No immediate plans for monetary tightening - BoG

Despite the recent call by the recent International Monetary Fund staff mission to Ghana for the Bank of Ghana to ready itself to tighten monetary policy, the central bank is confident that barring a major change in local or external economic fundamentals, an increase in its benchmark Monetary Policy Rate will not be necessary for now.

BoG Governor Dr Addison told participants at a plenary session of the 2019 Ghana Economic Forum, organized by B&FT that government’s assurances that it will maintain fiscal discipline in the run up to next year’s general elections provide the grounds to avoid fiscal tightening which no-one in Ghana really wants.

His declaration has been received with overt relief by corporate Ghana and indeed the enlightened public, which are worried about perceived general illiquidity in the economy and the possibility of an interest rate hike on the advice of the IMF.

The BoG’s Monetary Policy Committee is scheduled to meet later this month to determine the MPR for the following two months and the IMF’ mission’s statement, made at the end of October has changed the narrative from disappointment that the BoG has refused to cut its key rate despite improved macro-economic indicators to fears that monetary policy is more likely to be tightened than eased.

The BoG’s main worry is the fiscal deficit. It was originally set for 2019 at 4.2 percent of Gross Domestic Product, the first increase over the previous year (3.9 percent for 2018) since Ghana began an IMF supervised fiscal consolidation programme in 2015. Instructively that programme ended in April 2019 allowing government to compromise its fiscal consolidation imperative with its avowed commitment to supply side economic policy rather than strict demand management.

However, by July, the deficit had reached 3.9 percent, the result of a 15.7 percent shortfall in total revenue caused primarily by a, 8.4 percent shortfall in tax revenue, even though this was 14.8 percent higher than tax revenues for the corresponding period of 2018. In response government has been cutting back on its budgeted expenditures, but not by as much as its revenue shortfalls; the cuts amounting to 5.7 percent during the first seven months of the year.

However, despite new tax measures announced during the mid-year review the fiscal deficit had climbed to 4.7 percent of GDP by October, higher than the revised target of 4.5 percent. Nevertheless, it is likely that government will stay within its self-imposed legal 5.0 percent cap and combined with the recent presidential promise to do same in the 2020 election year, this appears enough to satisfy the BoG which itself is keeping to the agreement not to finance the fiscal deficit itself.

Furthermore, broad money supply (M2+) slowed significantly during the first eight months of this year, to 11.8 percent year on year, by August 2019 from 23.1 percent over the previous one-year period, mainly due to a slowdown in growth in net domestic assets.

The BoG’s contentment is further bolstered by monetary easing in the United States in a bid to support faltering economic growth brought about primarily by the US-China trade war – the Federal Reserve Bank has cut its Federal Funds rates three times so far this year, the latest being a 25 basis points cut at the end of October to a range of 1.5 to 1.75 percent bringing the cumulative cuts this year to 75 basis points, effectively almost reversing the four rate cuts last year.

The US central bank has declared it has no intention to tighten monetary policy – President Trump even wants further cuts because despite US economic growth still appreciable at 1.9 percent by the third quarter of this year, business investment contracted by 3.0 percent and worse still, spending on factories and offices slumped by 15 percent.

This means Ghana does not need to raise its own rates to keep foreign portfolio investors attracted to financing the country’s own deficit.

Even in the very unlikely situation that it becomes necessary the BoG could steepen Ghana’s yield curve further to keep short term rates low to support local borrowers and increase medium term rates since this is where foreign portfolio investors are allowed to operate; a strategy the central bank has employed successfully since the second quarter of 2019.

Consequent to all this the BoG is widely expected to maintain its MPR at 16 percent yet again when its MPC meets in the third week of this month. Corporate Ghana, which until the recent IMF statement had been hoping for monetary easing will be happy just to avoid any new tightening.