A fortnight, a team from the International Monetary Fund was in Ghana to assess the country’s macroeconomic progress, the first such assessment since the end of the Extended Credit Facility programme that has largely guided Ghana’s economic management policies since the middle of this decade. Although, the Fund is not as important with regards to Ghana’s policy formulation and implementation as it was during the four-year duration of that programme, the strong influence it has on the stance of the international community regarding Ghana means its views are still pivotal to the country’s economic well-being.
But even more importantly, the IMF still gives good advice.
Last two-weeks, the Fund called on government to tighten its fiscal policy and stand ready to tighten monetary policy as well. This is hardly surprising; the differences in economic management philosophy between the supply side economics inclined incumbent government and the demand management focused IMF is well acknowledged.
Therefore, the IMF will not get its wish with regards to Ghana’s fiscal policy stance for 2020, particularly since it is an election year. Indeed, it is likely that government’s commitment to its self-imposed 5.0 percent cap on the fiscal deficit will be sorely tested next year.
This will make monetary policy all the more crucial over the year leading up to the next general elections.
To be sure, any tightening of monetary policy under the current circumstances will not win the Bank of Ghana any popularity contests. The most recent decision to retain the benchmark Monetary Policy Rate at 16.0 percent left the private sector unhappy, what with inflation at a long term low and the cedi having more or less stabilized after a turbulent period at the beginning of the year. Inflation has since fallen even further to 7.6 percent (albeit the result of the rebasing of the inflation computations more than real disinflation) and the cedi’s exchange rate is not even as issue for public consideration currently.
Besides, government’s expansionary macroeconomic stance seems to be working – the IMF now forecasts a 7.0 percent growth rate for Ghana this year, a little higher than last year’s 6.8 percent and pretty close to the ambitious 7.6 percent targeted this year by government itself.
But this also means that there is not an urgent need to lower interest rates to boost the economic growth rate. Therefore, under the circumstances – particularly an expected fiscal loosening next year – it would be prudent for the central bank to heed the IMF’s advice and stand ready to tighten its monetary stance. Afterall, next year’s expected wider fiscal deficit will need to be financed in part on the domestic market and this will require competitive interest yields on cedi denominated public debt securities.
Of course though, tighter monetary policy would normally mean higher business financing costs which nobody wants.
Therefore, we recommend that the BoG reverts to its deliberate strategy of striving to steepen the yield curve by pushing for lower short-term interest rates which would allow for businesses to borrow more cheaply, and at the same time higher medium to long term rates which would attract foreign portfolio investment into Ghana. This makes sense since the foreign investors who have to be attracted by higher rates are disallowed from subscribing to short tenured public debt securities, while most private sector borrowing tends to be short term.
We commended the BoG earlier this year when it fist attempted this strategy and we would be happy to do so again.
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