Heightened risk to fiscal slippage, inflation hold policy rate again


The Monetary Policy Committee (MPC) of the Bank of Ghana has, once again, kept the policy rate at 14.5 percent, citing risk to inflation and fiscal disruptions emanating from COVID-19 related expenditure as reasons, making it the sixth consecutive time the MPC has kept the policy rate constant in the space of one-year.

The committee, in its report released yesterday, stated that even though economic activity shows promising signs of a rebound following the vaccination programme earlier in the month, uncertainties remain over achieving the revenue target set out in the budget, hence, heightening the probability of fiscal slippage.

Furthermore, the uptick in inflation last month which consequently pushed it above the Bank of Ghana’s upper target band of 10 percent, indicates risk to inflation still exist, requiring cautious measures to be taken to avoid further hikes in the ensuing months.

“On the domestic front, the Bank’s high frequency indicators have continued to pick up, reflecting the rebound in economic activity. Although business and consumer sentiments softened on the back of the surge in COVID-19 cases in the early months of 2021, the rollout of the vaccination programme has increased optimism about the future and will further add a boost to the anticipated recovery in growth.

Even though private sector credit growth remains generally weak due to the pandemic, the rebound of input supplies evidenced by increased non-oil imports should support the ongoing rebound in economic activity

The 2021 budget has set fiscal policy on an adjustment path albeit slower than originally anticipated. The adjustment for 2021 is expected to be driven, mainly by revenue-enhancing measures, and to a lesser extent, expenditure rationalization due to the need to continue the stimulus programmes. The Committee assessed achieving the enhanced revenue targets and the heavy reliance on the domestic market as the main risks to the budget.

After declining in January 2021, headline inflation rose in February slightly above the upper band of the medium-term target, driven mainly by non-food prices. The Bank’s forecast, however, remain broadly unchanged with headline inflation expected to return to the target band in the second quarter of 2021.

Risks to inflation in the near-term are broadly balanced, but there are emerging short-term pressures emanating from the rising crude oil prices and the direct and secondary price effects of the revenue measures announced in the 2021 budget. Monetary policy would need to remain vigilant to monitor these risks. Under the circumstances, the Committee decided to keep the policy rate at 14.5 percent,” the MPC statement stated.

The decision doesn’t really come as a surprise as data presented in the 2021 budget shows the economy is still reeling under the pressure of the pandemic, hence, conditions remain unfavourable for a cut in policy rate, even though that will prop up growth in the economy.

The 2021 budget shows the fiscal deficit for 2020 hit 11.7 percent, exceeding the revised target by 30 basis points. And given the current situation, it is expected to further worsen as government still has pandemic-related expenditure to make. In fact, the MPC admitted in its last meeting that the prospects of a sharp fiscal correction in 2021 looks unlikely amidst the second wave of the pandemic which will be requiring additional spending to provide testing, vaccines, etc.

Unfortunately, government will have to resort to borrowing to take care of these expenditure, a move that will further drive the public debt upwards. Currently, the public debt has hit over 76 percent of GDP as of December 2020, and expected to climb higher with the lingering of the pandemic. All these reasons make it unfavourable for a policy rate cut.

Inflation for February 2021 also climbed to 10.3 percent from the 9.9 percent recorded a month earlier, indicating that it has moved outside the medium-term target band of 6-10 percent, rather making a case for policy rate hike.

However, due to government’s pursuit of expansionary policy which essentially aims at making more funds available for the private sector through the banks to support growth of the economy, it will be difficult for the MPC to hike the rate, hence, its decision to, at worst, keep it constant over the past 12 months.

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