Deficit financing necessary evil – BoG
THE Bank of Ghana (BoG) says it expects the Finance Minister, Ken Ofori-Atta, to brief Parliament on financial support the central bank provided to the government last year as part of measures to contextualise the significance of that action in keeping the economy together.
The central bank said its loans to the government were necessitated by a bulgy funding gap that was occasioned by revenue underperformance and lack of market access, following ratings downgrades.
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“BoG financing was part of a crises management tool used in dealing with the difficulties of 2022,” it said in a statement signed by its Secretary, Ms Sandra Thompson on February.
As the economic woes deepened last year and funding sources dried up, the central bank said the state of government finances were pushed “into near external and domestic default,” making BoG the undesired option for a makeshift solution.
“With the above, the policy choices were not that of business as usual but rather a more challenged conduct of macroeconomic policy in the context of crisis,” the bank said in the statement responding to public commentary on the matter.
“The government needed to finance critical expenditures for which BoG needed to provide the necessary financing to avert a disorderly default of both servicing for domestic and external debt, including financing critical imports to keep the economy on the stable path,” it explained.
The release said BoG’s advances to the government totalled GH¢44.5 billion last year.
Zero deficit financing
Until 2020, BoG had operated a zero deficit financing policy as agreed with the International Monetary Fund (IMF) under the country’s 16th fund-assisted programme.
In 2020 when the COVID-19 pandemic peaked, the central bank suspended the policy under a certificate of emergency to purchase a GH¢10 billion sovereign bond that it said would help ease the financial constraint emanating from the crisis.
It, however, restored the policy in 2021 only to set it aside last year when the Eurobond market shut to the government, auction failures peaked and revenue lagged behind target.
Breakdown
The BoG release explained that as part of its support to the budget last year, it purchased treasury bonds from banks worth GH¢7.2 billion.
It said the purchases were to provide the lenders with liquidity to enable them to meet their obligation to customers.
It said it also advanced about GH¢8.9 billion, representing on-lending facilities granted by the IMF to the government while overdrafts extended to the government, solely meant for the purpose of addressing auction shortfalls and paying customers whose bonds had matured and for which government did not have adequate resources totalled GH¢37.9 billion.
“At the same time, government deposit liabilities at BoG recorded an increase of GH¢9.5 billion in the course of 2022.
“On a net basis therefore, putting together all claims and netting off all deposit liabilities, these transactions resulted in an increase in BoG’s net claims to the government by GH¢44.5 billion,” the statement said.
IMF position
In spite of its fierce resistance to deficit financing all over the world, BoG said in the release that the IMF agreed that it was a necessary mechanism to hold the system together for a sustainable solution.
“In fact, while the team from the IMF, who assessed the situation of the economy, noted that this outcome is sub-optimal, it was agreed that this temporary arrangement was needed as part of a comprehensive solution to be addressed in the government’s economic policies and programmes to be supported by the IMF. “And so, the indication in the media that the IMF came and uncovered the extent of the overdraft is wholly inaccurate.” BoG said.
Fiscal rule
The central bank noted that the ongoing debt operations were part of the corrective measures designed to address the financing problem of the budget.
It recalled that in 2020 the Parliament of Ghana suspended the Fiscal Responsibility Act, 2018 (Act,982) in view of the crises precipitated by the COVID-19 pandemic – a suspension that is yet to be reinstated by Parliament.
It also recalled that the former Minority Leader, Haruna Iddrisu, during the 2023 budget discussions in Parliament requested the Finance Minister to brief Parliament on the extent of BoG’s financing of government’s budget and on the new limit agreed, noting that: “We expect that this will be complied with.”
