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.