IEA Director criticizes BoG’s new Cash Reserve Ratio directive

Dr. John Kwakye, Executive Director of the Institute of Economic Affairs (IEA), has raised alarm bells over Bank of Ghana’s recent monetary policy decisions and approach to financing the 2024 budget.

According to him, the Central Bank is using monetary policy instructions to finance the 2024 budget at the expense of domestic banks.

Central to Dr. Kwakye’s concerns are the elevated interest rates and an aggressive increase in cash reserve ratios by the Central Bank. These measures, he contends, have created an unfavourable environment for banks, limiting their liquidity and constraining their ability to extend credit to individuals and businesses alike.

Questioning the efficacy of the Monetary Policy Committee’s strategies, Dr. Kwakye suggests that the current approach is not only failing to achieve its intended objectives but is exacerbating the very issues it seeks to address. High-interest rates, he argues, are deterring private businesses from seeking the much-needed loans, thereby hampering expansion and economic growth.

Furthermore, Dr. Kwakye takes issue with the central bank’s use of high policy rates as a blunt instrument to combat inflation. He describes this tactic as inherently counterproductive, asserting that the Bank of Ghana’s strategy of injecting excess liquidity into the system through monetary financing and subsequently mopping it up with stringent measures is fundamentally flawed.

Of particular concern to Dr. Kwakye is the abrupt increase in cash reserve ratios from 15% to 25%, a move he deems excessively aggressive and potentially detrimental to the stability of the banking sector and the wider economy.

“These are not the solutions to the problem. Bank of Ghana contributed to excess liquidity in the system through monetary financing of the budget and then turn around to mop the excess liquidity through very high interest rates, and very high reserve requirements,” he stated.

Dr. Kwakye has therefore called on the central bank to reconsider its approach advocating for a more balanced and nuanced monetary policy, urging a revision of the cash reserve ratio to a more modest 5%.

Such a recalibration, he believes, would provide banks with the flexibility they need to stimulate investment and facilitate lending to the private sector, thereby catalysing economic growth.