Economist and Professor of Finance at the University of Ghana Business School (UGBS), Prof. Godfred Bokpin has pointed out that monetization of government’s budget deficit by the Bank of Ghana is undermining the effectiveness of its own monetary policy.
Speaking during an interview on the Conversation titled “Analysing the 2022 Banking Sector Results and its Effects on the Economy”, the Professor averred that fiscal dominance by the Government has become problematic for the Central Bank and rendering its inflation targeting framework ineffective against driving down inflation in the country.
“The key requirement for inflation targeting to be effective is for fiscal policy to be properly managed, but when you deny the BoG that, then it can’t use monetary policy to bring down inflation to desirable levels to engineer growth.
“Fiscal dominance by the government has been a big problem for a long time. Fiscal policy creates the problem and monetary policy is used to fix it and so monetary policy becomes more like a subordinate to fiscal policy instead of being complementary.”
Professor Godfred Bokpin
Elaborating further, Prof Bokpin noted that he has a sense that the Central Bank Governor, Dr. Ernest Addison, is not happy with how fiscal policy is being managed by government. This he noted, is evident from the MPC press releases by the Governor in recent times.
Prof Gatsi Proposes 3 Measures To Deal With Gov’t’s Fiscal Dominance
More so, the Dean of the University of Cape Coast Business School, Professor John Gatsi, has said fiscal dominance by the government is the biggest problem facing the execution of monetary policy by the Central Bank and by extension the management of the Ghanaian economy.
Also, Prof. Gatsi proposed three measures he believes will help reduce government’s fiscal dominance in the economy.
According to him, these measures are: efficient monetary policy by the BoG, an efficient fiscal policy management where government expenditure is checked and targeted at productive sectors, and the total independence of the Central Bank such that it is able to deny financing of government deficit beyond a certain level.
In his view, the BoG over the years hasn’t upheld its independence and that has contributed to government’s fiscal dominance.
Fiscal dominance is often inflationary and in the case of Ghana where the Central Bank has adopted inflation targeting as its monetary policy framework to reduce inflation, it becomes extremely difficult for the Central Bank to do so as government on the fiscal policy side is contributing to inflation through its excessive expenditure or spending.
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