Policy rate not solution to rising inflation — Expert
Dennis Brown — Senior Manager, Financial Advisory, Deloitte Ghana

Policy rate not solution to rising inflation — Expert

Financial analyst at Deloitte Ghana has proposed a number of measures meant to check rising inflation and boost the country’s forex (FX) reserves. 


Although the country’s inflation rate has started declining, albeit at a slow space, the end of February figure of 52.8 per cent is still considered to be on the higher side.

The Senior Manager, Financial Advisory, Deloitte Ghana, Dennis Brown, told the Daily Graphic in an interview that as a country, there was the need for a more sustainable approach to dealing with inflation in the country rather than the use of the policy rate.

The interview was meant to elicit his views on the impact of high inflation on the economy and measures the government can adopt to shore up its dwindling forex reserves.

“The policy rate, at best, is only a short term monetary measure,”  he said, confirming what many other analysts have said about the use of the policy rate to check rising inflation in the country. 

For now, it appears Bank of Ghana’s (BoG) policy rate is beginning to have the intended impact, being largely an inflation targeting approach. 

In the short term, this is expected to be maintained in the hope that it continues to put inflation in check. 

“It is, however, important to note that the policy rate has been on the rise since July 2022, at which point it was 19 per cent, and now stands at 28 per cent,” Mr Brown said.

Whilst the policy rate will likely moderate inflation in the short term, in the medium to long term, the continued rise in the policy rate will have adverse implications for private sector access to credit as commercial borrowing will become too expensive and unaffordable to private sector businesses or will be contracted at high rates, which will increase operating costs of business. 

Such costs are likely to be transferred to consumers, which will in turn increase inflation and defeat the purpose of increasing the policy rate in the first place, Mr Brown argued.

Building forex buffers

Consequently, Mr Brown suggested that a more sustainable approach to dealing with inflation is to increase the production capacity of the economy and to combine that with an effective and aggressive import substitution policy.”

A major source of inflation in Ghana relates to the impact of foreign exchange on imported goods and services. 

Mr Brown maintained that so far as imported goods constitute the larger portion of the basket of goods and services consumed by households in Ghana, the country will continue to face inflationary pressures. 

The financial analyst believes that “this situation can be corrected by an aggressive import substitution policy. 

Secondly, and particularly within the short term, government must find a way to retain far more significant portions of export earnings in the economy in order to boost our forex reserve.”

He was of the view that the current situation was such that although the country was able to generate exports that can match imports in value, only an insignificant portion of these export earnings were retained or reinvested back into the economy to support the country’s forex reserve. 

“At worst, government must find a way to incentivise businesses involved in exports to retain and reinvest larger portions of their export earnings back into the economy to help shore up our forex reserve. 

This will help stabilise forex rates and reduce the cost of imported goods, thereby moderating inflation.

Investing borrowed funds

Many analysts are concerned about the country’s debt size and have maintained that much of the borrowed funds have been consumed instead of it being used on capital projects with the potency to have positive returns to help pay back the loans.

Mr Brown said: “In terms of where borrowed funds should be invested, the general principle for a developing economy like ours is that, it is better to invest borrowed funds in capital expenditure as opposed to consumption expenditure. 


Capital expenditure can be explained as expenditure that results in the creation of an asset than can be commercialised to pay back for the funds borrowed to fund the creation or acquisition of that asset.” 

He said consumption expenditures are largely for short term financing needs such as salaries and health emergencies. 

“In order to encourage prudent financial management practices, the government should consider an approach where borrowed funds are earmarked and ring-fenced for clearly defined purposes, with the majority of it being mapped to capital expenditure items. 

If strictly adhered to, this should prevent the situation where funds are initially borrowed for capital expenditure purposes and later diverted for unplanned consumption expenditure items,” he said. 


Mr Brown said in this regard, investing in industrialisation policies and programmes such as “our agric expansion and modernisation strategies and uplifting our infrastructure to attract foreign investments into the real sector will yield the returns required to pay back the loans”.

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