Resetting Ghana’s economy – The interplay of monetary policy, fiscal management, and banking reforms

Ghana’s economy has hit some rocky roads with unstable monetary policies, fiscal mismanagement, and a financial sector crisis that saw several banks fold under the past administration. These hurdles have put a damper on growth, jobs, and investor trust. But President Mahama’s leadership sparks hope! With a plan to tackle fiscal indiscipline, unsustainable monetary policies, and the financial sector meltdown, there’s a promising future for stability and economic revival.

The previous government’s initiatives aimed to stimulate economic growth, but they led to macroeconomic challenges such as the depreciation of the cedi, increasing inflation, and a rising debt burden. The banking sector experienced a significant downturn, requiring the government to allocate GHS 29.9 billion for a financial sector cleanup, which some viewed as excessive and mismanaged. Fiscal spending increased with the excuse of COVID-19 and the Russia-Ukraine war, causing Ghana’s debt to reach high levels. This resulted in exclusion from international capital markets and the need for debt restructuring.

Considering these challenges, the current administration has prioritized economic recovery through judicious fiscal management, monetary stabilization, and regulatory reforms. The 2025 State of the Nation Address (SONA) outline crucial measures taken to restore confidence in the financial system, including the reduction of treasury bill rates, the adoption of a homegrown fiscal consolidation program, and a debt restructuring initiative.

Voices of concern have emerged from figures such as Mr. Isaac Adongo, a Ghanaian politician and member of the Seventh Parliament representing the Bolgatanga Central Constituency, who is also a financial expert and chartered accountant, currently set to join the new Bank of Ghana board. He criticizes the previous administration for lacking a coordinated policy framework that ensures financial stability and promotes economic growth.

This discourse will examine Ghana’s economic landscape, with a focus on monetary policy, fiscal management, and the banking sector collapse that occurred under the previous administration. It will also explore the policy directions of the new government, and the strategies required to reset the economy and restore confidence in the financial sector. By analysing key economic indicators, expert opinions, and policy declarations, alongside insights from SONA 2025 and Mr. Isaac Adongo’s exclusive interview on TV3 Newsday, this discussion aims to articulate key strategies for achieving long-term financial stability and inclusive economic development.

Beyond the immediate financial and economic recovery measures, President Mahama’s leadership qualities bring a renewed sense of hope. His pragmatic approach, experience in governance, and willingness to embrace broad-based consultation signal a leadership style rooted in inclusivity and accountability. The upcoming National Economic Dialogue and the government’s commitment to fiscal prudence set the stage for a new economic trajectory – one that prioritizes the well-being of the people over short-term political gains.

 

My first emphasis is on MONETARY MANAGEMENT IN GHANA: An Analysis of Historical Trends and Future Directions. Ghana’s monetary framework under the previous government showed inefficiencies that impacted financial stability. One challenge was the inconsistent application of monetary policy tools by the Bank of Ghana. While the Monetary Policy Committee (MPC) was responsible for inflation targeting, interest rate management, and currency stabilization, political influence and inadequate coordination with fiscal policy often affected its performance. High inflation and cedi depreciation created an economic environment that limited investment and reduced consumer purchasing power.

The Bank of Ghana (BoG) faced considerable scrutiny regarding its efficacy in managing inflation and exchange rate depreciation. In 2023, inflation reached a notable high of 54.1%, which considerably diminished consumer purchasing power and intensified the cost of living. The cedi experienced a depreciation exceeding 30% during the same period, primarily due to weak foreign reserves and speculative activities within the foreign exchange market.

The monetary policy of the previous administration focused on high interest rates to control inflation. This approach led to higher borrowing costs for businesses, which reduced investment and slowed economic growth. The benchmark interest rate peaked at 30% in 2023, posing substantial challenges for private enterprises in accessing affordable credit. Consequently, this environment led to a contraction in manufacturing output and job losses, further intensifying the unemployment crisis.

The independence of the BoG was called into question due to its significant lending to the government for financing fiscal deficits. This monetization of the deficit contributed to inflationary pressures and undermined public confidence in the central bank’s ability to maintain price stability. The previous government’s dependence on BoG overdrafts reached unsustainable levels, with the central bank financing over GHS 50 billion of the national budget deficit within a two-year span.

