INJECTING DISCIPLINE INTO THE ECONOMY (FEB 25)

THE Bank of Ghana has taken a bold step to address the harsh economic realities presently confronting the country.
At the centre of the central bank’s measures is the reduction in the rate at which it lends money to commercial banks, otherwise known as the prime rate.
Since the rate has a direct correlation with the activities of commercial banks in the country, it is expected that the move will force the banks to also increase their lending rates, thereby reducing the public’s demand for money, since borrowing cost has now increased.
The anticipated effect is that the reduced borrowing will translate into less money in the system, which has always been the source of persistent increase in the prices of goods and services, creating the phenomenon called inflation.
There is no doubt that the measure in reducing the level of spending and the amount of money in the system will bring some hardships to Ghanaians.
No one needs to tell us that these are difficult times for the global economy and that such measures, difficult as they may seem, are intended to be the bitter pill that will bring sound health to an ailing economy.
In the realm of economic dynamics, some economic analysts have argued against the use of the prime rate to check inflation, adducing the argument that the causes of inflation should be carefully investigated to determine where the pressure emanates from and apply the right tool to check it.
The analysts holding this school of thought have recently argued that the current inflation has been caused by a rise in the prices of consumer goods as a result of the falling value of the cedi against the major trading currencies.
The Bank of Ghana, however, has explained that a monetary policy tightening is necessary to break the incipient changes in the prices of goods and services, as well as stabilise the exchange rate.
This means that the bank has placed economic stability ahead of cost of borrowing, which many fear will increase the production cost of firms and cascade into higher prices of goods and services.
In the words of Dr Paul Acquah, the Governor of the Bank of Ghana, the measure was good to unwound the large domestic and external deficits which could put the economy off balance.
Prospects are also good with the lowering prices of crude oil against the rising prices of commodities such as cocoa and gold on the international markets.
The move should be in Ghana’s favour and help push inflation down to between 10 and 13 per cent at the end of the year, during which time the prime rate can accordingly be reduced.
It is against this background that the DAILY GRAPHIC commends the Bank of Ghana for acting quickly to complement the government’s intended prudent fiscal policies to be announced in the budget.
There are strong indications that aid from donor countries may be reduced as a result of the difficult economic situation most of the donor countries are facing.
As the nation braces up to that challenge, the DAILY GRAPHIC urges Ghanaians to remain committed to a strong work ethic in order to increase productivity.