COVID-19 exposes liquidity challenge of Ghana’s economy as BoG saves gov’t with GHC10bn
Adnan Adams Mohammed
A renowned economist has indicated that, Ghana’s existing
economic and liquidity challenges which hitherto were being suppressed by
government from exploding have been exposed badly by the Coronavirus (COVID-19)
pandemic.
Fortnight ago, the Finance Minister, Ken Ofori-Atta reported
to parliament as required by (section 30) of Bank of Ghana Act, 2002(Act 612)
as amended by Act 918 (2016) requesting a GHC10 billion financing from Bank of
Ghana.
This is clear indication that, the economy is been illiquid and
the printing of new money is needed as an immediate intervention to help ensure
there is enough currency at the banks for withdrawals to aid business and
household purchasing and consumption. This comes with inflationary
consequences. Before the outbreak of the COVID-19, many economists and
financial analyst had challenged the government’s much touted assertion that,
the economy was liquid after the two years period of clean-up exercise of the
banking and non-banking financial institutions sectors of the economy. Already,
some Ghanaians are of the view that the government is using COVID-19 to add on
to the already burdensome debt levels from any available source,
“COVID-19 is indeed a revealer. It has revealed that the
economy of Ghana has inadequate liquidity buffers”, Professor John Gatsi, Dean
of the University of Cape Coast School of Business has said in his latest
article.
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Professor John Gatsi |
However, Mr Ofori-Atta, last Friday, briefed Parliament
about government’s decision to borrow GH¢10 billion from the Bank of Ghana.
The amount is to finance the gap in the 2020 budget which
has been thrown out of gear as a result of the COVID-19 pandemic.
Chairman for the finance committee, Dr Mark Assibey-Yeboah
explained that several countries including even developed ones have had to fall
on their central banks for respite from the impact of the pandemic.
The minority, however, disagrees with the Central Bank’s
support to the government, despite the threat posed by the pandemic.
Minority Spokesperson on finance, Cassiel Ato Forson who had
accused the BoG of engaging in illegality argued government must rather cut
down on needless expenditure and re-prioritize instead of hiding behind the
pandemic to compound the public debt.
The former deputy finance minister indicated government’s
insatiable appetite for borrowing under the cloak of COVID-19 was as a result
of election 2020.
Central Bank’s support for government’s budget has been
halted for almost four years as part of the requirements imposed by IMF after
the country went to the Fund for a bailout.
Meanwhile, Prof Gatsi throws more light on the economy,
liquidity situation, debt levels amidst COVID-19.
Read below answers to pressing questions he shared with
Economy Times on Ghana’s economy to help the ordinary Ghanaian get the
understanding clearer:
Question 1:
Does COVID-19 period mean anything requested by government
is correct?
Answer:
No. Where the request is not in line with the rules the
request is inappropriate. Some people create the impression that we are not in
normal times and that government needs money so government is right in asking
anything. Some even explain that some laws should be shelved for now to allow
the government executes its programs. The truth is the emergency powers granted
the president does not overthrow our democracy nor the requirements of the
public financial management framework and debt management objectives.
Whatever government requests for must be within the rules.
Because if the misconception that we are in a crisis, we are not in normal
times is the reason why government would like to deplete the heritage fund and
can ask BoG for whatever amount even when is outside the rules then very soon
when public institutions are asked to surrender all their funds because we are
not in normal times such people will have no problem perhaps until government
asks them to surrender their personal savings because we are not in normal
times.
Question 2:
What is the meaning of BoG financing government?
Answer:
According to section 30 of Act612 as amended , it is a short
term loan to government by BoG and the interest on this loan is to be
determined by the Board of BoG and the Minister of Finance as an over- the-
counter transaction. For the avoidance of doubt the heading of section 30 is
temporal advances and subsection 3 requires the repayment within three months.
Any money taken or to be received that has the obligation of
repayment either with or without interest is called a loan.
Question 3:
What is the limit or amount allowed by law to be borrowed by
government from the BoG?
Answer:
According to Act 918 which amended Act 612 by introducing
subsection 7, total loans, advances, treasury bills and other securities MUST
not be more than 5% of previous year’s revenue. Any borrowing more than this
requirement is illegal and the explanation that we are not in normal times does
make it legal.
In 2019, the total revenue was approximately GHC52 billion
and 5% of this is equal to GHC2.6 billion. The BoG has already provided GHC4.5
billion to government which is a violation.
Question 4:
What happens in an emergency?
Answer:
Section 6 of Act 612 authorizes the Minister of Finance, the
Governor of the Bank of Ghana and the Controller and Accountant-General to meet
and determine the limit or the amount to be borrowed above the earlier 5% of
previous year’s revenue rule. It means in an emergency government can borrow
from BoG more than the GHC2.6 billion but only after the amount determined by
the three parties is submitted to parliament for approval.
The approval rules in article 181 and section 56 of the
public financial management Act requires prior approval by parliament before
borrowing takes place especially when government already received funding from
the Stabilization fund($219million), World Bank ($100million) and IMF
($1billion).
Question 5:
So what is wrong with the GHC10 billion loan?
Answer:
1. Because BoG has disbursed above the 5% rule before
reporting to parliament for approval
2. The entire section 30 is about short term loans to
government to be repaid in three months but BoG is lending this money through a
ten - year bond in which repayment of interest and principal starts after two
years. This means it is no more a short term loan. Section 30 does not give
such authority to the parties to convert the short term arrangement to a long
term loan agreement.
Question 6:
Why the limitation to short term loan?
Answer:
The general rule is government does not borrow from itself
through short term loan. Also to avoid
what Fiscal management experts called fiscal dominance which may undermine the
monetary policy role of BoG with contagion effects.
In exercise the authority granted the trio to determine the
amount to borrow from BoG in an emergency, they should not overlook the risk to
the economy if excessive amounts are borrowed from the BoG.
Section 30 is therefore a special arrangement with clear
conditions.
That is the reason why the public financial management Act
prohibits public institutions from buying treasury bills.
So borrowing from BoG is meant to address short term
financial needs even under emergencies.
Question 7:
What is the
conclusion?
Answer:
The conclusion is that there is a 5% rule of borrowing from
BoG by government. The borrowing is
short term and not long term as the government is seeking to do.
There should be prior approval of any amount determined by
parliament. Also this arrangement is not an ordinary support, it is a loan. The
interest rate on the loan is the BoG policy rate and is a floating interest
rate meaning if the policy rate goes up the repayment burden goes up.
Very educative exposition. Thank you
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