Increase Policy Rate to 16.5% to address cedi depreciation, others – IEA to BoG

The Bank of Ghana has been urged to increase the Policy Rate – the rate at which it lends to commercial bank – by 200 basis points from 14.5% to 16.5% to stem inflation.

According to the Institute of Economic Affairs, this will increase the attractiveness of cedi-denominated assets to stem disinvestments from the money and capital markets and the negative effect on the cedi.

It noted that “increase the Primary Reserve Requirement from 8% to 10% to help curb liquidity creation by banks, which could fuel both inflation and exchange rate depreciation”.

These proposals have become necessary because of the rising inflation rate, exchange rate and reduced investor interest in Government of Ghana denominated assets.

“Change the current foreign currency-cedi primary reserve requirement to foreign currency-foreign currency requirement to help boost foreign currency reserves at the Bank of Ghana. This will also meet a long-standing demand by banks”, the IEA added.

The IEA also urged the Bank of Ghana to enforce foreign exchange laws more strictly, including relating to documentation requirements for external transfers, the limitation in carry-on foreign currency by travellers and documentation requirements for foreign currency purchases from forex bureau.

Others are the activities of unlicensed foreign currency dealers, pricing of goods and services in cedis and not in foreign currency, payment for services provided by Ghanaians in cedis and not foreign currency as well as money laundering through banks and forex bureaus.

It concluded saying “it is important that government and Bank of Ghana collectively take these measures to restore investor confidence and gain needed policy credibility. Failure to act accordingly will only worsen the economic crisis, with widening of spreads on Ghana’s bonds, decreasing access to international bond markets, growing disinvestments from local financial markets and growing pressure on the cedi.”

Source: myjoyonline.com

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