By: Joshua Worlasi AMLANU
[email protected] / [email protected]
Ghana’s economy is teetering on a tightrope. Inflation, which remains elevated at 22.4 percent, continues to challenge both the central bank and the government as both authorities implement measures to restore price stability.
Following an expansionary fiscal stance in 2024 that created strong liquidity conditions, the Bank of Ghana (BoG) has tightened monetary policy to curb inflationary pressures.
The Monetary Policy Committee (MPC) raised the policy rate by 100 basis points to 28 percent in March. Meanwhile, the government’s 2025 budget aims to bring inflation down to 11.9 percent by December 2025.
Everyone’s asking the same thing: can fiscal and monetary policy finally get on the same page to tame a beast that’s been running wild for over a year?
The MPC’s hawkish pivot wasn’t a total shock to everyone. “The market might be caught off guard, but I saw it coming,” said Courage Kingsley Martey, head of insights at IC Group, who’d flagged a possible hike back in January.
Alongside the rate increase, the central bank introduced a new 273-day open market operation (OMO) bill to absorb excess liquidity—a clear indication of its commitment to controlling inflation.
Governor Dr. Johnson Pandit Asiama, speaking at the post-MPC meeting press briefing, emphasised the urgency of the situation. “At 23.1 percent, inflation should have been closer to 17 percent by now,” he stated. “We must take decisive action to prevent further escalation.
Inflation has remained persistently high, hovering around 23 percent for over a year. Data from the Ghana Statistical Service show that inflation stood at 23.8 percent in December 2024, up from 23.2 percent in December 2023. Prior to the recent decline to 22.4 percent in March—driven largely by easing non-food prices—inflation had only edged down slightly to 23.1 percent in February.
However, food inflation remains elevated due to adverse weather conditions and supply chain disruptions. Core inflation also remains strong, indicating sustained underlying price pressures.
The central bank is under increasing pressure, having missed the IMF’s end-2024 inflation target and triggered the Monetary Policy Consultation Clause. Had the policy rate been maintained at 27 percent, inflation was projected to end the year above 18 percent.
Earlier forecasts by the Bank of Ghana indicated that keeping the rate unchanged would yield minimal progress in disinflation.
The latest adjustment underscores how shifts in the policy rate can significantly influence inflation outcomes by year-end. Under the IMF-supported programme, Ghana is targeting an inflation rate of 8 percent, with a tolerance band of ±4 percentage points, by end of 2025.
The MPC has acknowledged the risks posed by excess liquidity, warning that failing to tighten policy could derail the disinflation process.
However, the question remains: can inflation slow quickly enough to meet the government’s ambitious 11.9 percent target, or will structural challenges—such as food supply constraints and exchange rate volatility—prolong inflationary pressures?
Diverging policy approaches
The BoG’s response to inflation has been firm, with its recent rate hike and liquidity absorption measures reinforcing its stance. However, the fiscal side of policy appears to be moving in a different direction.
Treasury bill rates have fallen significantly, with the 91-day bill yield dropping from 28.19 percent in January to 15.06 percent as of April 4, 2025. This, resulting in negative real returns for investors, raising concerns about the sustainability of such low rates.
Finance Minister Dr. Cassiel Ato Forson’s 2025 budget targets a sharp reduction in inflation while avoiding drastic tax increases. The government plans to boost revenue by 20 percent through improved collection measures rather than new taxes, while also implementing expenditure controls.
Additionally, fiscal reforms include scrapping the e-levy and potentially removing the COVID-19 levy to enhance disposable income. There are also proposals to reform the VAT system to reduce distortions and stabilize prices.
A key component of the disinflation strategy focuses on agriculture. Given food inflation’s significant contribution to overall price levels, the government aims to increase the supply of essential food items such as grains, vegetables, and poultry.
While these efforts could help stabilize prices, their effectiveness in the short term remains uncertain. If food inflation persists, will broader disinflation efforts be compromised?
A tightrope walk for policymakers
The government’s previous expansionary fiscal policies contributed to excess liquidity, which the central bank is now trying to absorb. While the government has pledged fiscal restraint, its reliance on short-term borrowing through Treasury bills raises concerns.
With Ghana’s bond market still constrained following debt restructuring, T-bills remain the primary financing tool. However, falling yields have made them less attractive to investors, potentially limiting the government’s borrowing capacity.
Market reactions to declining T-bill yields have been mixed. Some analysts interpret the drop as a sign of confidence in the disinflation process, while others worry about the sustainability of negative real returns.
Mr. Martey suggests that lower yields indicate expectations of falling inflation rather than panic. However, market analyst Kwadwo Acheampong remains skeptical about the sustainability of low T-bill rates. “The government will need to borrow short-term to meet its obligations, which may force rates higher eventually,” he noted.
Global risks and domestic challenges
Ghana’s economic outlook is further complicated by global factors. U.S. tariff threats and slowing economic growth in major economies, including China, could affect Ghana’s trade performance and capital flows.
Disinflation has stalled in some advanced economies, and central banks are maintaining relatively tight monetary conditions. If global economic conditions deteriorate, could Ghana face additional external shocks that undermine its disinflation efforts?
Exchange rate volatility is another pressing concern. A depreciating cedi could drive up import costs, adding further inflationary pressure.
This would likely force the BoG to maintain a tight monetary policy stance for an extended period, raising questions about whether inflation can decline quickly enough to justify lower interest rates.
Inflation control vs growth
While the government is optimistic about achieving its inflation target, some analysts caution that excessive monetary tightening could slow economic activity.
Acheampong sees the recent rate hike as a strong signal that the MPC is determined to control inflation. However, he also notes that the significant gap between inflation and Treasury bill rates poses risks.
If borrowing costs remain elevated and credit conditions tighten, will businesses struggle to expand, potentially dampening economic growth?
The government’s strategy hinges on inflation declining sufficiently in the first half of the year to allow for lower interest rates in the second half.
However, if inflation proves more persistent than expected, could prolonged high interest rates stifle investment and consumption, delaying economic recovery, which was recorded in 2024?
The road ahead
The coming months will be crucial in determining whether Ghana’s inflation trajectory will align with policy expectations.
The April inflation report has set the tone for future policy decisions, however, if food prices continue to remain elevated, the MPC may be forced to implement further tightening measures, potentially widening the gap between policy rates and T-bill yields.
Achieving the 11.9 percent inflation target will require strict fiscal discipline, effective monetary policy execution, and favourable external conditions.
While fiscal and monetary policies do not need to be perfectly aligned, there must be sign of both authorities working toward the same objective. Mr. Martey highlights that despite apparent differences, both policies ultimately aim to curb excess demand.
However, risks remain significant. Any fiscal slippage or external shock could prolong the central bank’s tight stance, leading to extended economic uncertainty.
If inflation declines as projected, real interest rates could turn positive in the latter part of the year, making T-bills more attractive to investors. Additionally, if revenue-enhancing measures succeed without excessive borrowing, the government could sustain lower interest rates, reducing financing costs.
Yet, if inflation remains stubborn, will policymakers be forced to recalibrate their approach? Can the economy withstand prolonged monetary tightening, or will growth suffer as a result?
The answers to these questions will shape not only the country’s economic landscape in 2025 but also its long-term financial stability.
Amid these challenges, one key question remains: will fiscal and monetary policy finally find common ground, or will diverging pressures keep them apart? The coming months will provide critical insights into the direction of Ghana’s economic recovery.
