Position Paper: There should be an enhanced harmonious relationship between BoG and Finance Ministry

**Call for Collaboration Between Bank of Ghana and Finance Ministry**

Prof. Isaac Boadi, Executive Director of the Institute of Economic Research and Public Policy (IERPPT), urges better cooperation between the Bank of Ghana (BoG) and the Ministry of Finance (MoF).

His call follows a recent policy rate hike from 27% to 28%. At the same time, 91-day Treasury bill rates sharply declined from 29% to 15%.

In Ghana, both institutions manage the Treasury bill auction market. However, their roles are distinct.

The MoF shapes the government's short-term borrowing strategy using Treasury bills. It determines how much money to raise and sets borrowing targets aligned with fiscal goals.

For example, the MoF might issue GH¢2 billion in 91-day T-bills for immediate needs. The Ministry also manages the maturity structure of these securities.

This ensures a balanced debt profile by staggering repayment timelines. It aligns repayments with revenue cycles, optimizing fiscal stability.

**Role of Bank of Ghana in Treasury Bill Auctions**

The BoG executes Treasury bill auctions on behalf of the government. In this role, it acts as both issuer and auctioneer for short-term borrowing.

The auction uses a competitive bidding system where banks and investors submit bids. They specify the yield they are willing to accept for T-bills.

The BoG evaluates bids sequentially, prioritizing those with lower yields. This minimizes borrowing costs until the total amount specified by MoF is fully subscribed.

After each auction, BoG establishes a cut-off yield based on accepted bids. This yield becomes the benchmark market rate for that tenor.

It influences broader interest rates in the financial system and reflects investor confidence in Ghana’s fiscal stability.

**Recent Trends in Treasury Bill Rates**

According to BoG's report, Figure 1 shows that 91-day Treasury bill rates dropped from 28.19% to 15.71% between January and March 2025.

Figure 2 illustrates that during this period, T-bill rates fell from 29% to 15%. Meanwhile, the policy rate increased from 27% to 28%.

From January to March 2025, T-bill rates reflected rising government borrowing costs but showed declining investor confidence—falling from 28.52% to 15.71%.

The monetary policy rate rose by only 100 basis points during this time while T-bill yields changed significantly by over a thousand basis points.

IERPPT emphasizes discussing how these changes impact businesses amid economic fluctuations.

**Impact on Businesses Due to Rate Changes**

An increase in monetary policy rates raises borrowing costs for businesses. Banks respond by hiking lending rates which can delay or reduce expansion plans.

Higher interest rates also dampen consumer spending across sectors like retail and real estate. Households may cut back on loans and mortgages due to increased costs.

Businesses with variable-rate debt face higher interest payments that squeeze profits. Over time, expensive credit can stifle investments and innovation leading to slower GDP growth.

These challenges force businesses to prioritize financial resilience while adapting strategies for tough economic conditions.

**Implications of Declining T-Bill Rates**

A sharp decline in T-bill rates signals shifts in government borrowing costs and investor sentiment. While firms holding T-bills see lower returns, it may indicate improved fiscal stability through lower inflation expectations.

Sustained low T-bill rates could eventually ease credit access for businesses as market interest rates decline over time. Companies might also shift funds into higher-yield investments like stocks or bonds due to reduced returns on T-bills.

This dynamic highlights how monetary conditions influence corporate financial strategies amidst changing market dynamics.

**Identifying Inconsistencies in Monetary Policy**

The simultaneous rise in policy rates alongside falling T-bill yields presents a paradoxical situation in Ghana’s monetary policy stance.

Typically, raising policy rates should tighten liquidity and increase short-term interest rates like T-bill yields but this has not occurred here.

Instead, falling T-bill yields suggest excess liquidity as investors bid down yields despite tightening efforts by BoG.

This contradiction indicates potential issues within monetary policy transmission mechanisms where central bank actions do not align with market behavior.

Such inconsistencies raise questions about underlying fiscal pressures or administrative interventions affecting borrowing costs.

**Business Challenges Arising From These Inconsistencies**

The divergence between rising policy rates and falling T-bill yields creates uncertainty for businesses regarding capital costs.

While firms face higher borrowing costs due to elevated policy rates, declining T-bill yields complicate financial forecasting.

This inconsistency increases risks of credit crunches as banks may prefer safe government securities over riskier loans.

Investment uncertainty deters long-term capital expenditures as firms await clearer monetary policies.

If low T-bill rates lead BoG to cut its policy rate later on, businesses could benefit from lower borrowing costs then.

Until such changes occur, sectors reliant on external financing must navigate volatility while balancing growth ambitions against liquidity preservation needs.

This misalignment risks capital misallocation undermining credibility within monetary policies overall.

**IERPP's Recommendations for Businesses**

Businesses should adopt cautious approaches by delaying major loan commitments until interest stabilizes.

To bridge funding gaps effectively during this period firms can explore alternative financing options such as equity injections or trade credits instead.

Monitoring BoG’s signals closely is crucial since sustained declines in Treasury bill yields may prompt future rate cuts benefiting credit-dependent sectors later on.

These strategies aim at enhancing financial resilience while navigating uncertain macroeconomic conditions ahead effectively overall without compromising operational capabilities significantly moving forward together collaboratively towards success ultimately!