The loosening of Ghana’s monetary policy [Article]

Over the past year, the Bank of Ghana has cut its benchmark Monetary Policy Rate five times. Elorm Desewu and Toma Imihere examine how continuity and transparency in monetary policy is benefiting the economy

The latest cut in the Bank of Ghana’s Monetary Policy Rate, announced on Monday, November 27, 2017 is the fifth since the immediate past Governor of the central bank, Dr Nasir Abdul Isshahaku, began the process of monetary easing after several years of exceedingly tight monetary policy aimed at squeezing inflation out of the economy. The latest reduction of 100 basis points has brought the benchmark interest rate down to 20%, its lowest level in half a decade.

The incumbent Governor, Dr Ernest Addison is now leading the loosening of monetary policy begun by his predecessor and it is coming at a critical time. While provisional real Gross Domestic Product estimates from the Ghana Statistical Service show that the economy grew by 6.6% and 9.0% for the first and second quarters of 2017 respectively and is expected to be a robust 7.9% for the full year, the data also shows that non-oil GDP growth was much slower at 3.9% in the first quarter and 4.0% in the second quarter. This means that Ghana’s renewed economic growth is primarily oil driven which means the benefits cannot yet be felt around the general populace since the oil sector is still an enclave one.

The conventional wisdom is that the easing of monetary policy is the BoG’s support for the new emphasis on supply side expansionary economic policy adopted by the President Nana Akufo-Addo administration introduced to replace the demand management driven policies of its predecessor, the Mahama administration, which have had the backing of the International Monetary Fund. Indeed, the BoG was heavily criticized by the organized private sector for the tightness of its monetary policy between early 2015 and the first three quarters of 2016 when the benchmark MPR was hiked to a record high of 26.0% in a bid to stem rising inflation and bring it down towards the medium term target of 8% plus or minus 2%. The central bank was accused of being too single minded in its inflation targeting focus which, critics argued, was stifling economic growth and consequently, economic activity and job creation.

Actually though, the BoG has had a handle on the situation all along. It is instructive that the central bank began easing monetary policy in November2016, almost three months before the change of government and four months before the change of Governor. The primary factor behind the commencement of monetary policy loosening was changing economic performance indicators rather than changes in economic management personnel and this in instructive in that it evidences the independence of the BoG and its policy formulation.

The first reduction in the MPR, by 50 basis points in November 2016 under the helmsmanship of Dr Ishahakku came in the wake of the BoG’s assessment that the severe upward pressures on inflation brought about by the sharp increases in both electricity and water tariffs at the end of 2015 had been fully transmitted enabling inflation to begin falling. Importantly, Producer Price Inflation had began falling sharply, an indicator that Consumer Price Inflation was about to follow in that direction. Besides this Ghana had begun registering a merchandise trade surplus – the first in more than a decade – thus narrowing the current account surplus and improving the overall balance of payments position which ultimately held the promise of sustained cedi stability.

The change of government and subsequent change of BoG Governor, accompanied with a shift towards supply side rather than demand management economic policy by government itself, has simply continued the central bank’s monetary easing process; over the last three Monetary Policy Committee meetings chaired by Dr Isshahaku, the MPR was lowered by a cumulative 250 basis point, while over the subsequent four since Dr Addison succeeded him, it has been cut by a further 250 basis points.

Throughout the process, the BoG has got its timing right. Inflation has continued on a downward trajectory despite the sharp rise in government’s unbudgeted fiscal deficit spending during the second half of 2016 and the steep depreciation of the cedi between December 2016 and March 2017. The MPR cuts have been transmitted into significantly falling interest rates for both government domestic debt securities and for bank deposits and loans. And the cedi has more or less been stable since late March this year.

All this is supporting economic expansion without putting Ghana’s return to macroeconomic stability at undue risk. Liquidity is on the rise; broad money supply (M2+) grew by 22.6% over the 12 months up to October 2017, relative to a 19.8% annual growth a year ago. Although growth in deposit money bank credit to the private sector has slowed, from an annual 12.1% to 9.4%, this is as a result of banks balance sheet restructuring in the face of non performing loans reaching a new high of 21% following the reclassification of loan quality assessment.

The devising and application of monetary policy over the past year illustrates the benefits of its independence from government itself, in that monetary easing began at the right time, in late 2016, after one and a half years of very tight policy had stemmed spiraling inflation, and has been continued into new administrations, both at Flagstaff House and at the BoG itself.

This reflects the central bank’s over-riding commitment to its philosophy of ensuring price stability to create an enabling environment to support sustainable growth.

Indeed, when Dr Isshahaku resigned earlier this year, the public praise he received from Finance Minister Ken Ofori-Atta was largely a recognition of the timing of the commencement of monetary easing. Top officials of the Akufo-Addo administration’s economic management team agree that if the BoG had started its monetary easing earlier, inflation would have been higher than it is today and this would have made the current resurgence of strong economic growth all the more difficult to achieve.

Asserts Dr Addison: “ The inflation targeting framework places heavy weight on the maintenance of low and stable inflation which is a key element of successful monetary policy. The rationale goes beyond the direct benefits of price stability for economic efficiency and growth. The maintenance of price stability and the development by the central bank of a strong reputation for and commitment to it, also serves to anchor  the private sector’s expectations of future inflation. Well-anchored inflation expectations, which means that the public continues to expect low and stable inflation even if inflation temporarily deviates from its expected level, not only makes price stability much easier to achieve but also increases the central bank’s ability to stabilize output and employment.”

It is instructive that the BoG’s latest confidence surveys conducted in October pointed to improved business and consumer confidence in the economy in the face of falling inflation even though non oil economic growth is still sluggish.

The BoG now has very good reason to be confident that the inflation targets for both end of 2017 and the medium term will be met or at least nearly met. Inflation is currently 11.6%, down from 15.8% as at October 2016. That this is happening even as growth targets are likely to be exceeded – albeit propelled primarily by the oil sector – is a vindication of the BoG monetary policy management over the past two years, even at a time that it was getting little help from the fiscal management of government itself.

By: Toma Imihere & Elorm Desewu/

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