Taxes compel BoG to hold policy rate for the sixth time at 14.5%
The Bank of Ghana (BoG) has maintained its benchmark policy rate based on inflationary pressures that could arise due to the government’s taxes.
The BoG announced on Monday, March 22, that it has held the policy rate at 14.5%.
The policy rate determines the rate at which commercial banks set interest rates on loans and has an impact on liquidity in the system.
This would be the sixth consecutive time it has been maintained since it was cut in March 2020 by 150 basis points to contain the impact of the COVID-19 pandemic.
“Risks to inflation in the near-term are broadly balanced, but there are emerging short-term pressures emanating from the rising crude oil prices and the direct and secondary price effects of the revenue measures announced in the 2021 budget,” the apex bank said in a statement.
“Monetary policy would need to remain vigilant to monitor these risks”.
The government aims to spend GHS113.8 billion to achieve three pillars of recovery, consolidation, and aggressive growth.
At least six additional taxes introduced in the budget are expected to raise the revenue of GHS72.5 billion.
This is likely to hike prices of goods and services, which could impact inflation, as explained by investment banking firm C-nergy Ghana Limited.
They believe that the effects of COVID-19 are still present, and revenue generation measures via taxes would be counterproductive.
“The passthrough effect of these taxes could generate inflationary pressures and push the year-end single-digit inflation target off course. Demand remains depressed, and businesses are still struggling to recover”.
An Economic Analyst with Databank Financial Services, Mr Courage Kwesi Boti and held a similar view.
The central bank highlighted a rebound in economic activity, which is expected to continue its growth path.
“Although business and consumer sentiments softened on the back of the surge in COVID cases in the early months of 2021, the rollout of the vaccination programme has increased optimism about the future and will further add a boost to the anticipated recovery in growth,” the central bank added.
Private sector credit growth has witnessed a decline due to the pandemic, but the BoG believes the rebound of input supplies evidenced by increased non-oil imports should support the ongoing rebound in economic activity.
2020 overview
Provisional data from the Ministry of Finance indicated that 2020 recorded an overall broad cash budget deficit of 11.7 percent of GDP against the revised target of 11.4 percent of GDP for the year.
The primary balance also recorded a deficit of 5.3 percent of GDP compared to the revised target deficit of 4.6 percent of GDP. Over the review period, total revenue and grants amounted to GH¢55.1 billion (14.3 percent of GDP), marginally higher than the revised target of GH¢53.7 billion (13.9 percent of GDP).
Total expenditures and arrears clearance amounted to GH¢100.1 billion (26.1 percent of GDP) against the revised target of GH¢97.7 billion (25.4 percent of GDP).
The high deficit pushed the stock of public debt to 76.1 percent of GDP (GH¢291.6 billion) at the end of December 2020 compared with 62.4 percent of GDP (GH¢218.2 billion) at the end of December 2019. Of the total debt stock, domestic
debt amounted to GH¢149.8 billion (39.1 percent of GDP), while the external debt was GH¢141.8 billion (37 percent of GDP).