The Bank of Ghana’s (BoG) financing of budget deficits is set to end with the International Monetary Fund (IMF) programme’s introduction, Governor Ernest Addison has stated.
The Bank has faced criticism for its loans to government, which reached nearly
GH¢42billion by the end of 2022 with concerns centering around the growing public
debt stock and possible inflationary pressures.
As a result, it is expected that the IMF will require the signing and
enforcement of a Memorandum of Understanding (MoU) between the central bank and
fiscal authority, pledging zero-financing from the former as one of the
conditions for its US$3billion facility agreement.
To this end, Dr. Addison noted in a media statement after the 110th Monetary
Policy Committee (MPC) meeting that even without external pressure, proper
implementation of the IMF’s framework will render the Bank’s financing
activities unnecessary.
“If the policies are implemented as designed, there will be no need for the
central bank to step in,” he said, while expressing optimism that total
agreement with the Fund and first disbursement can be attained by end of
quarter-one.
As of June 2022, the economy was in a difficult position with no access to
international capital markets, low revenue and obligations to be met, leading
to the central bank’s direct financing of government.
“The central bank stepped in to ensure that the economy continued to function;
to service our debts for holders of government instruments to get their
payments. This was the scenario in June 2022.
“Revenues were not there, but the payments needed to be made. The central bank
had to support the system. There was really no choice and there was no plan B
but the system needed to be kept stable. But once the decision was made to go
to the IMF – plan B, it all changed. Plan A was not sustainable, as the Bank of
Ghana alone could not hold the system together for much longer,” Dr. Addison
explained.
The deficit financing, analysts say, was one of the major contributors to
dwindling the nation’s stock of reserves as it became inflationary through the
exchange rate channel [where more cedis flooded the financial system].
Data from the first Summary of Economic and Financial Data for the year
published by the BoG showed that at the close of 2022, Gross International
Reserves totalled US$6.2billion – equivalent to 2.7 months of import cover –
down from US$9.7billion, equivalent to 4.4 months of import cover at the
comparable period in 2021.
Similarly, the Net International Reserve dropped from US$6.1billion to
US$2.4billion during the period under consideration.
Already, provisional data on budget execution for the period January to
November 2022 indicate an overrun on the broad fiscal deficit, on a cash basis,
from the intended target of 6.7 percent of Gross Domestic Product (GDP) to 9.8
percent of GDP.
The 2023 budget has a deficit target of 7.7 percent of GDP, equivalent to
GH¢61.47billion and above the legally-mandated ceiling of 5 percent.
Source: B&FT