Ghana‘s central bank has made a daring decision to raise its borrowing cost to a record high of 30% in a bid to tackle escalating inflation that has plagued the West African nation in recent times.
The announcement by Governor Ernest Addison has caught financial markets off guard, with only a minority of economists predicting such an increase.
The Ghanaian cedi experienced a slight dip of about 0.3% against the dollar to 11.48 following the announcement. At the same time, the nation’s dollar bond maturing in 2032 saw a marginal decline to 41.18 cents on the dollar, as per Bloomberg generic pricing.
Governor Addison explained that, “Although inflation is expected to decline in the near term, baseline forecasts show a slightly higher elevated profile in the year ahead, which if not contained could embed in underlying inflationary pressures. It is important that policy responds appropriately and decisively to prevent these rates from becoming embedded and consequently derail the disinflation process.”
Annual inflation in Ghana has been persistently above the central bank’s target range of 6% to 10% since September 2021, and it unexpectedly accelerated to a staggering 42.5% in the past two months. The surge has been attributed to second-round effects of rising food prices, which have exacerbated the inflationary pressures in the economy.
Fiscal policy is also expected to play a role in addressing inflation. On Tuesday, Finance Minister Ken Ofori-Atta will present the nation’s first mid-term budget review since the government began restructuring the country’s debt and secured a $3 billion bailout from the International Monetary Fund (IMF) in mid-May to support economic recovery.
The IMF program comes with the condition that the Ghanaian government must control spending and boost revenue collection, actions that will have implications for inflation. The country, known as the world’s second-largest grower of cocoa beans, aims to reduce its debt to 55% of gross domestic product (GDP) by 2028, down from 71.2% of GDP at the end of 2022.
However, while these measures may address inflation concerns, they could add further strain to households and businesses already grappling with the high cost of living and potentially hamper economic growth.
The World Bank’s local office has projected Ghana’s GDP growth to slow to 1.5% in 2023 from 3.1% in 2022, with a modest recovery to 2.8% next year before returning to potential growth from 2025.