How long can this tightening continue?
Tough times call for tough decisions and the Bank of Ghana (BoG) appears to be living up to that billing. But for how long can its tools withstand the pressure?
Since November last year, the central bank has put on its tightening cap as the race to arrest inflation, contain the cedi depreciation and generally stabilise the economy heats up.
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Now, with the race in its dicey stage (inflation yet to peak, the cedi still falling at an alarming rate and fiscal operations less inclined to tightening), BoG’s solutions risk becoming problems in themselves.
Yet, doing nothing is more dangerous.
Emergency MPC
For the first time in the nation’s history, the central bank last Wednesday raised its policy rate by three per centage points to help encourage savings and discourage spending.
The increment in the policy rate from 19 per cent to 22 per cent is the highest jump since November 2002 when the inflation targeting (IT) framework, which hinges on periodic benchmark rate adjustments, was instituted and operationalised.
The historic decision by the bank’s Monetary Policy Committee (MPC) after an emergency meeting is aimed at slowing down the pace of price increases at a time when inflation is more than three times higher than the upper band of BoG’s medium term target and the cedi’s value is being eroded at a frightening speed.
It also comes at a time when the lack of market access has protracted and investors’ appetite for cedi assets has plummeted.
These have forced BoG to increase its bailout support to the government to fund the budget in a way that risks creating a cyclical problem.
Sucking liquidity
In addition to the policy rate hike, the seven-member committee also raised the ratio of ‘idle’ funds that banks must keep with the central bank from 12 per cent to 15 per cent.
The increased reserved requirement ratio (RRR) is meant to mop up excess liquidity and help douse the price pressures that higher spending is causing in the economy.
Indeed, last Wednesday’s emergency decisions are an upgrade of the heightened policy-tightening stance of the central bank this year.
In March, BoG hiked the policy rate by two per centage points to 19 per cent.
It then raised the RRR to 12 per cent, returned the capital conservation buffer (CCB) of banks to three per cent for the capital adequacy ratio (CAR) to rise back to the 13 per cent, and also reset the provisioning rate for loans in the other loans exceptionally mentioned (OLEM) category to the original 10 per cent.
These measures led to the withdrawal of almost GH¢5 billion from the economy.
Given that this withdrawal was immediate, it created a shock to the banking sector, with a minimum of three banks being unable to meet the requirement in the first days of implementation.
Fiscal dominance
Experts say the latest round of tightening could suck out more than GH¢6 billion by November when the final adjustment of banks’ reserves to the 15 per cent is expected.
But how relevant are these tough measures to the current challenges, especially given that inflation continues its piercing run, the cedi depreciates more and the crises are far from over?
The actions are better than no show!
To be fair, BoG is fighting a problem it largely did not create and that alone is remarkable.
The debt overhang, which has spilled into a debilitating interest expense and amortisation, and the large budget deficits are the results of fiscal policy choices.
Given that these occurred at a time expenditure controls and revenue performance were weak, investors found Ghana to be an unattractive lender.
This gave rise to the lack of market access, which effectively shut the door to the Eurobond market – then the country’s largest and most reliable source of hard currencies to meet rising expenditure demands and build reserves to cushion the cedi against depreciation.
Instead of cutting spending as a response strategy to help regain confidence, the status quo remained as the government resorted to unconvincing measures to increase revenue mobilisation.
The result was the slump in confidence, worsened by the multiple downgrades; first in February following the presentation of the 2022 budget, and the latest ones this August after the mid-year budget review.
Actions over words
It is obvious that BoG’s latest action will cost businesses and individuals more.
It makes borrowing more expensive by making treasury bills more attractive.
It also literally takes money from people’s pockets into the central bank’s vault, thereby slashing consumption.
These undermine growth and pinch citizens harder.
With businesses and consumers still recovering from the pandemic and the effects of the war, the chances of retaining one’s job and/or getting a new one are grimmer now.
But hard as these may be, they are the trade offs to helping stabilise the situation.
For evidence, one needs to look at the results when there was no action.
In July when the central bank surprisingly left the rate unchanged with the hope that the mid year review would anchor stability and inspire growth, it took less than a month for it to see and realise its mistake.
The confidence deteriorated, the cedi depreciation accelerated sharply and auction failures piled up.
These put more pressure on BoG to finance the budget through increased overdrafts, an action that is inflationary and risk breaching the law.
What next?
The reality though is that the central bank and its policy options now face a painful test of how long before they become stale.
This requires the government to do more than it is doing to complement the monetary efforts.
The current expenditure cuts are cosmetic and not far reaching.
When credit ratings agencies downgrade you to junk status and investors avoid your bonds over debt concerns, more needs to give than a 30 per cent spending cut that lacks clarity.
A spending overhaul is urgently needed to rein in big expenditure items and postpone those that can wait.
Assurances of new inflows need to be credible as previous comments in March about an imminent $2 billion inflow have failed to materilaise to date.
The same scenario appears to be playing out with the $750 million loan from AFREXIM.
This erodes the hopes of investors and heightens the uncertainty.
IMF angle
Also, more concrete action is needed on the plan to secure a bailout from the International Monetary Fund (IMF).
The enhanced domestic programme (EDP) needs to move from a plan to a document that the market can work with and quote from.
Indeed, more urgency needs to be injected into the discussions and a team of negotiators with a leader announced as soon as possible to help boost confidence.
While at it, the Executive and the general political leadership needs to show good faith to the fiscal consolidation cause.
They must cut the bulgy expense of the Article 71 office holders and prioritise prudence in the face of this national burden sharing.
These must be immediate. Only then can BoG’s measures yield their full results.
