BoG says fiscal policy is an area to watch

Governor of the Bank of Ghana, Dr. Ernest Addison says the bank’s desire to reduce its key lending rate is hampered by the uncertainty surrounding government’s fiscal policy, especially as the effects of the COVID-19 pandemic still linger.

After its monetary policy committee meeting last week, which was followed by a press briefing on Monday, the central bank decided to hold its policy rate at 14.5 percent and warned of fiscal policy risks to monetary policy implementation.

“There is this small area that we have to watch carefully—that is the fiscal situation. Were it not for the fiscal situation, one could easily have asked this question [whether there is room for a further reduction in the policy rate in 2020.] But now we are all monitoring the situation and we cannot predict whether we will go down or up depending on how things will go over the next six months,” Dr. Addison said.

The government’s key fiscal indicators have all been thrown off balance by the pandemic, with the 2020 general elections still yet to come. In July the government formally suspended the statutory fiscal deficit rule, which sets a ceiling on the annual budget deficit at 5 percent of GDP, in order to increase spending to address the repercussions of the coronavirus pandemic.

The election presents further risks to a budget that has already suffered severely from the pandemic, with the deficit set to reach double digits (11.4 percent of GDP) this year.

The central bank’s initial response to the pandemic in March was to reduce its policy rate by 150 basis points together with other measures to allow banks give cheaper credit to mitigate the devastating effects of the virus.

Despite the 3.2 percent GDP contraction in the second quarter of the year, the BoG governor said there were visible signs of the economy rebounding, with the government’s projection of 0.9 percent growth for 2020 likely to be exceeded.

Many analysts have also predicted that economic growth will improve in the second half of the year, given the easing of coronavirus restrictions, including the reopening of the Kotoka International Airport for commercial passenger flights at the beginning of September.

The outlook for the policy rate is that no reduction is likely to be seen in the rest of the year, said the Economist Intelligence Unit (EIU) in its September Ghana Country Report.

“Although inflation is currently above the 6-10 percent target band, we believe that the BoG will maintain rates at the current level (rather than hiking rates in a bid to stem inflation) as economic activity declines and the BoG seeks to boost access to credit to support businesses,” the EIU said.