The Bank of Ghana (BoG) is taking significant steps to restore macroeconomic stability through major monetary and exchange rate policy changes, on the back of approval for a 36-month arrangement under the International Monetary Fund’s (IMF) US$3billion Extended Credit Facility (ECF).
The ECF arrangement aligns with government’s Post-COVID-19 Programme for Economic Growth (PC-PEG), which aims to foster stronger and more inclusive growth while implementing resilience-building reforms.
According to the IMF Staff report, the BoG’s monetary and exchange rate policies under the programme will prioritise reining-in inflation and rebuilding foreign reserve buffers. Key objectives include tightening monetary policy until inflation exhibits a clear declining trend and eliminating monetary financing of government’s budget. Additionally, the central bank will enhance exchange rate flexibility and limit foreign exchange interventions to restore external buffers.
One crucial change involves revising the Bank of Ghana Act of 2002, known as Act 612. This revision aims to bolster central bank independence and enhance monetary policy credibility. Proposed revisions include reducing the overdraft limit, improving compliance, refining emergency conditions for temporarily exceeding the limit, and specifying the permissible breach extent for each emergency category. These changes will be based on recommendations from the safeguards assessment update. To ensure compliance, the Ministry of Finance (MoF) and the BoG have signed a Memorandum of Understanding establishing zero monetary financing throughout the programme as a prior action.
The Bank of Ghana Act of 2002 revision is a significant stride toward strengthening central bank independence and enhancing monetary policy credibility. Coupled with the commitment to zero monetary financing, these revisions will contribute to improved governance and transparency in monetary operations.
In pursuit of price stability, the BoG’s monetary policy will aim to bring inflation back to the medium-term objective of 8 ± 2 percent. This approach will be implemented within the framework of an inflation-targetting regime supported by a flexible exchange rate system. By containing inflation and accumulating foreign exchange reserves, the programme seeks to safeguard the real income of vulnerable populations and enhance macroeconomic stability and resilience.
The report emphasises BoG’s commitment to decisive monetary policy tightening until inflation demonstrates a clear declining trajectory. Frontloading the tightening measures will ensure a rapid and orderly path toward the inflation target. Liquidity absorption will be employed to meet the inflation objective while considering potential risks to financial stability. The BoG will strengthen its inflation-targetting framework by improving its forecast and policy analysis system, enhancing macroeconomic data collection (including the BoG inflation expectations survey), building analytical capacity, and refining central bank monetary policy communication.
Regarding the foreign exchange market, the BoG is dedicated to achieving greater exchange rate flexibility to enhance resilience against shocks and rebuild central bank reserves. Gradual limitations on foreign exchange interventions will be implemented to prevent excessive exchange rate volatility. Adherence to a gross foreign exchange intervention budget aligned with reserve targets will include devotion to capping monthly gross foreign exchange sales.
In the event of a need for larger interventions, consultations with IMF staff will be sought to determine the appropriate policy response. The central bank will provide foreign exchange liquidity at the prevailing market exchange rate and ensure the purchase of gold from local miners adheres to best practices, avoiding any distortions.
Efforts to establish a unified exchange rate market will involve necessary actions and reforms, while policies that create market segmentation or multiple exchange rates will be avoided. Foreign exchange auctions will serve as the primary mechanism for providing liquidity, with enhancements aimed at facilitating efficient price discovery, allocation and market-deepening. Collaboration with IMF staff will be pursued in this endeavour.
As part of deepening the foreign exchange market, the current temporary foreign exchange surrender requirement by miners to the central bank will be phased out. Government intends engaging key exporting companies to explore options for increasing voluntary domiciliation of export proceeds.
These policy changes, if implemented by the Bank of Ghana under the IMF ECF programme, are expected to restore confidence, attract foreign investments and pave the way for stronger and more inclusive economic growth in Ghana. The success of these changes will depend on effective implementation, continued commitment to reforms, and close monitoring of macroeconomic indicators to ensure progress toward the programme’s objectives.
