Christian Akorlie, Cooper Inveen

ACCRA (Reuters – Ghana’s central banking announced on Monday its largest interest rate rise in over a decade. This is to stem rampant inflation which could lead to a debt crisis for one of the most powerful economies in West Africa.

Bank of Ghana raised the main lending rate to 17% by 250 basis points. This is a strong signal against an escalating price of commodities, from fuel to flour, as well as against a weakening local currency, which has lowered investor confidence.

This is Ghana’s largest ever increase, according to official records. More than twice the 100-basis point rise forecast by Reuters polling 10 economists last Wednesday.

Ernest Addison (the bank governor) stated that “inflation risks are on the upside” because of uncertainty around price development. The upside is that inflation risks are low.

Ghana has been long regarded as an emerging star among Africa’s emerging market economies. But, underwhelming oil revenues along with supply chain disruptions during the COVID-19 Pandemic have brought down expectations.

In February 2016, consumer inflation reached 15.7%, which is the highest level since 2016. Prices for food, housing and transportation have all seen significant increases.

Bakeries and restaurants have reduced their menus and cut back on staff. Over spiralling fuel prices, the national taxi driver union threatened strike. [L5N2VD7O1]

Things will only get worse with the war in Ukraine. Addision indicated that Ghana imported nearly 25% of its wheat and 60% of its iron from Ukraine. He expects inflation to rise to the targeted 8% plus or minus 2% range by year’s end.

The Ghanaian cedi is now at 20% under the dollar. It’s the second-weakest emerging market currency in a list with 20 units that Reuters monitors.

Addison attributed this to the recent downgrades of credit ratings agencies Moody’s(NYSE:) (Fitch), which he stated shook investor trust.

Ghana’s public debt total stands at $50.8 million (351.8 billion Ghanaian Cedi). This is about 80% according to the central bank statistics.

The central bank is working to rectify the situation. Monday’s rate rise marks the bank’s second consecutive increase in the prime rate within a single year (since 2015 and November).

Economists warn that a growing fiscal deficit can lead to an entire debt crisis.

Ghana’s ruling party claims that the solution is in a 1.75% electronic payment tax, also known locally as the e-levy, which was so detested last year by the opposition, it caused a brawl at parliament.

Some have proposed a programme of relief from debt through the International Monetary Fund. Ghanaian authorities, however, have not yet reacted to this suggestion.