The increase in monetary policy rate by the central bank was largely targetted at bringing down inflation, but it appears government will have to contend with a possible increase in interest on its domestic debts.
As at June this year, the domestic debt stood at GH¢35.9billion, which forms about 38 percent of the country’s total public debt stock. Currently, government borrows from the domestic market at about 25.2 percent and analysts fear that the rate hike exposes government to an increase in debt servicing cost.
Razia Khan, Managing Director, Head Africa Macro Research, Standard Chartered Bank, said the recent rate hike by the central bank highlights the country’s “ongoing vulnerability; with the cost of servicing domestic debt raised further in nominal terms”.
The country’s total debt stock as at June stands at GH¢94.5billion, representing about 70.9 percent of GDP — a figure that is sure to increase with the planned issuance of the US$1.5billion Eurobond.
Interest payment has been a drain on government’s finances.
Total interest payment, according to the 2014 budget, is estimated at GH¢9.6billion, equivalent to 7.1 percent of GDP and 24.4 percent of total expenditure. Of this amount GH¢1.5billion will be expended on external interest, while GH¢8billion will be for domestic interest payments.
Speaking at Monday’s MPC press briefing, Governor of the central bank Mr. Henry Wampah said its current forecasts suggest that attainment of the medium-term inflation target by end of 2016 will require further tightening in the monetary policy stance, or else the target horizon will shift into 2017.
After the rate action, Ms. Khan in a comment to the media said the central bank’s action somehow came as a surprise to the market.
“With inflation typically seeing a seasonal improvement at this time of the year, few expected the Bank of Ghana to tighten interest rates at its September meeting. This will have been reinforced by recent cedi appreciation, which was seen as removing any immediate impetus for further tightening,” she said.
With Ghana’s strong adherence to the IMF programme, Ms. Khan said it would have come as a surprise to see the Bank of Ghana not heed the Washington-based lender’s expectation of a further tightening.
“The IMF’s first review of Ghana’s programme made clear expectation that the Bank of Ghana should tighten further if it felt there were upside risks to inflation. Given Ghana’s continued compliance with the IMF programme, including allowing for full adjustment of fuel and utility prices, it is clear that some risks to inflation still persist,” she said.
RazielOben-Okon, an economist and senior lecturer at GIMPA, opines that “the calls for tight monetary policy on the part of the MPC can only be successful with the support of stringent fiscal consolidation, including a sustainable debt to GDP ratio”.
He maintained that government’s high borrowing may be thwarting efforts of the Bank of Ghana in curtailing inflation through high interest rates, which is a component of cost-push inflation.
“It is therefore worrying that our debt to GDP ratio has reached GH¢94.5billion as at the end of June 2015, representing 70.9 percent of GDP — especially when our total revenue as a percentage of GDP is just a little above 20 percent,” he added.