Measures being undertaken by the Bank of Ghana (BoG) to rein-in red hot inflation and arrest the cedi’s fall will further choke the already-starved real sector of the economy, an economist has warned.
The central bank faces a tall order as it seeks to reassure a market that has been rattled by the recent downgrades by Fitch and S&P, and while talks continue about injections of US$2billion and US$750million in the final quarter of the year, it is expected that the BoG will adopt a pre-emptive posture to tighten local currency liquidity flows at the conclusion of its emergency monetary policy committee (MPC).
This is due to an increasing number of Government Bonds being liquidated at maturity – particularly by offshore investors – instead of being rolled over.
With the Q4 demand for the US greenback looming, analysts are forecasting that the monetary authority could raise the monetary policy rate (MPR) by two percentage points to, on the one hand, entice investors to minimise the liquidation of maturing bonds between now and end of the year, and on the other hand attempt to achieve its inflation-targetting goal.
However, while acknowledging that the BoG is between the devil and the deep blue sea, an economist and Dean of the University of Cape Coast (UCC) Business School, Professor John Gatsi, argues that the rate hike and impending gold purchase in the local currency will drive liquidity away from the real sector.
“Obviously, the BoG has access to more information; and if its diagnostics is that capital flight and speculation are the key drivers of exchange rate volatility, it is well within its right to do something about it. But we know that this will hurt the real economy, and if we are being honest we must wonder if the real sector is a priority; since recent actions over the past month, such as the utility tariff hikes – which are beyond the central bank’s remit, suggest otherwise,” he remarked.
Already, commercial banks have signalled their intention to tighten credit to businesses and households, citing rising lending rates and general uncertainty surrounding the economy’s performance. The unfavourable economic landscape has also seen fiscal authorities slash their growth forecast for the year, from 5.8 percent to 3.7 percent.
Policy alignment
Prof. Gatsi believes that a policy dissonance, stemming primarily from a degree of recklessness on the part of fiscal authorities, is to blame for the current state of affairs. “The fiscal authorities have made the job of their monetary counterparts much more difficult than it should have been,” he said.
The sentiment was echoed in part by a Senior Economist with Databank, Courage Kinglsey Martey, who says a broader conversation must be had about getting the goals of fiscal policy to align with the goals of monetary policy, especially now – when price stability is paramount.
“This is even more important, because at recent MPC meetings we reckoned the weak fiscal position and exposure to high borrowing costs have been a major constraint on the capacity of the MPC to fully unleash its monetary policy tools against inflation and currency instability,” he remarked in a response to the B&FT.
“The weak expenditure controls have consistently resulted in a high borrowing or financing requirement by the fiscal authority. This has either constrained the monetary authority’s capacity to tighten as much as the policy rules required, or coerced it into monetising the deficit and creating fiscal dominance of monetary policy. This undermines the monetary authority’s credibility and weakens the effectiveness of monetary policy,” he added.
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The fiscal authorities’ posture has alarmed a number of observers – domestic and foreign; with the investment bank, Goldman Sachs, in a note to investors following announcement of the emergency MPC meeting, highlighting perceived apathy on the part of authorities in its engagements with the IMF to bring relief.
“In our recent trip to Accra, one notable observation was the authorities’ perceived lack of urgency in concluding programme talks with the IMF (with locals expecting a 6-9 month timeframe), despite intensifying balance of payment (BoP), FX and fiscal financing pressures.
“We have argued that a delayed conclusion creates the risk of further deficit monetisation by the BoG, cedi depreciation and a decline in FX reserves – implying that the macroeconomic outlook may deteriorate further in the near-term,” Goldman Sachs stressed.
