Returning to economic growth

As hoped for by private enterprise and supply side economists alike, the Bank of Ghana’s Monetary Policy Committee has opted to keep the benchmark Monetary Policy Rate at 14.5 per cent for the next two months. This newspaper had been advocating for this over the past week and is satisfied with the decision.

Yet again Ghana’s central bank has shown its capacity for formulating monetary policy based on the peculiarities of the country’s macro-economic circumstances rather than received classical economic doctrine or the rigid policy solutions offered by the International Monetary Fund, which curiously recommends demand management for troubled emerging market economies even as it supports supply side economics in the developed economies which finance its activities.

The retention of the MPR at 14.5 percent will be important in effort to continue the economic rebound that Ghana has started enjoying. The central bank’s Composite Index of Economic Activity rose by 3.2 per cent over the 12 months up to July, a reversal of the unprecedented 10.6 per cent contraction suffered in May, due to the effects of socio-economic restrictions imposed to curb the spread of COVID 19.

Now, the BoG is forecasting full year economic growth of between 2.0 per cent and 2.5 per cent for 2020, which is more than twice the 0.9 per cent forecast by the Ministry of Finance as recently as July. BoG Governor Dr Ernest Addison happily admits that Ghana’s economic managers, himself included over-estimated the eventual effects of COVID 19 on Ghana’s short-term economic performance.

It is refreshing to see the BoG seemingly putting economic growth before its traditional core strategy of inflation targeting this time around. But to be sure this does not indicate a change of core strategy by the central bank. Rather, the BoG is correctly considering that because the Ghanaian economy is currently operating significantly below its actual capacity, growth oriented factors that would normally generate inflationary pressures will not at the current time.

Indeed, the BoG further admits that if not for Ghana’s huge fiscal deficit being incurred this year because of the peculiar circumstances, it could have eased monetary policy even further to support a rebond in economic growth.

To be sure, the other key conditions are ripe for further easing. For one thing, since 2018, the share of foreign investors holdings of Ghana’s public cedi denominated domestic debt has declined from over 30 per cent to barely 18 per cent. This means Ghana does not have to offer as high as hitherto yields on its medium to long term bonds, just to provide compensation to those foreign investors for the foreign exchange losses the stand to incur from the cedi’s depreciation during the tenor of the bonds.

Secondly, the United States Federal Reserve Bank has declared that it will support economic growth with close to zero interest rates for the next couple of years, which means that even lowered yields on Ghana’s medium to long term cedi denominated sovereign bonds will be hugely competitive for international investors.

However the BoG is not taking advantage of all this because it fears the potential inflationary effects of the fiscal deficit which now looks like ending the year considerably higher than even the record high 11.8 per cent being targeted.  By July it was 7.4 percent which was higher than the 7.2 percent targeted for that time. Worse still government is showing a penchant for giving in to the demands of vested interest groups which will push the deficit higher still.

So government holds the key to further monetary easing that would promote faster economic growth. It simply has to keep the deficit within target, political exigencies notwithstanding.


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