Economist lauds BoG

Dr. Abdul Malik Iddrisu has commended the various policies rolled out by the Bank of Ghana (BoG) to address the recent challenges facing the Ghanaian economy especially, rising inflation.

The Country Advisor for the Centre for Tax Analysis in Developing Countries (TaxDev) indicated that the increase in the policy rate by 250 basis points in March this year, aligned with what is happening in other parts of the world as central banks are hiking policy rates in an attempt to reduce inflation.

Dr. Abdul Malik Iddrisu explained that increasing the policy rate means Bank of Ghana is indirectly communicating to economic agents that it wants to limit liquidity in the system.

He said the most important policy tool available to the central bank when trying to mop up excess liquidity is the policy rate, “so, on that front, it’s a good one”.

“The BoG has done what it needs to do in terms of laying the foundation for macroeconomic stability of the economy which is required. The fiscal side, the government has to be clear on what it needs to do in order to ensure that the fiscal outlook is as good as it should be over the medium term. Over the medium-term, we’ve got a number of goals, how are we achieving them? We have targets for revenue, we have targets for external borrowing” he said.

Dr. Abdul Malik Iddrisu added that, even though it is important to reduce liquidity in the system, what is more important is the ‘pass through effects’.

He stated that regardless of what the central bank does in terms of liquidity, if people still have the edge to patronize foreign products vis-à-vis local products, prices of goods and services will continue to rise because of the rising freight charges and the weak local currency.

“If these people still have the edge to import, they will import at a higher cost because the Forex rate is determined by demand and supply. So, once the forex rate is higher, the only way you can shore up supply of foreign exchange in your system is either through exports or through what we’ve normally been doing through borrowing externally to get some dollars coming in so that you can support your forex market”.

Low export drive

Dr. Abdul Malik Iddrisu however, lamented that the country’s export drive is not as good as it should be and its only through borrowing that government can actually get the amount of forex that it needs in the system.

“Now, where we are as a country, we don’t have that level of forex because we’ve not been able to go out there and do that euro bond thing and that is why our Cedi is not doing very well”, he said.

The Country Advisor for TaxDev indicated that government’s announcement of pumping $2 billion dollars into the economy will help bring some stability in the forex market.

Nevertheless, he indicated that people who will want to invest in Ghana will also respond to the signal or what people say about the Ghanaian economy. He said this will play a vital role in government’s ability to raise the $2 billion dollars, especially information about the country’s ability to service its debt.

“So, it’s not an automatic bullet that once you float, people will buy it. But I mean it’s all about sending out the right signal because these are investors who are rational and they need to be convinced that, that investment will yield the best return for them which is economical relative to what they would get in other parts of the world. That’s the only way they will be convinced to invest in the economy. If that is not sorted out, you will not get people investing in the economy”.

Dr. Abdul Malik Iddrisu indicated that the monetary policy measures will also mean that businesses will not be able to borrow, “as you would have expected, because lending rates are going up and that will impact on our recovery”. He however, stated that despite the policy rate effect on the lending rates, there are a host of other variables that influence lending rates, some of which are bank-specific.