BoG budget deficit financing a contributory factor to high inflation, cedi depreciation – IEA

Director of Research at the Institute for Economic Affairs (IEA), Dr John Kwakye, has pointed to the financing of the budget deficit by the Bank of Ghana as a major contributory factor to the current high inflation and depreciation of the local currency.

Making the assertion as a panelist on NorvanReports’ Twitter Space Conversation dubbed “The Current Economic Crisis: Is there Any Silver Lining; What is Ghana missing?”, Dr Kwakye quipped the financing of the budget deficit by the Central Bank fuelled the country’s prevailing high inflation rate and cedi depreciation against the American greenback.

Despite being aware of how inflationary the financing of the budget was, the BoG, Dr Kwakye noted, continued to do so and instead of putting a stop to its budget deficit financing activities, the Central Bank rather undertook an aggressive policy rate hiking approach leading to increments in interest rates on loans and thereby crowding out the private sector.

“BoG financing of the budget fuels inflation and cedi depreciation, and the BoG will then turn around to raise the policy rate and increase interest rate and crowd out the private sector,” he quipped speaking on the subject matter asserting successive governments and the current government have not particularly well in managing the economy.

According to recent data, the Central Bank has spent over GHS 77bn in financing the government’s budget deficit.

Inflation rate decreased to 45% in March 2023 from the rates recorded in January and February 2023, which were 53.6% and 52.8% respectively. Despite this, inflation rate is still four times higher than the Bank of Ghana’s upper policy target of 10%.

According to data from the Ghana Statistical Service (GSS), inflation reached its highest point at 54.1% in December 2022, following a 19-month acceleration. The GSS also indicated that food inflation was recorded at 50.8% in March 2023, while non-food inflation was recorded at 40.6% creating a difference of 10.2% Moreover, locally produced items had an inflation rate of 41.9% while imported items recorded 51.6%.

Meanwhile the Cedi has in the last one month appreciated significantly by 13.95% (GHS 12.55 to GHS 10.80) against the Dollar.

Analyzing the reasons cedi’s performance against the dollar, Director of Operations at Dalex Finance, Joe Jackson averred that, broadly, lower local demand for USD, USD depreciation against global currencies and investors no more moving Cedi funds to USD are the major reasons for the cedi’s sterling performance.

The cedi gained 3.11% to the US dollar in the first week of April to narrow its year-to-date losses on the forex or retail market to about 17%.However, the cedi has marginally depreciated against the dollar, reaching GHS 10.90 to $1 according to forex rates released by the Central Bank on Friday, April 21 2023.