When the country’s central bank, the Bank of Ghana (BoG), was first granted the independence to set interest rates in 2002, it faced a turbulent economic scenario, in which the level of inflation had pushed past the 60% mark. Since that time the authority has wielded its rate-setting power to control inflation in the interests of society and the economy, each year establishing a target corridor that it deems to be suitable for this purpose. The seven members of its Monetary Policy Committee have tackled a relatively high inflation environment for much of the past decade, with the headline rate traversing a corridor of between 10% and 20%. Looking ahead, Ghanaian authorities are navigating the long-discussed introduction of the an African currency, which would significantly alter the direction of fiscal policies.
In relation to its interest rate setting, this task has become easier since 2016, as the nation’s inflation rate has gradually decreased to fall within the bank’s current target of 6-10%. This trend has allowed the BoG to steadily cut interest rates: the central bank’s policy rate was lowered by 200 basis points in March 2018, from 20% to 18%, and further to 17% in June 2018, and thereafter remained unaltered for the rest of the year.
After three meetings with no changes, the BoG surprised the market by cutting again in January 2019, bringing the policy rate to a five-year low of 16%. The bank cited lower non-food inflation as the principal factor enabling the rate change and, with the inflation comfortably within its target band, hinted at lowering key policy rates yet again. This prospect is a welcome one for those who believe that Ghana’s high interest rates are one of the key hurdles to economic growth.
However, monetary policy decisions will also have to take into account the weakness of the Ghanaian cedi, which has been declining in value against the dollar since 2018 due to a combination of factors. Notably, these include the stubborn trade deficit and increasing risk aversion among international investors with regard to emerging market economies.
Ghana’s monetary policy may also face a significant disruptive force in the form of a new currency that it will share with a number of other states in the region: the eco. The concept of a regional currency is not a new one in West Africa. Eight members of the ECOWAS – that is, Togo, Senegal, Niger, Mali, Côte d’Ivoire, Guinea-Bissau, Burkina Faso and Benin – already use the CFA franc as their legal tender. ECOWAS, meanwhile, has been planning the introduction of a more broad-based regional currency for decades.
Early plans for the new currency envisioned a launch in the year 2000, but difficulties in harmonising monetary policies governing the eight currencies used in the ECOWAS region delayed its creation. In order to overcome this, the economic bloc decided to adopt a more gradual approach to its ambitious goal, and in 2019 it revealed that six members of the group, including Ghana, Nigeria and Liberia, will begin to act as currency pioneers for the region, adopting the eco in 2020.
The potential benefits of this move are significant. Most notably, currency integration can be an effective means of reducing both risks and costs for banks and financial institutions that are operating across the region, and can help to provide a stronger defence against financial crises. However, establishing a common currency in the West African region will also generate large institutional costs, which ECOWAS has yet to fully address. A more fundamental challenge, according to some observers, is the economic misalignment of the participating nations; for example, the total GDP of the Guinean economy is smaller than that of Nigeria’s 13th-largest state, Abia. These issues are likely to be the focus of discussions among involved authorities in 2020.
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