Election year spending poses upside risk to stability of Cedi – Bank of Ghana

The Bank of Ghana (BoG) has said that in the outlook, the tight monetary policy stance in Ghana and forward guidance on policy rate cuts in some advanced economies are expected to work through the expectations channel to help ease pressure on the cedi.

Also, the central bank said, strong liquidity management and continued Forex auctions are expected to support the forex market.

However, the BoG said in its Monetary Policy Report, July 2024 that “Fiscal spending amid upcoming elections remains an upside risk to the stability of the cedi.”

The report further explained that on the international currency market, the US dollar strengthened in June but has since weakened as investors anticipate a rate cut in September, supported by the decline in inflation in June, and softer-than-expected US economic data.

The pressure on the cedi eased somewhat in June from elevated pressures in May, it said.

The easing pressure, the BoG said, was on the back of the revised regulations on advanced payments for imports by the central bank, and steadfast implementation of the new Cash Reserve Ratio (CRR) regime

Also, it added positive sentiments from the third tranche of the International Monetary Fund  External Credit Facility (IMF ECF), the breakthrough with the external debt restructuring, as well as the Fed’s expected rate cut supported the recovery in the cedi.

“The domestic currency depreciated by 18.6 percent, 17.9 percent, and 16.0 percent against the dollar, the pound, and the euro, respectively, on a year-to-date basis. This was against a depreciation of 22.0 percent, 26.3 percent, and 23.8 percent against the dollar, the pound, and the euro, respectively, during the same period in 2023,” the report said.

The central bank is not the only institution raising concerns about how the elections pose significant risk to the Cedi as Ghana heads into a major election on December 7 this year.

Accounting and auditing firm, Deloitte, earlier issued a caution to  the government of Ghana against overspending.

Deloitte said spending beyond the limit could pose a severe threat to the downward trend in inflation and also the improved currency performance.

Headline inflation declined to 22.8% in June 2024 from 23.2% in January 2023, per figures churned out by the Ghana Statistical Service (GSS).

The downward trend in inflation in 2024 has been largely driven by decrease in non-food inflation, tightening monetary policy, ongoing fiscal consolidation by the government, low volatility of transport fares due to stable crude oil prices, and some base drift effect from previous price increases.

In its assessment of the 2024 mid-year budget statement, Deloitte indicated that the downward trend recorded in the year-to-date depreciation and inflation further affirms the view that Ghana’s economic recovery process is on track.

This notwithstanding, it said, the upcoming elections and its potential for increased Government expenditure beyond targeted levels, as well as the recurrent increase demand for dollars ahead of Christmas festivities in the last quarter of the year present risk to the improved currency depreciation and inflation recorded so far.

“Having highlighted the risk to maintaining the positive trajectory noted above, it is important to note that the IMF Programme, whilst serving as a check on Government’s expenditure also provides opportunity to boost Ghana’s foreign reserves.

“This, together with other inflows expected from the World Bank Development Policy Operation (DPO) might help absorb some of the FX shocks associated with the December festivities,” it said.

source: 3news