The John Mahama administration plans strategic reforms to restore monetary stability. The central bank will adopt stronger inflation-targeting measures, guided solely by economic fundamentals, excluding political influence. The government has initiated a debt restructuring program to reduce reliance on BoG financing, addressing inflationary pressures and stabilizing the cedi.

The current administration has adjusted the interest rate framework as part of its monetary policy. The Finance Minister announced a significant reduction in Treasury bill rates within the first 50 days of President Mahama’s administration. The 91-day T-bill rate decreased from 28.34% to 20.79%, the 182-day T-bill rate fell from 28.96% to 22.98%, and the 364-day T-bill rate reduced from 30.17% to 22.69%. These reductions are intended to lower borrowing costs for businesses and individuals, thereby supporting economic growth. This initiative aims to improve the transmission mechanism of monetary policy, helping ensure that lower policy rates result in cheaper credit access for businesses and individuals.

Key reforms designed to stabilize monetary policy include ensuring that the Monetary Policy Committee (MPC) functions with independence and relies on data-driven decision-making processes to achieve price stability. The government aims to enhance domestic production and exports to reduce dependence on foreign currency, thereby addressing the underlying causes of exchange rate depreciation. Close collaboration between the Ministry of Finance and the Bank of Ghana is considered essential to align monetary policy with broader economic objectives.

 

The second emphasis is on FISCAL MANAGEMENT, specifically addressing the challenges associated with the debt burden and expenditure controls. The significant borrowing undertaken by the previous administration has resulted in considerable fiscal challenges and issues related to public expenditure. By the end of 2024, the national debt is projected to surpass GHS 600 billion, with debt servicing consuming over 70% of government revenue. This situation has been compounded by elevated government spending in both administrative costs and over-budgeted infrastructure projects.

 

The John Mahama administration has instituted a homegrown fiscal consolidation program aimed at mitigating wasteful expenditures, broadening the tax base, and enhancing public financial management. Key initiatives include a cost-cutting initiative designed to reduce administrative overheads and limit non-essential spending. Ministries, Departments, and Agencies (MDAs) have been instructed to decrease discretionary expenditures by 20%.

The government has successfully lowered Treasury bill rates, resulting in reduced borrowing costs for both businesses and consumers, thereby facilitating private sector-led economic growth. Furthermore, the administration is engaged in negotiations with international creditors to restructure Ghana’s external debt to ensure long-term sustainability without imposing undue burden on the citizenry. New policies have been introduced to eliminate tax exemptions that disproportionately benefit large corporations, while simultaneously enhancing tax compliance among high-income earners. The revenue generated from these measures is anticipated to improve government finances without inflicting excessive strain on the average Ghanaian.

The Sustainable Growth and Investment agenda of the Mahama administration emphasizes not merely short-term stabilization but also long-term economic transformation. The government is prioritizing investments in agriculture, infrastructure, and industrialization with the intent of creating jobs and boosting economic productivity. The introduction of the ‘24-Hour Economy’ initiative and the ‘Big Push’ policy, which is aimed at injecting US$10 billion into infrastructure development, represent key components of this transformative agenda.

The fiscal prudence exhibited by the John Mahama administration is beginning to yield positive results. Ghana’s fiscal deficit, measured at 10.8% of GDP in 2024, is projected to decline to 7.5% by the end of 2025. The homegrown fiscal consolidation strategy aspires to reduce the budget deficit to below 5% of GDP by 2026, marking a substantial improvement compared to the double-digit deficits observed in prior years. This progress signifies a critical advancement toward restoring investor confidence and achieving macroeconomic stability. President Mahama’s leadership offers hope that the country can navigate its current economic challenges and emerge stronger, more resilient, and more prosperous than ever before.

 

My Third Emphasis is on the BANKING SECTOR REFORM. The collapse of the banking sector in Ghana is considered one of the significant economic events in the nation’s recent history. The failure of several banks, because of what has been referred to as the “banking sector clean-up,” continues to be a topic of discussion. While regulatory authorities described their actions as efforts to strengthen the financial system, an alternative perspective suggests that some of the impacted banks experienced liquidation due to regulatory measures that might have had political motivations rather than solely focusing on protecting depositors and ensuring financial stability.

