Introduction and background
The primary objective of monetary policy in Ghana,as enshrined in the Bank of Ghana Act 2002 (Act612), is themaintenanceof stability of the general level of prices. Without prejudice to its primary objective and independently of instructions from Government or any other authority, the Bank of Ghana (BoG) is expected to support the general economic policy of Government and promote economic growth and effective and efficient operation of the banking and credit systems in the country. Upon the enactment by Parliament of the Act, the BoG gained instrument independence - free to choose monetary policy instruments to carry out its mandate.
The Act provides for the Government to obtain some monetary accommodation to finance its activities. It sets a ceiling of 10 per cent of the preceding year's government revenue fornet domestic financing (NDF) of the current year’s deficit. All too often, however, the BoG has acted as if the ceiling was set for it alone. Indeed there have been instances where BoG financing of the budgethas exceeded the ceiling. For example, at end-September 2014 BoG financing of the 2014 budget stood at an estimated 23 percent of 2013 government revenue. As discussed below this behaviour of the BoG is a reflection of ‘fiscal dominance of monetary policy'.
In May 2007 after five years of informal Inflation Targeting (IT), the BoG formally adopted IT as its monetary policy framework. Unfortunately, however, the global financial crisis of 2007-2008 imparted large adverse shocks on the economy making successful implementation of IT practically impossible.
Over the years fiscal dominance of monetary policy has been a persistent characteristic of the macroeconomic policy environment. Large fiscal deficits under tight market financing conditions have typically resulted in monetization of the deficit.The monetization, in turn, has undermined the BoG's pursuit of the monetary policy mandate in its statutes. Literally the BoG abandons - voluntarily or otherwise - its primary objective of inflation controlto accommodate the financing requirements of the fiscal authority. As a result Ghana has had a tendency of running double - digit inflation.
In order to firmly establish the effectiveness of the IT framework, the Bank of Ghana Act needs to be amended - structural benchmark for December 2015. The required amendment seeks to significantly strengthen the BoG's functional autonomy, governance and ability to respond to banking sector crisis situations. Strengthening governance provisions in the new Act is to ensure the personal autonomy of key management, Board and audit committee members of the bank. The provisionsin the new Act are aimed at the elimination of fiscal dominance of monetary policy. In the interim, i.e. until the enactment of the new BoG Act, a memorandum of understanding (MOU) was to be signed between the Ministry of Finance
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