The Institute of Economic Affairs (IEA) has projected that it expects the Policy Rate (PR) to be increased by 200 basis points to 26.5% after the Bank of Ghana has completed its recent review of developments in the Ghanaian economy.

According to the institute, the significant gap between inflation and the policy rate has compelled banks to access Central Bank funds at cheaper rates and on-lend to the government at higher rates, which is impacting negatively on the economy.

A statement issued by the IEA and signed by the Director of Research, Dr. John Kwakye, ahead of the MPC’s announcement on Monday, November 28, 2022 highlighted that a further increase in the PR may be necessary to consolidate the incipient stability and reassure the markets of the strong commitment to fighting inflation.

“The decision regarding the PR is rather tricky—and challenging—at this time. We note that a significant gap has opened between the PR, at 24.5%, and inflation, at 40.5%. This is not uncommon. However, it’s rather unusual, especially in the Ghanaian context, where the real PR has been, more often than not, positive. Similarly, the PR has fallen far behind Treasury Bill rates, which are over 35%. From that standpoint, I expect the PR to be increased by 200 basis points to 26.5%.

“This has caused misalignment between the rates and increased the potential for ‘round-tripping’, to the extent that it is possible for banks to access Central Bank funds at cheaper rates and on-lend to the government at higher rates. It is also the case that major economies, such as US and UK, have further tightened their policies, increasing the pressure on the currencies of emerging markets and developing countries.”
Dr. John Kwakye

The IEA further underscored that pressure will mount on the PR since the Bank of Ghana and government are not implementing adequate intervention measures to target directly the underlying causes of inflation.

The institute indicated that already, interest rates have reached prohibitive levels and hurting the real economy as the cost of doing business has escalated. It pointed out that reducing the growth projection for 2022 from the original 5.8% to 3.7% in the Mid-Year Budget attests to a slowing economy.

Nevertheless, the IEA stated that inflation is of greater concern and must be the first target of policy, as the institute expects inflation to go up further in November 2022, reflecting the pipeline pressures, before possibly slowing in December 2022 to reflect the slight decrease in fuel prices and stability on the foreign exchange market.

IEA pleased with BoG policies on forex

The IEA indicated that it was pleased with policies initiated by the Bank of Ghana to check some of the abuses of the forex rules and regulations.

This followed calls on the Central Bank to enforce the forex rules, including limits on forex carry-on by travelers, dealings in forex, pricing of goods and services in forex, transfers through banks and unauthorized transfers through forex bureaux and other channels.

Additionally, following the President’s declaration to prioritize exports and restrict importation of certain items, the BoG has followed up by announcing that it would no longer provide forex for importation of those items, which include rice, poultry, vegetable oil, toothpaste, pasta, fruit juice, bottled water, ceramics and tiles.

The IEA is however, doubtful whether these items will be available in sufficient quantities from local producers, since shortages could trigger price hikes, especially ahead of the Christmas period.

Again, since these items are not banned, it added that nothing stops importers from sourcing forex from other sources to import them and then come back to banks to demand more forex to import items not on the restricted list.

The IEA therefore, urged the Bank of Ghana to take a good look at the practice whereby a chunk of forex inflows—including from cocoa, loans, grants, non-traditional exports—is surrendered to BoG, which oversees their disbursement to banks for their customers’ needs.