Staff of the International Monetary Fund (IMF) are preparing to hold discussions with Ghana on the possible implications of parliament’s passage of the Amended Bank of Ghana (BoG) Act that includes 5% financing of budget deficit as against zero financing contained in the three-year bailout programme.
In April 2015, Government of Ghana signed a $918 million IMF Extended Credit Facility (ECF) to support medium-term economic stabilisation.
Senior Communications Officer of the IMF, Wafa Amr disclosed this to The Finder in a mail sent to the paper in response to questions regarding the possible implications of the approved 5% on the programme.
“Under the IMF-supported programme, the government committed to eliminate regular financing from Bank of Ghana (BoG).
“There has been significant progress toward this objective and the government has not received any new financing from BOG since the beginning of 2016.
“This is an important feature to support the credibility and effectiveness of the inflation-targeting framework for monetary policy.
“IMF staff will now assess and discuss with the authorities the possible implications for the programme of the adoption by Parliament of the Amended Bank of Ghana Act allowing central bank financing of the government”, Wafa Amr added.
Parliament passed the BoG Amendment Bill to allow central bank’s financing of the government’s budget deficit up to a ceiling of 5% of the previous year’s total revenue, instead of the zero financing demanded by the IMF.
Prior to the amendment, the BoG law, Act 662, states that the total of the loans, advances, purchase of treasury bills and securities, together with money borrowed by the government from other banking institutions and the public at the close of a financial year, shall not exceed 10% of the total revenue of the fiscal year in which the advances were made.
However, the IMF wants the funding eliminated, a condition the government must fulfil for it to conclude Ghana’s third programme review and disburse the next tranche of aid.
The Parliamentary Select Committee on Finance, which recommended 5%, is of the view that the zero financing provision being demanded by the IMF is unfair since it will negatively affect national development.
Central bank credit to government, which has been a major source of financing the deficit, was curbed at 5% of previous year’s tax revenue for 2015 and 0% for 2016 and 2017.
The share of interest payment on debt in overall government expenditure has grown from 8.5% in 2008 to 23.2% as of September 2015.
Conventional wisdom favours the notion that limited central bank lending to the government is conducive to lower inflation, and this, if sustained over the long run, promotes higher rates of economic growth.
Mr Cassiel Ato Forson explains
Mr Cassiel Ato Forson, Deputy Minister of Finance, in a statement, said even though Parliament has passed a BoG financing limit of 5% of previous year’s revenue in the BoG Amendment Bill, the government remains committed and would still continue to implement the ECF Programme as agreed with the Fund.
“In doing so, we will continue to adhere to the requirement of zero BoG financing under the IMF-ECF Programme—as a matter of fiscal prudence—as we have done since the beginning of the year”, he added.
“Prior to this year, we observed a reduction in BoG financing of the budget from 10%, under the BoG Act, to 5% in 2015,” the statement said.
Furthermore, it should be noted that under the Fund programme, government is allowed to temporarily borrow up to 2% of previous year’s revenue within a 90-day windows in special circumstances, Mr Forson added.
“To help us manage liquidity pressures under the zero financing, we are improving domestic revenue mobilisation with the implementation of tax measures, as well as improving tax administration.
“We have switched successfully to the Ghana Stock Exchange to finance long-term budget needs, compared to the relatively short-term BoG Treasury Bill market or auctions.
“Additionally, a number of initiatives to strengthen cash management are being implemented, including a Cash Management Operational Framework which forecasts revenue and public expenditure numbers two weeks ahead of time has been developed.
“The framework provides information on government cash flows on a weekly basis.
“The new Public Financial Management (PFM) Bill, currently being debated in Parliament, contains provisions for prudent economic management to codify for the first time some of the measures being implemented under the government’s own Home-Grown (and now IMF) Programme.
“For the first time, extensive provisions relating to budget and fiscal rules, including the budget deficit, financing and public debt, are also codified in the PFM Bill”, Mr Forson said.
The finder