Tighter monetary policy expected under IMF programme

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The Bank of Ghana’s Monetary Policy Committee (MPC) is currently meeting to determine the country’s future monetary policy, amid calls from the International Monetary Fund (IMF) for the Bank of Ghana (BoG) to continue tightening monetary policy until inflation is firmly on a declining trajectory and to eliminate monetary financing of the budget.

The impact of such a position on Ghana’s economy will be significant, with a continuation of the current policy likely leading to a further slowdown in economic growth. Since the COVID-19 pandemic, the economy has been hit hard by various shocks including currency depreciation – requiring a careful balance between policies that support growth and those that rein-in inflation.

Inflation has risen sharply due to global inflation, adjustments in petroleum prices and utility tariffs, global food price increases, monetisation of the fiscal deficit, and large pass-through of exchange rate depreciation. In December 2022 inflation reached 54.1 percent, up from 12.6 percent in the previous year – but has since marginally decreased to 53.6 percent in January 2023, and further to 52.8 percent in February 2023 before dropping to 45 percent and 41.2 percent in March and April 2023 respectively.

The Monetary Policy Committee of the Bank of Ghana responded by raising the Monetary Policy Rate to 29.5 percent, citing the need to anchor inflation expectations toward the medium-term target of 8±2 percent.

This stance by the MPC indicates that the committee will remain steadfast in its tightening stance until inflation displays significant signs of moderation, implementing other available monetary tools to control the money supply and mitigate inflationary pressures. The monetary authorities have expressed the view that although headline inflation has declined marginally for two consecutive months, it remains relatively high compared to the medium-term target of 8±2 percent. As such, further tightening of the monetary policy stance is necessary to reinforce the pace of disinflation and place the economy firmly on the path of stability.

The impact of this policy-stance is already evident in the economy’s growth numbers, as shown in the Real Composite Index of Economic Activity (CIEA) – which points to further moderation in economic activity amid a challenging macroeconomic environment. The contraction in economic activity by 7.6 percent in January 2023 compared to a growth rate of 4.2 percent in the same period of 2022 primarily arose from main indicators like cement sales, imports and credit to the private sector.

This tightening policy has a severe effect on local businesses, primarily small and medium-sized enterprises (SMEs), making borrowing costs prohibitively expensive. Given the limited access to credit, SMEs are struggling to invest in their businesses; leading to economic growth and job creation constraints.

The current policy trajectory, if continued, could further lead to a downturn in key sectors of the economy such as agriculture, industry and real estate – all crucial for the development of Ghana’s economy. Therefore, policy measures must balance reducing inflation with measures that support growth-friendly policies to keep businesses running, particularly in the private sector.

The focus on reducing inflation and rebuilding foreign reserve buffers is necessary to ensure economic stability. While government and the BoG must continue implementing policies to address the current economic crisis, the impact of those policies on local businesses should be taken into account to ensure a prosperous future economy.

In view of this, careful consideration must be given when balancing policies that reduce inflation and those which support growth and job creation. While government and the BoG must continue implementing these policies to address the current economic crisis, they must take into account the impact of these policies on local businesses. Ultimately, the economy’s future depends on getting this balance right.

Sharing this thought, banking consultant Dr. Richmond Atuahene agreed with the Fund’s position: stating that he expects a rate hike in the region of 100 basis points, citing the gap between inflation and the policy rate.

“I agree with the IMF, especially as real interest rate remains negative, with inflation remaining at over 40 percent. I expect to see a raise of 100bps as the BoG must be seen to be working. It could even be as high as 200 bps, but I would say 100 bps is more likely,” he explained.

Inflation tumbled for the fourth consecutive month to 41.2 percent in April, but remains 11.7 percentage points and 31.2 percentage points above the current policy rate and the central banks upper-band target.

Despite the Ghana Reference Rate (GRR) dropping to 26.45 percent for May, Dr. Atuahene believes the real economy will continue feeling the pinch.

“We haven’t seen Treasury bill rates drop as much as we had anticipated, and all of these factors will play into the cost of borrowing for businesses and households,” he further stated.


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