BoG hinges policy rate cut on budget performance

Governor of the Bank of Ghana, Dr. Ernest Addison, has said there is no room for further policy rate cuts this year – unless government is able to execute to the letter its budget for the 2019 fiscal year.

The monetary policy committee had earlier this month held the rate at 16 percent, prompting fears that the rate – which has since January 2017 been reduced by 950 basis points – would not go down any further in 2019.

Speaking in an interview in Washington, DC, on the sidelines of the World Bank/IMF Spring Meetings last week, Dr. Addison said a lot will depend on government’s ability to stay on course in its implementation of the budget.

“A lot of this will depend on execution of the budget going forward. If the budget doesn’t stay on course, not only will we not be able to proceed on the easing cycle, we may even have to tighten the policy; and we served that notice during the MPC meeting,” the Governor said.

Government has over the past two years kept within its budget deficit targets even as domestic revenue performance lagged behind expectations. On both occasions it has had to cut expenditure in order to meet the set budget deficit targets.

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This year, government is projecting to reach 4.2 percent budget deficit – but given the cost of financial sector resolution to central government, which is estimated to be about 3.5 percent of GDP, there are concerns this could endanger the budget performance.

With domestic revenue performance failing its target over the past two years, too, the central bank’s outlook to monetary policy appears precautionary.

The Governor is however optimistic about government’s commitment to ensuring macroeconomic stability after completingthe International Monetary Fund (IMF) Extended Credit Facility (ECF).

According to Dr. Addison, investors have been seeking reassurance over continuation of fiscal discipline post-IMF – especially given that next year is an election year, which is usually susceptible to overspending.

“The president [Nana Akufo-Addo] himself has said we will remain disciplined. We have set up institutions such as the Fiscal Council.  We have the Fiscal Responsibility Law, Fiscal Advisory Council and Financial Stability Council.

“The BoG has an MoU with the Finance Ministry for zero deficit-financing. We have gone ahead to put the budget ceiling into the law.

“We have done a lot to suggest that there will not be any derailing of the deficit-limit. All these irreversible structures have been put in place to assure the market about commitment to discipline,” Dr. Addison said.

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