Policymaking processes are either rule-based or discretionary, and the former is widely accepted in a democracy. Rule-based policymaking is predominately anchored on procedural democracy guided by the Constitution and other legal provisions. This often leads to predictable behaviours and makes policymakers confine themselves to certain rules to address socio-economic challenges. Discretionary policymaking, however, is the selection of the best decisions during economic uncertainties. The time inconsistency in this context is that government policies optimally agreed to be implemented at a given time may no longer be valid at later times. Most in post-crises, governments have little to no binding commitment to the original policy plan and policymakers will switch to other “better policy decisions” when in another crisis.
Often when government interferences affect the free market and other economic actors, politicians and policymakers will expect economic turbulence, and policy change, and behave in ways that will make the rule-based policy documents ineffective. The Domestic Debt Restructuring ( DBR) of Ghana led to the depletion of the Bank of Ghana’s net worth of GH60.8 billion.
The Bank of Ghana works with laws, regulatory frameworks and directives to direct monetary policies to support the government agenda. Per Section 30 (2) of Act 612 as amended by Act 918 “The total loans, advances, purchases of treasury bills and securities made under subsection (1) shall not at any time exceed 5 percent of the total revenue of the previous fiscal year. The amended section 30 further states that “where the total loans, advances, purchases of treasury bills and securities made under subsection (1) is 5 per cent of the total previous fiscal year’s total revenue, the governor shall notify the minister and parliament of the attainment of the limit under subsection 2 and the minister upon the notification shall report to parliament on the remedial measures to be taken.
Section 67 of Act 612 states “Except as otherwise provided in this act, a person who contravenes a provision of this act or regulations made under this act, or anything prescribed or direction made or given under this act” … “commits an offence and is liable on a summary conviction to a fine not exceeding 500 penalty units or to imprisonment for a period not exceeding two years or both”.
It has become publicly available knowledge that the Governor of the Bank of Ghana exceeded borrowings to the government by over 80% of the 2021 total revenue mobilization and this has resulted in skyrocketing inflation in the year 2022 which made life very uncomfortable for all Ghanaians. Estimates show that the inflation in 2022 impacted incomes and has sent about 800,000 Ghanaians below the poverty level.
This is where time inconsistency in public policy plays a role in crises and was demonstrated by the Central Bank. In a more dynamic context and to overcome time inconsistency where policy decisions are sequentially taken over time, crises will make governments delegate policymaking to institutions that are not directly accountable to citizens and do not depend on majority votes. This is the Central Bank.
To avoid this, first, we need to revise and enrich models of economic and monetary policies to better account for the role crises play in continuous developments. Secondly, I suggest, studying systematically and empirically, the actual causes of crises and citizens, who were able to sail through it all, will guide policymaking processes to create buffers for such uncertainties before, during and after. In most countries, efforts to develop public policies have focused on policies under certainty and risk, and have ignored the role of crises. In a world of true uncertainties, there is a need to adopt a behavioural policymaking approach to crises even when there are no crises. This is because, during crises, the public models of the economy fundamentally become different from the normal and often need ad hoc policy decisions, driving losses as observed with the Bank of Ghana.
It is important to note that in a crisis, existing policies and programs could be relevant or irrelevant but, in most cases, governments and politicians will switch to new or seemingly policies to address the crises leading to more financial losses.
Author
Peter Bismark Kwofie is a policy activist in Ghana with expertise in diagnosing business and economic barriers that stifle prosperity. His researches interest includes poverty alleviation and free trade. He works with the Institute for Liberty and Policy Innovation in Tema.
Image source: https://www.centralbanking.com/central-banks/2480744/bank-of-ghana
