IMF applauds BoG’s monetary policy stance
The International Monetary Fund (IMF) has applauded the current monetary policy stance of the Bank of Ghana (BoG), saying the policy stance remains “broadly appropriate.”
The assertion of the Fund contained in its July 2021 Article IV Consultation Paper on Ghana’s economy, follows the implementation of a number of monetary policies by the Central Bank to moderate the adverse impacts of the Covid pandemic on the economy.
The monetary policies implemented by the Central Bank aided in the quick recovery of the economy from the pandemic with Ghana managing a modest 0.4 percent growth rate at the end of 2020 and is projected to further grow at some 5 percentage points this year.
Notable among the monetary policy tools deployed by the BoG amid the pandemic is the reduction of its policy rate by 150 basis points last year and a further reduction of 100 basis points to 13.5 percent in May this year.
Specifically, the Bank of Ghana introduced the following policy and regulatory support amid the pandemic:
- The Monetary Policy Rate was reduced by 150 basis points in March 2020 and another 100 basis points in May 2021 to 13.5 percent to complement fiscal policy and provide support to economic growth;
- The cash reserve requirement (CRR) ratio for banks was lowered from 10 to 8 percent to provide additional liquidity to Banks. This policy measure was expected to free up additional resources of about GHS2 billion for banks and Specialised Deposit-Taking Institutions (SDIs) to lend to critical sectors of the economy;
- The CRR for Rural and Community Banks (RCBs), Savings and Loans Companies (S&Ls), Finance Houses was reduced from 8 to 6 percent; and from 10 to 8 percent for microfinance companies;
- The Capital Conservation Buffer was reduced by 1.5 percentage points to 11.5 percent and providing capital relief of about GHS1.1 billion for banks;
- The provisioning requirements for loans categories was reduced from 10 to 5 percent and which translates to about GHS115.3 million in capital relief to Banks;
- Restrictions were imposed on dividend and other capital distributions for the financial years 2019 and 2020 to preserve liquidity and capital buffers;
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- The deadline for new capital requirement for SDIs (MFIs and RCBs) was extended to December to provide temporary relief to SDIs, given current economic conditions;
- The Bank of Ghana requested Banks to grant 3-12 months moratorium on principal payments on loans granted to customers in the worst pandemic-hit sectors;
- A reduction in mobile money charges and waiver of transaction fees on minimum transactions (GHS100) and increased wallet limits was agreed with the TELCOS to promote electronic transactions as part of COVID protocols;
Touching on the country’s inflation rate which has largely been driven down and back into the Bank’s medium term target band of 8+-10 by the monetary tools implemented by the BoG, the Fund in the Article IV Consultation Paper, notes that much tighter policy measures would be needed if inflationary pressures materialize.
Presently, inflation rate stands at 7.8 percent, a 0.3 percentage points increment from May’s 7.5 percent recorded inflation rate. The increment in the inflation rate was due to price increments in transport and food.
The BoG currently employs or practices monetary policy tools under the Inflation Targeting Monetary Policy Regime which forecasts and sets inflation targets for a fiscal year based on several macroeconomic variables and not just monetary aggregates.
A monetary policy regime provides the structure within which monetary policy decisions are made. In all, there are 3 monetary policy regimes namely; the Exchange Rate Targeting regime, Monetary Targeting regime and Inflation Targeting regime.
Meanwhile, the IMF has said the country’s economic outlook is improving even though risks from the evolution of the Covid-19 pandemic and rising debt vulnerabilities remain.
According to the IMF, growth is expected to rebound to 4.7 percent in 2021 from 0.4 percent in 2020, supported by a strong cocoa season and mining and services activity and inflation which remains within the Bank of Ghana’s band target.
