand, and economic growth and employment, on the other hand.

The MPC faces even a more challenging decision this time round amid the persistent difficult economic environment, characterised by high inflation, unstable currency, still high debt, high unemployment and sub-optimal growth, among myriad problems. Inflation has been stuck in the low twenties for more than two years, recording 23.2% in 2023 and 23.8% in 2024, with the latest rate at the end of February being 23.1%, all of them much higher than the BoG’s target of (8+/-2)%. In the past two years or so, the cedi has depreciated markedly by 28% in 2023, 19% in 2024 and 5.4% between 1 January and 18 March this year.

While this year’s depreciation is lower than the 6.2% recorded in the same period of 2024, it is still significant. The overall fiscal deficit was -5.2% of GDP (on cash basis) in 2024, slightly above the limit of -5% set out in the suspended Fiscal Responsibility Act (FRA). Economic growth in 2024 was notably significant, at 5.7% (up from 3.1% in 2023), fuelled by the services, construction and mining sectors.

Against this generally gloomy economic backdrop, the Minister for Finance presented the new government’s first Budget and Economic Policy Statement for 2025 to Parliament on 11 March. The key macroeconomic projections in the Budget included:

i. Fiscal deficit (cash) of -4.1%;
ii. End-of-period inflation of 11.9%;
iii. Economic growth of 4.0%; and
iv. Gross international reserves of at least three months of import cover.

The Finance Minister also reported the existence of a substantial amount of government payment arrears to the tune of GHS67.5 billion (or 5.7% of GDP) and equally substantial indebtedness of several state-owned enterprises (SOEs).

The national public debt was reported to stand at GHC726.7 billion (US$49.4 billion) or 61.8% of GDP at the end of 2024, even after benefiting from the Domestic Debt Exchange Programme (DDEP) and the accompanying external debt restructuring. The figures generally point to an economy that is slowly emerging from a crisis, while remaining fragile and vulnerable, as the minister noted in his presentation.

Top objective: stability

The Bank of Ghana’s primary objective is widely known to be price stability. However, what is probably not so well known is the fact that the Bank is also enjoined to promote stabilisation of the exchange rate and economic growth, among other secondary objectives.

In spite of the Bank’s mandated multiple objectives, however, it has limited instruments to achieve them. Indeed, the Bank’s overriding instrument, the PR, has to be engaged almost exclusively as an economic stabiliser and economic stimulant as the situation demands. This goal-instrument limitation confronting the BoG highlights the importance of collaboration between the Bank and the government so that the latter can also bring on board its arsenal of fiscal instruments to achieve the desired macroeconomic outcomes.

The collaboration should critically entail alignment of monetary policy and fiscal policy so that the burden of economic stabilisation or stimulation as may be required does not disproportionately fall on either of the two policies.

Unfortunately, in the past, fiscal policy has been mostly loose amid fast-growing expenditure and lagging revenues. The widening expenditure-revenue gaps have exerted marked strain on prices and the exchange rate. Meanwhile, the ever increasing size of recurrent expenditure has consistently squeezed capital expenditure (CAPEX), with a drag on economic growth. In the circumstance, monetary policy has shouldered a disproportionately-high burden of both economic stabilisation and stimulation, a difficult balancing act.

T-Bill mismatch

As the MPC meets next week, it will once more be confronted with the difficult decision of where to place the PR with the aim of influencing the economy towards the best inflation and growth outcomes.

While it has long been the wish of many economic watchers that interest rates would begin to unravel to elicit lower cost of credit and engender investment and growth, such an outcome is unlikely at the MPC’s next meeting, given the difficult and uncertain economic environment.

The fact is that, on the one hand, economic growth is doing better, pointing to incipient economic recovery. However, on the one hand, inflation remains elevated, while the exchange rate, although exhibiting relative stability lately, remains vulnerable.

The vulnerability of the exchange rate has been heightened by the sharp drop of over 10 percentage points in Treasury Bill rates in the last few weeks, which threatens causing investors to flee in search of foreign exchange as a safer haven. It would be helpful to avoid further precipitous fall in Treasury Bill rates so as to stem their divergence from other money market rates. This should be done through close coordination of the government’s debt management and Bank of Ghana’s liquidity management.

Meanwhile, cuts in foreign aid by Western governments and emerging trade wars risk unsettling foreign exchange markets, calling for local vigilance.

A punter’s tip

My consideration of the several foregoing competing factors leads me to the conclusion that the balance of risks in Ghana currently lies more with inflation than economic growth. I am, therefore, inclined to expect the MPC to go for a hike in the PR by 100 basis points from 27% to 28%.

This decision should give a clear signal to the markets about the committee’s commitment to deal decisively with inflation and bring it under control in the foreseeable future. The decision should also help to anchor inflation expectations, while helping to counteract second-round effects generated from the supply and cost drivers of inflation, particularly food, energy and transportation.

It is worth pointing out here that targeting these supply and cost drivers would help ease the pressure on the PR. It is, therefore, encouraging to note that both the Minister for Finance and the Governor of the Bank of Ghana have signalled their intention to collaborate to achieve optimal outcomes for inflation, interest rates and economic growth.

John Kwabena Kwakye is the currently the director of research at the Institute of Economic Affairs (IEA), Ghana. He previously worked with the Bank of Ghana and the International Monetary Fund and is a former member of the Monetary Policy Committee of the BoG. The views expressed in this Note are entirely those of the author and not any institution(s) or person(s). Email: j_kwakye@yahoo.com

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