Ghana, which is currently grappling with a multifaceted economic crisis, has enacted a series of unprecedented economic measures, including a surprising move by the Monetary Policy Committee of the Bank of Ghana to cut the country’s benchmark interest rate by 100 basis points, reducing it from 30% to 29%.
This rate cut is a historic decision, marking the first instance of such an action in Ghana since 2021 and standing as the first occurrence of a rate cut by an African Central Bank in the current year. The move brings an end to the pause on the benchmark rate, which had been in effect since September 2023.
Ghana’s decision to cut rates follows a significant softening in inflation, which dropped to 23.2% in December 2023 from 26.2% in November 2023 – the lowest rate recorded since April 2022.
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The central bank governor Ernest Addison, who spoke to the media in Accra, said the cut was initiated in anticipation of a decline in inflation.
“The latest forecast suggests that the disinflation process will continue, and headline inflation is expected to ease to around 13% to 17% by the end of 2024, before gradually trending back to within the medium-term target range of 6% to 10% by 2025,” he said.
While expressing optimism about the disinflation process, Addison acknowledged potential risks to the inflation outlook. He stressed the need for strict implementation of the 2024 budget and a tight monetary policy stance to sustain the progress made, emphasizing the committee’s commitment to maintaining a strong policy stance to consolidate the disinflation gains in the face of an emerging economic recovery.
“These forecasts notwithstanding, there are upside risks to the inflation outlook and there is the need for strict implementation of the 2024 budget and a tight monetary policy stance to sustain the disinflation process,” he said.
“The committee noted the emerging recovery but sees the need to maintain a strong policy stance to consolidate the disinflation gains.”
The decision to cut rates coincided with other significant financial developments. Ghana recently received a $600 million disbursement from the International Monetary Fund (IMF), representing the second tranche of its $3 billion bailout program with the lender. This injection of funds is intended to support Ghana’s efforts to stabilize its economy and implement crucial reforms.
Additionally, the World Bank approved a $300 million Development Policy Financing last week, aimed at assisting Ghana in restoring fiscal sustainability and enhancing financial sector stability. These financial lifelines are essential as Ghana grapples with economic challenges on multiple fronts.
One of the critical issues faced by Ghana is its escalating debt burden. The country’s borrowing has increased substantially, leading to concerns about its ability to meet repayment obligations. To address this, Ghana has decided to restructure its debt, acknowledging the need for a comprehensive approach to managing its fiscal responsibilities.
In light of these challenges, the decision to cut interest rates has not gone out without criticism. Some argue that a rate cut may exacerbate inflationary pressures and hamper efforts to address the country’s fiscal imbalances. However, the central bank contends that this move is a strategic response to the evolving economic landscape and is aligned with the goal of fostering sustainable economic growth.
Looking beyond Ghana’s borders, attention now turns to Nigeria, where the Monetary Policy Committee of the Central Bank is set to meet on February 26 and 27 to determine benchmark rates. Nigeria’s benchmark rates have been on hold at 18.75% since July 2023.
In stark contrast to Ghana’s rate cut, analysts are anticipating further rate hikes in Nigeria, driven by the country’s inflation rates reaching a generation-high figure of 28.92% in December 2023. Some analysts even project a substantial 500-basis points hike.
While the contrasting measures of the two West African powerhouses underline the complexity of addressing economic issues in the region, the outcomes are likely going to have a heavy bearing on the economic growth of the two countries.