Bank of Ghana says policy rate tweak could worsen Ghana’s deficit situation

By  Charles Abuede and Zainab Iwayemi

• Maintaining rates will attract investors to government bonds

The Governor of the Bank of Ghana (BoG) has said that adjusting its policy rates downwards could elevate the risks from the fiscal side of the economy after it left its policy rate constant at 14.5 per cent for the fourth consecutive periods over apprehensions that a rate tweak will either destabilize growth or worsen the deficit situation.

Ernest Addison, the bank chief, disclosed this at a news conference in Accra where he announced decisions reached the bank’s last MPC meeting which he chaired.

Addison said that fixing the rate lower would at a time like this signal ease of interest rate, thus discourage investors from lending money to the government through the purchase of treasury securities.

According to him, “it would create a disincentive for getting the budget fully financed and that could create serious complications for the economy. And also expose the economy to deeper shocks from the Coronavirus (COVID-19) pandemic in the event that the impact of the viral spread resumed an upward trajectory.”

This marks the second time in a row that the central bank had maintained its rate to serve as a benchmark for other interest rates, and steady as a damper against fiscal pressures.

Addison, in his response to the question on why the bank chose to maintain the rate, when inflationary pressures had eased drastically and growth was rebounding, said the decision was meant to maintain investor interest in government bonds.

“It is important that the budget is fully financed and to keep the budget fully financed, you need an interest rate which is high enough to allow investors, including domestic investors, to be interested in buying government bonds. That is the context in which we find ourselves,” he said.

In the mid-year budget review (MYBR) presented in July, it was disclosed that since the COVID-19 pandemic broke in March, public expenditure has been revised upwards by about GH¢11.7 billion to GH¢96.3 billion, likewise revenue losses, which were projected at about GH¢13.7 billion.

In addition to revenue impact, the government as a result of the pandemic, almost tripled the initial deficit forecast from the earlier 4.7 per cent of gross domestic product (GDP) to 11.4 per cent of GDP, translating to a budget deficit of GH¢44.1 billion, according to the MYBR.

The Bank of Ghana governor described the development as “a large deficit financing needs,” noting that the situation required that investors maintained their interest in the country’s bonds to help fill the gap.

“This is not the time to be reducing the policy rate. It will create a disincentive for getting the budget fully financed and that could create serious complications for the economy. I think that is a very strong basis on why the policy rate has not been adjusted downwards,” he said.

Further revealing the outcome of the budget execution in the first nine months of the year, the governor said provisional data for the period showed an overall budget deficit of nine percent of GDP compared to the target of 8.9 per cent of GDP. Also, there was a deficit of 4.1 per cent in the primary balance of GDP, which is marginally above the target of four percent of GDP.

“Over the review period, total revenue and grants amounted to GH¢36.3 billion (9.4 percent of GDP) compared with the target of GH¢35.7 billion (9.3 percent of GDP). Total expenditure and arrears clearance amounted to GH¢70.9 billion (18.4 percent of GDP), marginally above the target of GH¢70 billion (18.2 percent of GDP).”

Furthermore, he said that the financing of the deficit impacted the stock of public debt, resulting in the debt stock rising to GH¢273.8 billion, which is equivalent to 71 per cent of GDP as at September. At the end of December 2019, the debt stock was GH¢218.2 billion, equivalent to 62.4 per cent of GDP.

The governor, therefore,  noted that the stock of debt comprising GH¢135.3 billion (35.1 percent of GDP) of domestic debts and GH¢138.5 billion (35.9 percent of GDP), was from external sources, while domestic component of the debt included the financial sector clean-up cost which was GH¢15.4 billion (4 percent of GDP).