The International Monetary Fund (IMF) has advised nations like Ghana, where inflation remains above the central bank’s target range, to continue enforcing a tight monetary policy.
Despite a consistent decline in inflation in recent months, the IMF cautioned against relaxing monetary policy rates too soon for countries facing such circumstances.
Luc Eyraud, the IMF Division Chief for Africa, delivered this message during a press conference in Accra. He suggested that while Ghana and similar nations could consider halting increases in the policy rate, reducing them at this stage would be premature.
In sub-Saharan Africa, headline inflation has been decreasing since reaching its peak in November 2022. However, about a third of countries still experience double-digit inflation due to significant currency depreciations. Even among nations with declining inflation rates, most have opted to maintain or tighten their policy rates.
In Ghana, the economy has grappled with high inflation, reaching a 22-year high of 54.1% in December 2022. Responding to this challenge, the Bank of Ghana’s Monetary Policy Committee consistently raised the policy rate, reaching 30% by the end of 2023.
As inflation eased to 23.2% in December 2023, the central bank reduced the policy rate to 29% in January 2024 for the first time in two years. This rate has since been maintained.
As the BoG prepares for its third Monetary Policy Committee meeting of the year, there are calls from the business community to further reduce the policy rate to facilitate cheaper access to finance. However, with 2024 being an election year, there are predictions that the central bank may relax the policy rate to support economic growth.
Despite these expectations, the IMF has advised against premature relaxation of the policy rate. As of March 2024, Ghana’s inflation rate stood at 25.8%, significantly above the central bank’s target range of 6%-10%.
Easing inflationary pressures
Mr Eyraud noted that about half of the countries in sub-Saharan Africa show clear signs of easing inflationary pressures, with inflation already below or within their target bands.
He said central banks in such countries may consider gradually easing to a more neutral policy stance to allow for more accommodative financing conditions, boosting private investment and mitigating the impact of fiscal consolidation.
He added that in nearly one-third of the countries, inflation was trending lower but moderately exceeded targets.
“In such countries, a pause in policy tightening may be warranted to ensure confidence in achieving price stability but it may be a bit too early to reduce the rate.
“As for the rest, where inflation significantly exceeds target policy rate and continues to rise, policymakers should decisively tighten monetary policy until inflation is firmly on a downward trajectory and projected to return to the central bank’s target range,” he stated.
He said maintaining price stability should be the immediate goal.
Debt sustainability
Also speaking at the press conference, IMF Deputy Director, Catherine Pattillo, said the fund was in the process of reviewing its debt sustainability framework to reflect changes in the global environment.
She said in its debt sustainability analysis, the fund looks at all the debt indicators, including growth indicators, exports and revenue, to come up with an assessment.
“But going forward, we are going to review our debt sustainability framework to ensure we pay good attention to things that are changing in the ways countries are borrowing,” she stated.
She said the review would look at the change in creditors, as countries are now opting for more domestic debt, the risks and benefits that come with it and also look at the climate shocks and how they affect debt sustainability.
In order to achieve debt sustainability, Ghana has completed a restructuring of its domestic debt and is in the process of restructuring its bilateral debt and external commercial debt.
The domestic debt restructuring exercise saw the government swap old bonds worth GH¢82 billion for 12 new ones at reduced coupon rates and longer tenors.
The country, also in January this year, reached an agreement with the Official Bilateral Creditor Committee (OCC), co-chaired by France and China, to restructure bilateral debts of about $5.5 billion.
The government is still in discussion with the OCC to formalise the agreement through a memorandum of understanding.
On the external commercial front, the government has opened fresh talks with its Eurobond holders to make some slight changes to the interim agreement reached with the investors.
This is because the interim agreement reached falls short of the debt sustainability targets set by the IMF under its three-year programme with Ghana.
The country is seeking to restructure commercial debts of about $14 billion, out of which $13 billion is in Eurobonds.
Return to capital market
On when countries like Ghana could re-assess the international capital market, Ms Pattillo said this would depend on domestic and external conditions, as the uncertainties in the global finance market remain.
She, however, noted that with the good progress being made by Ghana under the IMF programme, it may not be long for the country to regain access to the international capital market.
After a two-year hiatus, African countries have made a comeback to the international capital market, with Cote D’Ivoire, Kenya and Benin issuing Eurobonds this year.
Ms Pattillo said this was a positive sign for the region, adding that it was a sign that the market sentiment for the region was improving.
She, however, noted that the Eurobonds have been pricey due to the high-interest rate regime globally.
“The yields are much higher than pre-pandemic,” she stated.
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