The Bank of Ghana (BOG) has reversed three reliefs it introduced to cushion banks and the economy against the impact of the coronavirus disease (COVID)-19 pandemic.
They are the increase of the Cash Reserve Ratio to 12 per cent, reset of the Capital Buffer to the pre-pandemic levels of three per cent to make Capital Adequacy Ratio to a total of 13 per cent, and the provision of rate of loans in the Other Loans Exceptionally Mentioned (OLEM) category is reset to pre-pandemic levels of 10 per cent.
Effective April, the stimulus package the BoG introduced in the heat of the coronavirus in 2021 for universal banks to make capital available and to reduce the cost of capital as part of policies to prop up the economy, would cease.
The Governor of BoG, Dr Ernest Addison, announced this at the BoG Monetary Policy Committee press conference on Monday, and said the move was to stem rising inflation and depreciation of the Cedi.
The MPC held its 105th meeting, last week, to deliberate on recent macroeconomic developments and assess emerging risks to the inflation and growth outlook also deliberated on recent global and domestic developments and how these have impacted macroeconomic conditions since the last meeting.
The cedi since the beginning of the year has come under intense pressure, due in part to, the Sovereign credit rating downgrades of Ghana by Fitch and Moody’s and exit of some offshore investors in domestic securities.
That, the BoG has “caused the exchange rate to overshoot its long-term trend.”
Consequently, the government has announced plans to inject $2 billion into the economy to shore up the Cedi.
Dr Addison indicated that the reversal of the stimulus package would help contain inflation and strengthen the Cedi to bring stability to the economy.
Headline inflation has risen sharply to 15.7 per cent in February 2022, and both headline and core inflation are significantly above the upper limit of medium-term target band.
Specifically, the BoG said rising food prices, upward adjustments in petroleum prices and its effect on transport fares, and exchange rate depreciation pass-through have pushed up inflation to 15.7 per cent at the end of February 2022, 5.7 percentage points outside the medium-term target band.
According to BoG food inflation jumped sharply from 12.8 per cent in December 2021 to 17.4 per cent in February 2022, while non-food inflation jumped from 12.5 per cent to 14.5 per cent over the same period.
The Governor further said the withdrawal of the stimulus package would help withdraw excess capital from the system which was fuelling inflation.
Quizzed if the decision to reverse the stimulus package would not dampen growth at a time when the economy had not recovered from the shocks of the coronavirus pandemic, the Governor said “there is effect of every medicine you take.”
He said it was better to sacrifice growth for a while to curtail rising inflation, pointing out that growth could be achieved if there was stability in the economy.
“The combination of tighter global financing conditions, sharp pressures on the exchange rate, and elevated inflation pose some policy challenges. The uncertainty surrounding price developments and its impact on economic activity is weighing down business and consumer confidence,” the Governor said.
BY KINGSLEY ASARE