BOG MAY 2020 MPC STATEMENT
Reversal Of Bog’s Stance
On [Budget] Deficit-Financing
During the decade-long Global Financial and other crisis from 2008, BOG did not apply any of its fiscal powers under the Act 612. On the contrary, the BOG and IMF curtailed access to Banks funding under Act 612 during Phase I of the IMF ECF Program, even as the economic plight worsened. The causes were (a) the Global Financial (2008); (b) disruption in gas supply from WAGPI (Nigeria) that created a major power (“dumsor”) crisis; and (c) aggravating the adverse budget overruns from implementing the 2008 Single-Spine Pay Policy (SSPP) (2010 to 2014). The economy declined further with the fall in crude oil prices from late-2014 to 2016, with a slump in Ghana’s GDP growth rate but not recession as other SSA states. The recovery under ECF Phase II came in 2017, under the current government, with crude oil exports from two (2) new oilfields (Sankofa and TEN) and recovery in its price.
Throughout these problems, BOG cautioned against “fiscal dominance” of monetary policy and was key enforcer of the “zero-financing” rule under the ECF Program. It prepared the Memorandum of Understanding (MOU) with MOF (ECF Prior Action or PC) to ensured that BoG will not extend a hand during the economic and fiscal crisis—not even use the 5 percent liquidity support under Act 612 to pay the one-time single-spine arrears.
IMF missions also insisted on accessing equally harsh domestic and external financial markets to pay for the deficit (ECF Prior Action or Pperformance Criteria). Ironically, this was required for the IMF to release the next tranche for BOG balance of payment (BOP) support, under market conditions that had to do with the OPEC crude oil price pressures and second BRIC-led crisis (2014-16), when Brazil, China and India (and most SSA states) went into recession. It was then that Ghana floated its 2015 Sovereign Bond at the highest interest rate of 10.75 percent.
- Reversing BOG’s fiscal stance
Hence, the reversal of BOG fiscal stance beyond COVID-19 fiscal needs defies IMF and BOG caution on “fiscal dominance” and “zero-financing”. In fact, under ECF Phase 1, MOF did not bow to intense pressure to “sweep” the Sinking Fund to lower the budget deficit. Between 2015 and 2017, Ghana used the Fund to redeem US$550 million of the 2007 (US$750) Sovereign Bond to avoid default and expensive rollover. The current Government used US$200 million of the US$550 million to redeem the final balance on October 4, 2017. It also drew down US$250 million in May 2020 from the Stabilization Fund for COVID-19 support, a quarter of the IMF’s RCF US$1 billion loan. Therefore, the current government becomes the main beneficiary of the petroleum (PFMA) fiscal buffers and stabilizers—to which it did not add much despite inhering three (3) from 2017, compared one (1) oil field between 2011 and 2016.
- Will BOG’s fiscal stance also be permanent
The issue is not about measures that respond to the COVID-19 crisis; the concern is the government’s poor record of making temporary measures permanent—and adhering to the PRMA. The following are concrete examples:
- Petroleum buffers and stabilizers
Since 2017, GOG has failed to use two (2) additional oil fields to improve the PRMA buffers. It has (a) not accounted well for the stabilization fund; (b) spent the budget funds (ABFA) mainly on consumption; (c) not retired a single external bond from the sinking fund—despite a low cap that brought in significant flows; (d) not replenished the contingency fund; and (e ) not paid anything into the Ghana Infrastructure Investment Fund (GIIF).
- Temporary “nuisance” taxes
GOG did not make the temporary levies lapse, despite calling them “nuisance” taxes and promising to end them from 2017. Since the Rawlings era, past governments use the Budget process for the temporary import duty and fiscal (corporate income tax [CIT]) stabilization levy. As austerity measures, they imposed them during “hard” times and used discretion to return to Parliament to remove them during recovery or in “good” times.
