Some changes in MPC thinking required
The Central Bank of Ghana’s 64th Monetary Policy meeting is not only crucial but should be directed towards the International Monetary Fund (IMF) adjustors to the programme targets.
We expect some movement in thinking on how the bank will adjust and implement programmes outlined in the home grown policy to the IMF, as they are culpable of the same offence created by fiscal policy that dragged Ghana to economic challenges.
BoG should be able to discuss extensively issues on how it will strengthen the interbank foreign exchange system and adopt a rule-based method to determine daily exchange rates, the elimination by June 2016 the compulsory surrender requirements of foreign exchange in support of the market based exchange rate determination.
We expect a new Loan and Fiscal Agency Memorandum of Understanding with the Ministry of finance that limits BoG funding of Central government and from 2016 onwards a zero financing of government and to ensure commitment to more functioning foreign exchange market.
The monetary policy rate (MPR) is the main monetary policy tool used by the Bank of Ghana (BOG) to lower inflation rates, sustain economic growth and stabilise price levels in the economy.
Policy rate review
In 2014, the monetary policy rate was reviewed three times due to an upward trajectory in consumer inflation. The first review was done in February, from 16 per cent to 18 per cent. This rate was maintained to the end of the second quarter before being reviewed again to 19 per cent in July.
However, the persistent increase in consumer inflation compelled the Monetary Policy Committee (MPC) to review the monetary policy rate upwards to 21 per cent in November.
In February 2015, the MPC decided to keep the monetary policy rate at 21per cent due to the drop in the risk to inflation resulting from lower crude oil prices on the international market (BOG Monetary Policy Report, February 2015).
However, given the resurgence in consumer inflation from 16.4 per cent in January 2015 to 16.5 per cent and 16.6 per cent in February and March respectively, it remains less obvious whether the monetary policy rate will be reviewed upwards or kept at the same rate in May, 2015.
According to the latest IMF report, the following measures will be administered to make monetary policy rate more effective;
1. The Central Bank’s financing of government budget deficit and State Owned Enterprises will be limited to five per cent of previous year’s revenue in 2015 and reduced to zero from next year onwards.
2. A reduction of BOG’s interference in the foreign exchange market by abolishing the compulsory surrender requirement of foreign exchange from key sectors of the economy and BOG’s practice of securing foreign exchange to fund priority sector imports.
3. An adoption of a new BOG Act to enhance the functional autonomy of the BOG, include provisions that will allow quick response to banking crisis situations, enforce the annual aggregate limit for BOG’s guarantees for foreign loans by the government, as well as full compliance with the IFRS.
4. The BOG should stand ready to adjust the monetary policy rate as necessary to achieve the inflation and reserves targets and use all tools available to steer the interest rate more closely to the policy rate.
Necessary discipline required
We support the first three measures and expect the BoG to work assiduously within the estimated timelines to restore the effectiveness of the monetary policy rate. To start with, the increase in central bank financing of government budget deficit more than doubled from GHC 9.12 billion in December 2012 to GHC 20.26 billion in December 2014.
The percentage of the total central bank financing to previous years revenue in 2014 stood at 32.73 per cent which contributed largely to the increase in money supply by 36.6 per cent. Given the reduction in GDP growth from 7.3 per cent in 2013 to 4.0 per cent in 2014, the increase in money supply resulted in an excess aggregate demand which caused prices to increase on the domestic market.
Thus, the monetary financing of government crippled the main purpose of the tight monetary policy stance to curb inflation levels.
Secondly, the interference of BOG in the foreign exchange market has caused disparities in the interbank market rate and BOG rate and lowered stakeholder confidence in the foreign exchange market.
This has resulted in an increase in seasonal demand for foreign exchange and a persistent depreciation of the cedi over its major trading currencies. Thus, a progressive elimination of BOG’s interference in the foreign exchange market is a move in the right direction.
The absence of a provision in the previous Banking Acts that clearly stipulates the autonomous position of the central bank or its limits on credit to government has contributed largely to the hamstrung tighter monetary policy stance witnessed within the past two years.
Therefore, an adoption of a new Act to strengthen the autonomous position of the BOG will provide the legal framework to enforce the progressive elimination of limits on credit to government and improve upon the credibility of the tight monetary policy stance. However, we expect the MPC of the BOG to hold the MPR at 21 per cent until the excess liquidity in the system is reduced.
At the global level, the high debt levels in the public and private sectors in many major economies, slowing growth rates in emerging countries except India and a weaker labour market in the Euro region, continues to impact negatively on world output (OPEC Report, March 2015).
However, the windfall gains from the lower crude oil prices on the world market supported consumption in some advanced countries, removed budgetary constraints in some emerging countries and allowed major central banks to maintain monetary policy stance and even implement new measures (OPEC Report, March 2015).
The recovery of gold and cocoa prices on the world market shows a positive development in the external sector. Also, the averaging of crude oil prices around US$56.90 per barrel during the first four months of the year as against our benchmark price of US$52.8 per barrel indicates a lower risk to inflation.
At the end of April 2015, the cedi had already depreciated cumulatively by 20.29 per cent, 19.47 per cent and 10.16 per cent against the US dollar, pound and euro respectively. The interest rate for money market instruments remain above 25 per cent on the average and it’s ranked among the highest in Africa. An upward review will increase interest payments and reduce the net cash flows of businesses.
The cost of collateral requested by banks is likely to go up given the increase in risk of default. Businesses are already battling with the high energy costs, depreciation of the domestic cedi and lower demand for products due to cheaper substitutes on the market.
Workers are being laid off on a weekly basis due to high cost of production and employment generation is at its lowest. Hence, an increase in the monetary policy rate by even 100 basis points to 22 per cent will cripple the domestic market and worsen IMF’s projected GDP growth of 3.5 per cent.