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The Director of Research of the Institute of Economic Affairs (IEA), Dr John Kwakye, has called on the government to enforce tighter monetary and fiscal rules to ensure a stable cedi and exchange rate regime in the country.
The measures, Dr Kwakye said, should include the enforcement of five per cent ceiling on the Bank of Ghana’s lending to government, a progressive increase of the minimum foreign exchange cover for the cedi issued from the current 40 per cent to 70 per cent between 2023 and 2025, as well as the imposition of a ceiling of 60 per cent on the Gross Domestic Product (GDP) on public debt.
He made the suggestion at a roundtable in Accra last Wednesday which was held on the topic “Achieving durable price and exchange rate stability in Ghana: Is a Currency Board the answer?"
Organised by the IEA, a policy think-tank, the roundtable was attended by financial consultants, bankers and politicians.
Dr Kwakye indicated that achieving price and exchange rate stability had eluded the country for a long time due to the underlying defective structure of the economy, saying it lacked diversification and over relied on imports.
“Obviously, we cannot continue to operate the same lax fiscal and monetary policy systems and expect to have different outcomes.
We need to think outside the box and seek alternative solutions,” he said.
A durable price and exchange rate stability, he said, referred to stable currency that could successfully hold its unit of account or purchasing power over some time.
Dr Kwakye explained that at a basic level, a currency was stable when the international currency exchange rates did not fluctuate too much as against the consumer price index (CPI).
The CPI measures the overall change in consumer prices based on a representative basket of goods and services over time.
The research director indicated that to ensure stable price and exchange rate sustainably, there must be what he described as “scaling down” of the ceiling on fiscal deficit(government spending more money than it brings in) from the current five per cent to three per cent.
This he noted would be in consonance with the Economic Community of West African States(ECOWAS) and West African Monetary Zone (WAMZ) convergence criteria.
It is also expected that time limits and conditions could be set for a return to the ceiling after agreed suspension in times of unanticipated economic shocks and crises.
On the central bank's lending to government, he stated that such lending should be liquidated by the end of the fiscal year to which it applied without the possibility of securitising it into a permanent debt.
On strengthening of enforcement and oversight of the monetary and fiscal rules, Dr Kwakye advocated the establishment of an independent Parliamentary Budget Office to be manned by professionals appointed by the Public Services Commission and not the Presidency.
The PBO, he noted, would assist Parliament with independent budget analysis, forecasts and estimates of the costs of government projects and programmes, among other functions.
“Entrenching these monetary and fiscal rules and backing them with strong enforcement and oversight regime will ensure durable price and exchange stability in Ghana, while avoiding the pitfalls associated with the rigid currency board alternative" he observed.
The director was also of the view that the country had practised more “liberal fiscal and monetary policy regimes with poorer outcomes” therefore, the nation must not wait for a complete economic transformation before achieving an acceptable degree of stable price and exchange rate system.
Touching on whether or not to implement a currency board regime as other experts were advocating to ensure a stringent monetary and fiscal mechanism that delivers stable price and exchange rates, he said that system had its own advantages and disadvantages.
Its disadvantages, he said, included loss of monetary independence, possibility of loss of competitiveness, vulnerability to shocks and lack of lender or last resort status.
Dr Kwakye therefore suggested that currently a full-blown currency board would not be appropriate for the country but rather “a currency board-lite" tailored to suit the conditions in the country as well as to help mitigate some of the disadvantages identified in a full-blown currency board.
Entrenching these monetary and fiscal rules and backing them with strong enforcement and oversight regime will ensure durable price and exchange stability in Ghana
