Jawboning: A weakened tool in Monetary and Fiscal Policymaking


That it is tough to accurately predict the future is widely accepted. Indeed, no one can see that far ahead. And this is the constant hurdle faced by authorities making monetary and fiscal policy decisions. They are expected to make decisions that will yield positive returns now and in the unknown future.

Jawboning, often referred to as moral suasion or forward guidance, is one tool that has been adopted in monetary and fiscal policymaking. Jawboning involves the use of public appeals to influence political and economic events rather than resorting to direct intervention through legislation. This simple but rather powerful policymaking tool has been diminished if not lost in Ghana’s monetary and fiscal policymaking space.

Unlike other fiscal and monetary policymaking tools which require complex economic and statistical models, jawboning only requires comments and speeches from authorities. How easy can it be? However, the tool’s success relies heavily on credibility. The authorities making the speech or comment must be perceived by the people to be trustworthy or credible. In other words, that “they will do as they say”. When economic actors believe the words of fiscal and monetary policy officials, they are more likely to adjust their decisions in line with what the authorities say.

The central bank of Ghana formulates and implements monetary policy to achieve price stability, contribute to the promotion and maintenance of financial stability, and ensure a sound payment system. At its disposal is the use of forward guidance to achieve its mandate. The Governor and other top officials of the Bank have taken to platforms granted them and hinted to industry players what the central bank intends to do.

Although not very direct, such comments are subtly woven into speeches. There have been instances when the Bank has “walked its talk”. And there were times when jawboning became mere talk. For instance, the Bank of Ghana in a 2019 press release following the banking sector clean-up said that the reasons for mass failures of financial institutions included regulatory forbearance on the part of previous management of the Bank.

The Bank of Ghana then assured the public that it would continue to supervise the banking sector in a manner that protects depositors’ funds and promotes a safe, sound and inclusive financial system. This was a heartwarming assurance considering the losses of depositors in the banking sector clean-up. But did the central bank uphold its word on banking sector supervision?

In January 2023, there was a signal of persisting weakness in banking supervision. An auction by the Bank of Ghana aimed at raising funds to pay maturing cocoa bills failed – which led to an agreed roll-over for all investors who held cocoa bills.   In the BoG’s press release it stated that: “Cocoa bills, like Bank of Ghana bills, were designed as instruments to be held only by financial institutions. Unfortunately, it has come to the Bank of Ghana’s notice that some financial institutions sold their instruments to their retail clients”. Where did the supervision go? Clearly, there was laxity in supervision – a backsliding on the Bank’s earlier assurance of effective banking supervision.

At the recent 60th Anniversary Launch of the Institute of Chartered Accountants Ghana, the Bank of Ghana Governor passed a forward guidance in his speech that is critical considering government’s fiscal position in 2023. In his remarks, the Governor stated that: “The Bank of Ghana and Ministry of Finance will commit to zero financing of the budget in 2023 and beyond”. Industry players are watching. Will the Bank stick to its word? Should economic actors revise their expectations and economic projections based on these remarks?

As Ben Bernanke, former chairman of the United States Federal Reserve explained: “Monetary policy is 98 percent talk and only two percent action”. This highlights the importance of jawboning in monetary policymaking. And it must not be compromised in any way. A greater percentage of success in monetary policy lies in the confidence held by the public in the central bank, and not necessarily the ‘hardcore’ statistics churned out.

Recently, the cedi dipped against its major trading currencies and the Bank attributed this to speculation – words! In the Bank’s 109th Monetary Policy Committee (MPC) meeting, it noted: “More recently, the sharp depreciation episode has been driven by speculation of a possible debt restructuring – which led to portfolio rebalancing in favour of foreign currency holdings as against Ghana cedi-denominated assets”. This reechoes what good jawboning presents to the central bank if well managed.

Fiscal policy authorities have also dented moral suasion as a policy tool. In the past few years, fiscal authorities have gone back on their word. They have reneged on their ‘promises’ made to the public. In the earlier period of 2022, there were calls from various sectors of the economy for government to begin a bailout discussion with the International Monetary Fund (IMF). This was against a backdrop of unsustainable debt levels and foreseeable risks to the economy. Ggovernment vehemently stated that it was not going to the IMF. To quote a deputy Finance Minister: “We’re not going to the IMF. That is government’s position…”

Surprisingly, government in July 2022 announced it was going to the IMF. This was a huge blow to government’s credibility – and hence-forward, guidance as a policymaking tool. When governments make such ‘U-turns on their word, people begin to lose confidence in what they say. And this can have untoward consequences on the economy.

Government in December 2022, as part of measures to obtain approval for the proposed ECF programme by the IMF Board, announced a Domestic Debt Exchange Programme (DDEP). The initial announcement did not include individual bondholders; however, after seeing signs of low subscription to the programme, individual bondholders were included in the DDEP. Again, reverting decisions made to the public without any justifiable reasons serves no purpose other than to harm people’s perception of government. And once popular perception takes a negative turn, jawboning becomes ineffective.

In sum, words seep. And people form their perceptions based on their assessment of whether people in authority walk their talk. To make jawboning effective, managers of both fiscal and monetary policy must be careful with what they say and ensure adherence to the statements or cues they put out. Some damage has been caused, but it’s not too late. To repair jawboning as an effective tool, it must start with building trust.  All over again.

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