The selective process regarding the revocation of banking licenses raises significant concerns related to fairness and due process. While certain banks received government support to remain operational, others were permitted to undergo liquidation. This discrepancy has fueled speculation that the clean-up initiative may have served to realign economic power rather than constituting a purely technical intervention.

The banking crisis has resulted in significant consequences. Many jobs were lost, depositors faced uncertainty in accessing their funds, and investor confidence in the financial sector decreased. The reforms implemented within the banking sector have not stabilized the economy and have instead coincided with economic contraction and increased distrust of financial institutions.

The preceding government initiated a financial sector clean-up at an expense of GHS 29.9 billion. Although the official rationale centered on bolstering the banking system, critics contend that the measures adopted were excessive and politically charged. Isaac Adongo, a prominent critic of the banking sector reforms, has underscored the shortcomings associated with their implementation. He argues that the financial crisis was largely precipitated by the government’s failure to settle outstanding debts owed to contractors and businesses, which adversely impacted banks that had provided credit to these entities. Rather than addressing these fundamental issues, the administration opted for extensive bank closures, culminating in significant job losses and economic disruption.

The lack of a structured bailout strategy worsened the crisis. Unlike other countries with phased financial assistance for troubled banks, Ghana’s abrupt and uncoordinated actions led to many banks failing. This caused a confidence crisis in the financial sector. Many affected businesses, particularly small and medium-sized enterprises (SMEs), struggled to access financing, leading to closures, and reduced economic activity. The financial sector clean-up substantially elevated the public debt burden, as the funds utilized for deposit protection and payouts were predominantly obtained through government borrowing, thereby worsening Ghana’s already strained fiscal position.

On the Policy Interventions and the Way Forward, President Mahama’s administration is committed to addressing the lingering issues of the banking sector clean-up through a combination of policy reversals, targeted interventions, and governance reforms. One of the key measures being considered is the reassessment of the circumstances under which banks were closed. A technical review committee is expected to be established to investigate whether some financial institutions were unfairly targeted and, where justified, take steps to restore licenses to viable banks that were wrongly liquidated.

The government aims to strengthen corporate governance within the banking sector to prevent future crises. Measures such as enforcing stricter risk management frameworks, improving regulatory oversight, and ensuring that the Bank of Ghana operates with greater transparency and accountability will be prioritized.

Beyond addressing past missteps, the administration is focused on promoting financial inclusion and expanding credit access to businesses. Policies aimed at supporting indigenous banks, encouraging responsible lending, and improving liquidity in the financial sector will be introduced to stimulate economic growth. By rebuilding trust and stability in the financial system, the Mahama administration seeks to position Ghana’s banking sector as a catalyst for sustainable development rather than a source of economic distress.

 

Essentially, President John Mahama has demonstrated a committed approach to addressing these issues through the adoption of prudent monetary and fiscal strategies. By focusing on controlling inflation, reducing borrowing costs, restructuring debt, and enforcing fiscal discipline, Ghana is positioning itself towards economic recovery and sustainable growth.

Achieving long-term economic stability necessitates the synchronization of monetary and fiscal policies. Continuous collaboration between the Ministry of Finance and the Bank of Ghana (BoG) is essential to ensure consistency in policy formulation. Furthermore, implementing measures that reduce borrowing costs while maintaining a stable macroeconomic environment is critical. Although these reforms hold considerable promise, their success hinges upon consistent execution, transparency, and collaboration among monetary and fiscal policymakers.

Structural reforms will be necessary to enhance the productive capacity of the nation. Increasing investments in agriculture, manufacturing, and technology will facilitate Ghana’s transition away from excessive dependence on commodity exports, alleviating vulnerabilities to external shocks. It is vital to ensure that policy implementation and institutional reforms guarantee Ghana’s economic resurgence is both sustainable and inclusive.

While the journey to full recovery will require sustained effort and bold policy decisions, early indicators of progress suggest that Ghana is advancing in the right direction. By fostering an environment of transparency, accountability, and economic resilience, the current administration is establishing a foundation for long-term growth and prosperity. The upcoming years will be critical in determining the effectiveness of these reforms; however, it is evident that, under President Mahama’s leadership, Ghana is on the trajectory to rejuvenate its economy and reaffirm its position as a beacon of progress in Africa.

 

MOHAMMED, ABDUL – AZIZ BAMPOURI

Finance, Accounting & Corporate Governance Professional

2nd March 2025