BOG Policy Measures– An Imminent Inflationary Hike in Ghana?

BOG Policy Measures– An Imminent Inflationary Hike in Ghana?

The economic and financial crises brought by the outbreak of the coronavirus will leave great scars on several economies across the globe. To mitigate the health and economic crises of the COVID-19, countries need more resources than ever. However, emerging economies for now seem to be the worst hit by the pandemic due to limited financial resources and fragile health care systems.

Ghana, among several countries, approached the IMF for financial assistance to the tune of US$1billion so as to help contain the spread of the virus and also to support businesses as well as to protect livelihoods. The COVID-19 fund has also been established to harness private sector support in terms of donations so as to ease the burden on government whose debt stock stood at 59.3 percent of GDP at the end of March 2020, according to the Ghana’s central bank.

The Bank of Ghana indicated that as at the end of the first quarter of 2020, a deficit equivalent to 3.4 percent of GDP has been recorded compared with a deficit target of 1.9 percent of GDP in 2019. The rise in the deficit according to the central bank is as a result of shortfalls in tax revenues due to unfavourable external and domestic conditions which has been compounded by unbudgeted COVID-19 related expenditure.

One interesting and remarkable experience of the outbreak of the COVID-19 is that Central Banks have stepped up to the challenge by tearing down their own ‘rulebooks’. That is, the banks have stepped up to purchase government bonds so as to finance the ever-increasing expenditures that governments are forced to make due to the outbreak of the coronavirus.

Eswar Prasad, a professor of trade policy at Cornell University and a senior fellow at the Brookings Institution said,


more than ever, the World Looks to Central Bankers for Deliverance. Central bankers, once considered cautious and conservative, have shown they can act with agility, boldness, and creativity.


|The Bank of Ghana has embarked on massive expansionary policies following the outbreak of the coronavirus in an attempt to boost growth in the economy. The central bank embarked on the purchase of government bonds and a reduction in the policy rate whilst keeping its focus on inflation targeting of 8.0 per cent plus or minus 2.

Under the Bank of Ghana’s emergency financing provisions, which permits it to increase the limit of purchases of government securities, BoG purchased the government's COVID-19 relief bond with a face value of GH¢5.5 billion at the monetary policy rate with a 10-year tenor and a 2-year moratorium of principal and interest. BOG indicated that it was ready to continue with its asset purchase program up to GH¢10 billion in line with the current estimates of the financing gap from the pandemic.

Furthermore, the Bank of Ghana in March 2020 reduced its policy rate by 150 basis points from 16 percent to 14.5 percent. The reduction was due to elevated risks to inflation after an exaggerated rise in food prices following two episodes of panic buying of food before fumigation of markets across the country and the partial lockdown in the two largest cities.


Inflationary hikes in Ghana

Although these measures by the BoG are meant to support the government and also boost money supply in the economy, many have expressed concerns that this may come at a cost to the country as it will lead to a spike in inflation.

Already, inflation has been on the increase in the country as the country recorded a year-on-year inflation rate of 11.3% in May this year, from 10.6% in April– outside the central bank’s inflation target band- after recording 7.8% in January-March 2020. According to Bank of Ghana (BoG), this sharp rise in inflation is attributed to increased demand for food items stemming from the two-buying episodes preceding the market fumigation exercises across the country and the partial lockdown in both Accra and Kumasi– the two largest cities. This led to increased food prices in April and continued in May. Food and non-alcoholic products recorded the highest year-on-year inflation rate of 14.4%, followed by housing, water, electricity and gas division with 11.2%. Non-food inflation increased to 8.4% in May, from 7.7% in April and 7.5% in March 2020. Food inflation was thus the predominant driver of the year-on-year inflation, contributing 59.6%.



Quite clearly, the restrictions imposed on the movement of people and the closure of the country’s borders by the Government in response to the COVID-19 pandemic had significant impact on the prices of goods and services since April this year. Indeed, the high demand for food as a chunk of the population remained at home to observe the COVID-19 protocols put pressure on local food producers to deliver as imports were no longer coming in due to the closure of borders. The rise in inflation is projected to peak in the second quarter of the year and begin to return to disinflation path in subsequent quarters with inflation settling within the medium-term band by the end of the year.

In view of the rising inflation, The Vaultz magazine sort the views of Professor Newman Kwadwo Kusi, the Executive Director of Institute for Fiscal Studies (IFS) Ghana on the implications of the decision by the Central Bank to provide the Government with the GHȻ10 billion emergency financing. According to him,

the implication of this is that the residual fiscal financing gap has, in part, been closed by GHȻ10 billion; finance is available to help stimulate businesses– hospitality industry, trading activities, agriculture value chain, etc.– adversely impacted by the COVID-19 pandemic; and the public debt increased by GHȻ10 million.




