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Financing Of The Central Government Budget Is Risky - Center For Socioeconomic Studies To BoG

The implications of the Bank of Ghana’s Emergency MPC press release yesterday are such that moving the policy rate from 19% to 22% means the cost of borrowing for individuals and businesses has effectively gone up by 3%.

Considering the current Reference Rate of 24.23% and minimum risk margin of at least 10%, the minimum rate commercial banks will be lending to most individuals and businesses will be at least 37%. 

Announcing to the entire world that BoG is and will continue giving central government “overdrafts” until the government decides otherwise, contrary to the current and existing IMF directive of zero Central Bank financing of the central government budget is risky and debilitating; especially at a time, you are seeking a Balance of Payment support from the IMF.

What it means is, that you are telling investors you are not ready to adhere to any fiscal discipline rule from the IMF or anyone else. 

Announcing to the world you are planning on embarking on a “direct buying/transaction” of all Foreign Exchanges, FX from foreign-owned businesses (of their voluntary repatriation of export proceeds) sends a dangerous signal to the market and investor community that you have run out of FX and therefore resorting to an extreme measure.

This does not bode well for your local currency, the Cedi. Especially when they [foreign-owned businesses] are not under any obligations to sell to you. 

Raising the primary reserve requirement of banks from 12% to 15% in three (3) tranches simply accentuates the fact that you are forcing the banks to “ration” the sales of FX to individuals and businesses due to unavailability.

Again, this does not look good for your local currency, the Cedi.

In summary and effect, CSS sees this Emergency MPC Press Release as more damaging to the Cedi and the economy as a whole than doing it any good. 

CSS reiterates the problem is more with fiscal policy than monetary policy and the sooner fiscal policy embarks on an emergency review, the better for the Cedi and the economy as a whole. 

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