Ghana’s Economic Turmoil Linked to Government Borrowing, Central Bank Steps In
Ghana is currently facing its most severe economic downturn in decades, marked by soaring inflation rates that have challenged the stability of its financial institutions and the livelihoods of its citizens. Critical discussions have emerged around the actions of the Bank of Ghana, the nation’s central bank, in addressing these challenges, particularly in terms of monetary policy decisions.
In 2002, the Bank of Ghana was granted increased autonomy and flexibility under the Bank of Ghana Act 612, Section 33(2), enabling it to employ monetary policy more effectively to combat inflation and foster economic growth. This move came in response to the high inflation and sluggish economic growth that plagued Ghana in the years leading up to 2002. Initially, the bank’s efforts seemed to yield positive results, with inflation substantially dropping by 2007 and a noticeable improvement in the nation’s GDP per capita.
However, this period of economic stabilization had more to do with fiscal policy adjustments rather than the central bank’s monetary interventions. A significant factor was Ghana’s participation in the IMF-World Bank’s Heavily Indebted Poor Countries initiative, which saw the country’s public debt to GDP ratio decrease dramatically. This debt reduction played a crucial role in tempering inflation during that period, despite the central bank’s relatively hands-off approach to inflation control.
Post-2007, as the debt relief program concluded, Ghana saw a worrying surge in public debt, marking a departure from the earlier fiscal discipline. This escalation in borrowing from 2008 to 2021 brought with it rising inflation, a consequence of increased government expenditure without a corresponding rise in supply of goods and services. The situation reached a critical point in 2022, leading to a credit downgrade that severely restricted Ghana’s ability to borrow internationally, exacerbated the inflation crisis, and devalued the Ghanaian cedi.
Confronted with this dire scenario, the Bank of Ghana faced a dilemma typical of central banks operating under dual mandates—balancing between promoting economic growth and maintaining inflation stability. The downgrade forced the bank’s hand to inject approximately 37.9bn cedis into the economy to keep the fiscal machinery running, a move that, although controversial, was deemed necessary to stave off an economic collapse.
While critics argue that the central bank might have avoided exacerbating the inflationary spiral by refraining from lending to the government, the complexities inherent in managing an economy suggest there were no easy answers. Raising interest rates to combat inflation could have stifled investment and consumption further, leading to economic contraction. The Bank of Ghana, therefore, prioritized averting fiscal disaster over curbing inflation, a decision reflective of the tough choices central banks often have to make.
The Bank of Ghana’s intervention underscores the intricate relationship between fiscal policy and monetary stability. Moving forward, it may be prudent for Ghana to consider legislation akin to that of the European Central Bank, prohibiting direct central bank financing of government deficits. Such a measure could enforce fiscal discipline, preventing the recurrence of a debt-induced economic crisis.
In essence, Ghana’s current economic plight highlights the critical interplay between government borrowing and monetary policy in maintaining economic stability. As the nation navigates its way out of this crisis, the lessons learned could pave the way for more sustainable fiscal and monetary policy frameworks in the future.
