IEA proposes Currency Board System to curb Central Bank lending
The Institute of Economic Affairs (IEA), a renowned Ghanaian think tank, is advocating for the implementation of a Currency Board (CB) system in Ghana to limit Central Bank lending to the government. The IEA believes that this will help to stabilize the cedi and prevent economic instability in times of shocks.
The CB system is a rigid monetary management system that operates under strict rules, with little room for discretion. This system covers its currency fully with foreign exchange and does not lend to the government, which limits inflation and prevents currency depreciation and balance of payments crises. The IEA highlighted the success of the CB system in Francophone countries, which guarantees them low inflation and a stable currency. However, Ghana has chosen an independent Central Bank to conduct discretionary monetary policy, which the IEA blames for the country’s economic instability.
Despite having rules such as the Public Financial Management Act, the Bank of Ghana Act, the Fiscal Responsibility Act, and the relevant provisions in the 1992 Constitution, their enforcement and effectiveness are in question. Therefore, the IEA believes that rules-driven macroeconomic stability is necessary to prevent policy discretion abuse and enjoy economic stability.
The IEA’s call for a CB system in Ghana is not without merit. The country has had a long-standing issue with currency depreciation and inflation, which has led to economic instability. The Bank of Ghana’s lending to the government and limited foreign exchange cover of the cedi have exacerbated the situation. Moreover, the COVID-19 pandemic has exposed the country’s vulnerability to external shocks, and there is a need for a robust and stable monetary policy framework to navigate the uncertain times ahead.
The IEA’s proposal for a CB system has its strengths and weaknesses. On the one hand, the system is proven to be effective in limiting inflation and maintaining a stable currency. On the other hand, it is a rigid system that offers little room for discretion, which could be a disadvantage in times of economic crisis. Additionally, the CB system requires adequate foreign exchange reserves, which could be a challenge for Ghana, given its current account deficit.
Therefore, it is essential to carefully weigh the pros and cons of implementing a CB system in Ghana. The country needs a robust monetary policy framework that ensures macroeconomic stability, but it also needs flexibility to navigate uncertain times. It is crucial to strike a balance between these two needs and find a solution that works best for Ghana.
The IEA’s call for a Currency Board system in Ghana to limit Central Bank lending to the government is an important one. The country needs a robust and stable monetary policy framework that ensures macroeconomic stability and prevents economic instability. However, it is important to consider the pros and cons of the proposed system carefully and find a solution that works best for Ghana.
