BoG’s Policy Rate Hike Is Blind Copy Of US Monetary Policy -Economist Warns Ghana

When the Bank of Ghana (BoG) announced a hike in its policy rate to 250 bases point in a bid to arrest the severe depreciation of the cedi against major trading currencies, it was only copying monetary policy tool applications from the US, the respected economist, Dr. Jerry Monfant has observed.

According to him, the move is likely to fail miserably to impact the depreciation and rather cause more problems because of the fundamental differences in the structures of the US and Ghana monetary systems.

“Copying monetary policy tools blindly without recourse to the economic structure could lead to economic consequences,” Dr. Monfant warned.

He pointed out that the negative consequences potentially include; higher funding costs to banks that are already weak and struggling; fixed-income investments of banks becoming worthless as a result of hikes in policy rates; lower loan demand, thereby weakening the profitability of the banks; deterioration in loan quality of the banks, among several other differences.

“In the United States, 53 trillion dollars of money in circulation are made up of credit to its citizens and this account for 94 percent financial transactions. Physical cash in circulation is 3 trillion dollars, accounting for 6 percent of cash transactions,” Dr. Mofants explained.

“This tells you that once policy rate is increased, it has immediate effects on almost entire US economic system. On the contrary, total bank credit in Ghana as of June 2021 accounted for 38 percent or 47.4 billion cedis of broad money supply into the economy.”

According to him, “The bare truth is that the policy hike by the BoG would not achieve the reasonable impact of taming inflation because of the structure of the Ghanaian Monetary system. Rather, it will weaken the Ghanaian financial system, and create a catastrophic economic crisis, and the major victims would be the Ghanaian businesses.”

The respected financial expert said what Dr. Addison has done could be likened to a man “boxing with his own shadow.”

“To control inflation in Ghana using rates hikes could be likened to having boxing with your own shadow. While the policy instruments could be more effective in eg. United States economy, same can not be said about the Ghanaian economy.”

Diagnosing the real problem with the country’s economy, Dr. Jerry Monfant pointed out that the country’s banking system, which is the vehicle for financial transmission in the country’s monetary system, is in a mess.

The Ghanaian cedi, he pointed out, is down over 15 percent against the US dollars, making it one of the World worst performing currencies among emerging mainstream frontiers this year, trailing only Russia and Sri Lanka.

Meanwhile, Dr. Jerry Monfant has said he has heard that the crunch meeting that the Akufo-Addo government held at the Peduase Lodge to figure out how to salvage the economy from total collapse decided on some measures including a cut-down expenditure to bring down the fiscal deficit to 7% to tame growing macroeconomic imbalances.

However, he warns that such measures could rather worsen the problems for the economy.

“Government unthinkable decision of cutting down spending would reduce demand for goods and services by the citizens, thereby slowing growth and recovery! The question I ask is, what does the government economic management team intend to achieve???”