Gov’t baits bond market investors with static policy rate

Dr. Ernest Addison, Governor Bank of Ghana
  • Fiscal rule to be suspended for three years

The Monetary Policy Committee (MPC) of the central bank has, for the fourth consecutive time, maintained the policy rate, saying, any slight cut of the figure will prove inimical to the economy as investors will not be willing to buy government bonds to finance the 2021 budget.

Finance Minister Ken Ofori-Atta indicated in the 2021 first quarter budget that government plans to spend GH¢24 billion within the period to carry out its obligations. However, total revenue and grants is also projected at GH¢13.3 billion, leaving a deficit GH¢10.7 billion. This, the minister said, will be financed through borrowing from the international market to the tune of US$5 billion.

It is against this background and other factors that Governor of the Bank of Ghana, Dr. Ernest Yedu Addison, said moved the MPC to maintain the policy rate at its current 14.5 percent, in order to whip up enthusiasm among investors on the bond market, as they are attracted by high interest rates.

“It is important that the budget is fully financed and if the budget will be financed, we need an interest rate that will be high enough to attract investors – including domestic investors – to be interested in our government bonds. That is the context in which we find ourselves. We have a large financing need for the budget.

This is not the time to be reducing policy rate to create a disincentive for getting the budget to be financed. That will create serious complications for the economy. So I think that is a very strong basis for why the policy rate has not been adjusted downwards,” he said at a meeting with journalists in Accra.

The decision to protect the interest of investors on the bond market will, however, come as a disappointment to local businesses as lending rates will remain high at an average 21 percent for, at least, the rest of the year and possibly up to the first quarter of 2021, as the policy rate determines, to a large extent, banks’ interest rates on loans.

Suspension of fiscal rule

The governor further stated that the pandemic’s impact on the economy, has thrown the Fiscal Responsibility Law, which requires budget deficit to be kept at 5 percent of GDP or below, off gear; saying any possibility to start applying the rule will be after three years of its suspension.

“The type of shock that we have had in 2020 is not something that will easily be corrected. So we think that we probably will refer back to the fiscal rule in about three years. This is the discussion we have had. It is a gradual adjustment back to where we want to be and it goes to the bottom of the issue that this is an unprecedented year; we have never had this sort of thing happen before,” he said.

Parliament, in July 2020, approved the suspension of the law which only came into effect toward the end of last year due to the negative impact of the coronavirus pandemic on the economy, especially, on revenue and government expenditure.

This year was supposed to be the first time ever this rule would have applied, and it would have also tested government’s commitment to keep spending in check despite it being an election year which has historically been characterized by excessive spending to impress on electorates to retain the ruling party in power for another term.

Leave a Reply