ISODEC challenges BoG’s reliance on policy rate to drive economic growth

By: Winifred Fosua Agyekum

The Integrated Social Development Centre (ISODEC) is calling on the Bank of Ghana to move away from relying primarily on the Monetary Policy Rate to manage the economy.

ISODEC argues that there is no significant causal relationship between the policy rate and Ghana’s Gross Domestic Product (GDP) growth.

The organisation is instead advocating for a monetary policy framework that focuses on the quantity, quality and allocation of credit to productive sectors of the economy.

Speaking at a Stakeholders’ Consultative Forum on Alternative Economic Models for Ghana, Policy Analyst at ISODEC, Dr Adamu Braimah Abille, said the organisation’s analysis also found no causal relationship between the 90-day Treasury bill rate and GDP growth.

“So the policy rates show no significant causality with GDP at all, at any lag. And the 90-day T-bill shows no causality either. So our evidence shows that the policy rates should not be the lever of monetary policy.”

Dr Abille cautioned that continued reliance on high interest rates to control inflation could undermine productive investment by increasing the cost of borrowing.

“So we’ve seen that we can have high inflation, high interest rates, and high costs of borrowing, and it reduces productive investment, not just any investment.”
He therefore called for a shift from interest-rate targeting to a system that prioritises access to productive credit.

“The policy recommendation number one is that the monetary policy targeting, inflation targeting, we have to change it. We have to move from interest rate targeting to credit quantity and quality targeting.”

ISODEC is also proposing stronger regulation of credit allocation, including minimum lending requirements for sectors such as agriculture, manufacturing and agro-processing.

The organisation further wants the development of local and community-based banks to decentralise credit creation and improve access to financing for businesses outside major commercial centres.

Dr Abille said the Bank of Ghana’s emerging macro-prudential framework should place greater emphasis on directing credit towards productive sectors capable of supporting sustainable economic growth.