BoG’s move away from deficit financing anchors price stability

Finance and Energy Policy Analyst, Richmond Eduku

Ghana’s recent price stability has been significantly anchored by the Bank of Ghana’s (BoG) disciplined shift away from direct financing of government deficits, according to finance analyst Richmond Eduku.

Speaking on the drivers behind the sharp decline in inflation, Eduku indicated that one of the most critical structural reforms underpinning the country’s improving macroeconomic environment is the central bank’s renewed commitment to monetary policy discipline and fiscal independence.

“Price stability does not happen by accident. It is the result of deliberate institutional discipline. The Bank of Ghana’s decision to significantly reduce direct financing of government deficits has played a central role in anchoring inflation expectations and driving price reductions,” he stated.

Ghana’s headline inflation, which stood at 23.8 percent in December 2024, has since declined sharply to approximately 3.8 percent by early 2026.

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This has been attributed to sustained disinflation to tighter liquidity management, improved fiscal coordination, and strengthened legal safeguards limiting central bank financing of government operations.

In addition, legislative amendments to the Bank of Ghana Act, approved in late 2025, tightened statutory restrictions on primary market purchases of government securities, further reinforcing monetary independence.

Eduku explained that when central banks excessively finance government deficits, the money supply expands rapidly, often outpacing economic output and fueling inflation.

“When deficits are monetised, excess liquidity builds up in the system. That liquidity eventually translates into higher prices, exchange rate pressure, and erosion of purchasing power. By stepping back from routine deficit financing, the Bank of Ghana has reduced that inflationary pressure,” he said.

He further noted that the disciplined approach has helped stabilize the exchange rate, strengthen investor confidence, and improve Ghana’s sovereign risk perception. With reduced fiscal dominance, the central bank has been able to recalibrate policy rates gradually, lowering the Monetary Policy Rate to 15.5 percent by January 2026 without triggering renewed inflationary pressure.

For households, the benefits are tangible; slower increases in food prices, more predictable transport fares, and improved stability in imported goods prices have eased pressure on living costs. Businesses have also benefited from a more predictable pricing environment, allowing for better planning and investment decisions.

Eduku stressed that sustained macroeconomic stability will depend on continued adherence to statutory limits on central bank financing, transparent reporting of government borrowing sources, and disciplined fiscal consolidation.

“Reducing monetary financing is not simply an accounting adjustment; it is a fundamental reset of macroeconomic management. By reinforcing its independence and focusing on price stability, the Bank of Ghana has laid a stronger foundation for sustainable growth,” Eduku concluded.