Tackling Cedi Depreciation And Curbing Inflation: Experts Break Down BoG's August Monetary Policy Decisions

Tackling Cedi Depreciation And Curbing Inflation: Experts Break Down BoG's August Monetary Policy Decisions

The Bank of Ghana last week stepped in with some measures to stop the fall of the cedi and end the rising inflation. Experts with deep knowledge in the area have offered varied views on whether the BoG's move will work. YEN.com.gh breaks down the issues and presents the views expressed by the experts on the central bank's mitigation measures.

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Following rising inflation and the cedi's rapid fall against the dollar since the start of the year, the Bank of Ghana (BoG) has stepped in with some mitigation measures.

The mitigation measures are necessary because, generally, for an import-dependent country like Ghana, the depreciation of the cedi results in inflation. Inflation destabilises the market for goods and services and is particularly devastating for lower-income households.

Inflation increased for the 11th consecutive month to 31.7% in July 2022, from 29.8% the previous month. According to the Ghana Statistical Service, this was driven by food and nonfood price pressures. Food inflation rose to 32.3% in July 2022 from 30.7% in June 2022.

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Also, the cedi has lost an accumulated GH¢3.30 to the dollar in less than eight months. BoG's data show that the local currency started the year at $1.00 to GH¢6.02, then wobbled for about five months at an exchange rate of GH¢7.43 to $1. However, within the last three weeks, the cedi's depreciation has been steep and drastic, trading at forex bureaus at almost GH¢10 to the dollar. The cedi's woes come from high imports and huge loans in foreign currencies.

Making Sense of BoG's Monetary Policy Committee Meetings

BoG Governor, Dr Ernest Addison
Governor of the Bank of Ghana, Dr Ernest Addison. Source: Getty Images.
Source: Getty Images

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The Monetary Policy Committee meetings are held periodically, usually every two months. In simple terms, BoG sets rules on the flow of money intending to deal with an economic problem – in this recent case, heightening inflation and depreciation.

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The meeting is typically held among seven people: the governor of the BoG, his two deputies, the central bank's head of monetary policy analysis, the head of banking operations of the Bank, and two other experienced persons appointed by the finance minister. The meetings last about a week, after which a decision is announced.

The Decisions Announced After The August Emergency MPC Meeting

Ghana cedi notes
A man counts 50 cedi notes. Source: Getty Images.
Source: Getty Images

After the latest MPC meeting, the BoG announced on August 17, 2022, that a decision was taken to increase interest rates by 300 basis points to 22%. The term "basis points" is finance jargon that measures changes in interest rates and other percentages. But a 1% change equals 100 basis points, so 300 basis points is another way to say 3%. In a nutshell, the BoG has increased interest rates by 3%. From an initial 19% (in May and July) to 22%.

The central bank also increased the reserve ratio from 12% to 15%. This means that for any deposit that banks receive, they are required by the new rule to hold on to 15% of that amount and use the remaining 85% for their lending or investment activities.

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Also, to hold the cedi fall, the BoG announced that it was seeking to boost the supply of foreign exchange to the economy by collaborating with mining firms, international oil companies, and their bankers to purchase all foreign exchange arising from the voluntary repatriation of export proceeds from mining, and oil and gas companies. The central bank is confident that this will strengthen its foreign exchange auctions.

What Experts Think About BoG's Two Mitigation Measures

Theresa Mannah-Blankson
Dr Theresa Mannah-Blankson is a Fellow of CSJ. Source: UGC
Source: UGC

Economics guru and a fellow of the Centre Social Justice (CSJ), a left-of-centre policy think tank, Dr Theresa Mannah-Blankson, has explained to YEN.com.gh that monetary authorities would usually decide to reduce the money supply in circulation to arrest raging inflation.

She lists the following four main ways central banks achieve this:

1. Increase the prime rate – the interest rate applied to bank-to-bank lending. This makes it costly to borrow. It is the benchmark interest rate, and it is the basis for bank interest rates;

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2. Increase the reserve ratio – which reduces the amount available to banks to make loans/invest;

3. Increase the discount rate – the rate at which banks borrow from the central bank; and

4. Increase interest rate on banks' reserves on deposits held at the central bank – which is less common.

The BoG has chosen to apply 1 and 2 to deal with Ghana's situation.

"The implication is that it will be more costly for the private sector to borrow, which will slow down economic activity," she said.

The chief executive officer of the Association of Ghana Industries (AGI), Seth Twum Akwaboah, has said he is not impressed by the move announced by the BoG.

He cast his mind back to the past three policy rate reviews announced after MPC meetings and said they have not been ineffective.

"They are always reviewing and revising the policy rate upwards. So I would have expected that by now inflation would have come down drastically. But it’s not happening, so it means that there is something more to it than merely increasing the policy rate”, he told Joy News.

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Meanwhile, the chief economist for Africa and the Middle East at Standard Chartered, Razia Khan, backs the decision by the BoG to raise both interest rate and reserve ratio.

The Financial Times newspaper has quoted Razia as stating that the move was "fully justified" because it was clear that inflation in Ghana was unlikely to slow soon.

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Source: YEN.com.gh

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