Effects of Inflation on The Economy

As part of the measures to contain the spread of the coronavirus, the Government imposed a three-week partial lockdown in the Accra-Tema-Kasoa and Kumasi Metropolitan Areas and the country’s borders were closed. Quite obviously, the restrictions on the movement of persons and closure of borders affected the supply of goods (domestic and foreign) and services, causing local prices to rise.

The effects of inflation are mostly felt by various economic agents and sectors in diverse ways. The incidence mostly falls on firms, households and the macro-economy at large but with diverse degrees of severity. With regards to the sectors that will be most affected with the inflationary pressures, Prof Kusi indicated that the tourism sector is one of the severely hit sectors. However, the consumers seem to be the economic agents that will suffer the most with regards to the recent inflationary hikes.

He further indicated that


the nationwide lockdown, which has since been lifted, and border closures have created some difficulties for the agriculture sector. The supply chain for farm produce has experienced some disruptions in the transportation of farm produce to the markets due to increases in general prices in the country affecting demand for agricultural products in the process. The general increases in prices have also limited farmers’ access to farming inputs, such as seeds, fertilizers and insecticides, and access to markets. This has created a general fear in the country that acute shortage of food will emerge if the pandemic prolongs. This will lead to further increases in food prices, especially food security crops such as rice, beans, millet, sorghum, as well as poultry, vegetables and other agricultural produce.  


“Statistics from the Ghana Tourism Authority indicate that the tourism sector will witness a downsize in the next five months which may result in revenue loss of US$170 million in its entire value chain due to the COVID-19 impact on country’s economy.


The global trend in the cancellation of flights, closure of borders, and the need to maintain social distancing, including the ban on public gatherings, are also having huge negative impacts on economic activities in the hospitality industry. Among the worst hit are hotels, airline business, tourist sites and attractions, and car rental services which are experiencing cuts in occupancy rates down to under 30% and staff are being sent home.” 


Very high inflation distorts economic decisions and moderate levels of inflation can also distort investment and consumption decisions. Inflation normally erodes the real value of money and therefore benefits borrowers than lenders. In inflationary era, the quantity of goods that a cedi can buy today will reduce in a later date as less amount of goods will be bought by that same amount of money.

High levels of inflation have often resulted in currency substitution as people lose confidence in the domestic currency. Increasing demand for foreign currencies will further results in the depreciation of the Ghana cedi.  When this happens, monetary policy effectiveness is lessened in the domestic economy.

Another effect is the phenomenon of “Money Illusion”– where people seem to base their sense of satisfaction on nominal earnings rather than real earnings. Inflation could fool economic agents especially about their real wages. Even though wages will increase in nominal terms, the quantum of goods and services to be purchased by the same amount of money will reduce.


Policy Interventions

On the measures that Government could consider to ensure that inflation doesn’t become unmanageable in the coming months, Prof Kusi said,


Food inflation will need to be reduced in the coming months by a significant support of the agriculture value chain by the Government. A widening of the basket of foods produced under the government’s ‘Planting for Food and Jobs’ flagship program, together with strong financial support will help to significantly increase food production and reduce food prices in the country. Effective implementation and widening the basket of foods cultivated under the government’s Planting for Food and Jobs program during this pandemic period will help”.



He further stated that, some experts are of the view that Ghana’s Buffer Stock Company could be relied upon to flood the system with enough food items to contain the situation should it get to a worse point. Unfortunately, the preparedness of the Buffer Stock Company relative to food security in the country is weak to the extent that the company does not have enough stock to curtail a possible food shortage that may hit the country. This is because the country has not organized itself adequately in the area of food security to forestall such eventualities. The need therefore to address food security problem in Ghana cannot be over-emphasized.

Also, there is the need for disbursement of funds to be done in utmost good faith so as to make sure that businesses that are hardest hit by the pandemic benefits more. There is therefore, the need for more commitment by various stakeholders through avoidance of corrupt acts and compliance with government directives.

For government stimulus packages to make an impact on the economy, the Executive Director at the IFS said


the businesses stimulus package announced by the Government should target and support essential SMEs, especially those SMEs that provide inputs and services to support other SMEs. SMEs that have immediate demand for their products and services and the potential to create jobs must also be supported. There is also the need to ensure that disruptions to farmers’ access to inputs, such as seeds, fertilizers and insecticides, are eliminated”.


He further challenged government to pursue import substitution industrialization policy as a way of sustaining the economy since the pandemic has thrown international trade into a state of uncertainties.

Government also has to pursue an aggressive import substitution industrialization as uncertainties of international trade volumes to return to levels before the pandemic remain unlikely in the short to medium term.

The pandemic has posed serious threats to human lives and livelihoods. Thus, to lessen its effect on the Ghanaian economy, there is therefore the need for more commitment by various stakeholders through avoidance of corrupt acts and compliance with government directives.

There is also the need for massive education of the public so as to reduce fear and panic surrounding the coronavirus, this if properly done, will mitigate future panic buying as the COVID-19 cases continue to rise in Ghana.


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