Visible commitment to robust structural reforms will have the two-fold effect of bringing about an actual transformation of the local economy and added benefit of providing much-needed sovereign credibility in the long run.
This is according to a World Bank Country Economist for Ghana, Kwabena Gyan Kwakye, who says despite the current spate of challenges, central government must begin taking steps toward restructuring the economy and communicating such efforts in a manner that is considered trustworthy.
He said this as part of his submission during a Half-Year Economic Review Series session organised by the domestic arm of the Chartered Financial Analysts (CFA) Society in Accra. “Government must now transition from direct support for recovery to structural reforms,” he stressed.
The economist outlined four broad areas – viz Business Climate, Access to Finance, Connectivity and Access to basic services – as principal areas for the reforms.
The call comes on the back of a sharp nosedive in fortunes of the local economy, particularly since turn of the year. The period has been characterised by a battering of key macroeconomic indicators, with inflation sprinting to a two-decade high as it crossed the 30-point mark at its latest reading in July at 31.7 percent – driven largely by fuel and food prices.
This has prompted the Bank of Ghana (BoG), consistent with development across the globe, to raise its benchmark rate by 450 basis points from 14.5 percent in January to 19 percent in May; this rate was maintained in July.
The cedi has also fared poorly against its major trading partners, with almost 50 percent of its value eroded against the US dollar year-to-date. This has culminated in a return to the International Monetary Fund (IMF) for support.
With externalities including, but not limited to, the ongoing war between Russia and Ukraine showing no signs of abating, as well as escalating tensions between the US and China and fears of subdued intra-continental trade, Mr. Kwakye stated that serious consideration must be given to these measures.
Touching on the central bank, the economist urged enhanced collaboration with fiscal authorities to streamline their shared goals. He added that both must be more transparent regarding the factors which inform their decision-making.
“The BoG should continue to monitor the impact of price pressures on inflation expectations; and to maintain policy credibility, it should maintain forward guidance on the monetary stance. What we are saying is that they have to be more transparent with their stance when it comes to their engagements with the market, as it will help curb some of the speculative activities which are impacting on prices as well as the currency,” he added.
This is consistent with a position espoused by the other Bretton Woods institution – the IMF – which in an assessment of the global rate hikes to tame inflation said: “Monetary policy can’t resolve remaining pandemic-related bottlenecks in global supply chains and disruptions in commodities markets due to the war in Ukraine. It can however slow overall demand to address demand-related inflationary pressures; so a tightening of financial conditions is the goal.
“The high uncertainty clouding the economic and inflation outlook hampers the ability of central banks to provide simple guidance about the future path of policy. But clear communication by central banks about the need to further tighten policy and the steps required to control inflation is crucial to preserve credibility.
“Clear communication is also critical to avoid a sharp, disorderly tightening of financial conditions which could interact with, and amplify, existing financial vulnerabilities – putting economic growth and financial stability at risk down the road,” it added.