The current levies became effective in 2013, with gradual removal before the 2014 to 2016 global crisis—with certainty to make them lapse in 2017 with new fiscal flows from the TEN and Sankofa oil fields. Despite taking over these fields and Jubilee as well as a recovery in crude oil prices, the current government did not let the taxes lapse. Further, on taxes, it has blocked most VAT Input Tax Credit (ITC) that is due to registered VAT businesses and raised personal income taxes (PIT) on households, resulting in higher consumer prices and tax burden.
- ESLA extended to 15 years and beyond
Parliament passed the Energy Sector Levies Act (ESLA) in November 2015, with the energy and enhanced road levies, to resolve high levels of arrears that affect the banking sector. ESLA was to lapse within 3-to-5 years, which was the repayment period for the first ESLA restructuring loans with 15 domestic banks. Since 2018, the duration for the levy depends on the refinancing of some ESLA Bonds for about 15 years.
Given this background, the large fiscal gap could keep BOG’s funding over a long period. The Minister’s Statement is vague on the period of deferral for MOF’s interest payment obligations to BOG, as “… 2022 and beyond”. Parliament could should set a “renewable sunset date” for proper monitoring and repayment as economic conditions improve—a recovery in crude oil prices from the below US$20 pbl to US$30 pbl (plus) in the last three (3) weeks.
- BOG’s Balance Sheet “strong”
The fiscal support will weigh on BOG’s balance sheet, deprive it off valuable incomes, and add to domestic debt without servicing. The BOG facility of Ghc5.5 billion (possibly Ghc10 billion) to GOG has a moratorium of two (2) years, during which period, there will be no servicing of interest and principal. This will add to the deferral of interest payments on BoG debt of Ghc1.22 million approved by Parliament at the request of the Minister. These two significant (existing and new) domestic debt will add to the Public Debt (estimated to exceed 70 percent at end-2020) with annual cumulative effect, as the deferred amounts increase the principal. Hence, it is important to keep proper accounts of these accrued liabilities.
BOG’s engagement implies that it has a healthy balance sheet to withstand the weight of fiscal intervention and monetary intervention would have been a more useful mandate. It important to be cautious since the bulk of liability to depositors during the banking sector restructuring fell on the fiscal as loans, including the ESLA Bond. The redemption period for some bonds to customers of defunct banks for 3-to-5 years at zero (0) interest rate. Further, some state banks have not fully met their recapitalization.
It seems BOG did not get immediate and full foreign exchange flows and reserves benefits from recent MOF external loans. The MPC Statement notes: “GOG’s decision to access the Eurobond market earlier in the year and Rapid Credit Facility (RCF) financing from the IMF resulted in a build-up in reserves of US$1.5 billion (2.2 % of GDP)”—from a gross inflow of US$4.5 billion made up of Sovereign Bond (US$3 billion) and RCF (US$1.0 billion). This may be due to refinancing (backed by hard currency) and repayment of previous loans.
The post-COVID expectation is that BOG’s stance and measures will remain expedient and not bring back the ghost of “deficit” or “budget” financing. Ghana has experience of deficit-financing in the pre-SAP/ERP era in the 1970/80s which may seem a long time but still worth remembering. On occasions, BoG’s balance sheet has been impaired in the process and needed to fixing by the government. The frontloading of Public Debt that includes the full use of its IMF quota, early in the COVID-19 era, is worrisome since there is no prediction yet about when it will end. Ghana economic performance under the ECF Program was exceptional by African standards but the rush with which applied for the RCF loan not being followed by most “weaker” African states.
Given the varied experiences under the ECF Phases I and II, the IMF must develop “crisis” intervention guidelines—along the lines of mild, medium, and exceptional—for monetary and other interventions. COVID-19 is unique, with measures such as lockdowns, border closures, face masks, strain on health facilities, and social distancing rules that exacerbate its health and economic effects. The call for “crisis guidelines” is due to virtually conventional impact (though different in significance) of financial and non-financial crisis on developing countries: fall in aggregate demand in advanced economies [and elevated supply-chain disruptions]; consequential fall in demand for commodities and fall in their prices; fall in foreign currency flows and reserves; loss of fiscal revenues; and loss of production and employment.