The Institute of Economic Affairs (IEA) has commended the Bank of Ghana’s measures introduced to support banks and the economy deal with impacts from the coronavirus pandemic, including the decision to finance government’s budget.
After the country recorded its first coronavirus case in March, and subsequently went into a three-week lockdown in April to control the spread of the disease, banks and the private sector were negatively impacted by the economic shutdown – moving the central bank to introduce a raft of measures to support them. The bank has further made GH¢10bn available to support government’s budget.
Governor of the Bank of Ghana, Dr. Ernest Addison, says the bank has triggered the emergency financing provisions in section 30 of the Bank of Ghana Act 2002 (Act 612) to purchase a government of Ghana COVID-19 relief bond with a face value of GH¢5.5billion at the monetary policy rate, with a 10-year tenure and a moratorium of 2 years.
The Governor further stated that the central bank stands ready to continue with its asset purchase programme up to GH¢10billion, in line with current estimates of the financing gap from the COVID-19 pandemic. The Bank of Ghana’s decision has attracted mixed reactions from both political actors and financial analysts, with the IEA being the latest to wade into the debate as to whether it is prudent for such an intervention or not.
In the view of the IEA, financing from the central bank is better than funding the budget deficit from external borrowings, which wouldn’t be good for the mounting public debt.
“It has to be emphasised that in a developing country, the central bank should be able to offer some financing to government at a much cheaper rate than is available elsewhere, albeit subject to caps. Government’s lack of access to central bank money will compel it to borrow at much higher rates from the domestic bond market, where it will crowd out the private sector; or from international markets, leading to undesirable escalation of the public debt and erosion of long-term fiscal and debt sustainability.
“We therefore support the Bank’s decision to waive the existing zero-ceiling on its lending to government and its subsequent decision to purchase GHؓ¢10billion of Treasury bills. It is not only the BoG that is extending credit to its government.
“Many central banks across the globe, including even those in mature economies, are offering a helping ‘financial hand’ to their governments at this unprecedented time of need. We hear some people say that this will be inflationary. What we say to them in reply is that this is also a matter of survival. We need to survive the pandemic first and then find the means to solve any inflation that may be associated with it,” the IEA said in a statement.
Other measures the Bank of Ghana introduced include reducing the primary reserve requirement of banks from 10 percent to 8 percent, to free locked-up liquidity for banks to support the economy. This, the IEA says, is a step in the right direction.
Another one is the directive for banks and Specialised Deposit-Taking Institutions to ease repayment of loans that may experience difficulty due to the slowdown in economic activity. For the IEA, this directive will certainly bring relief to businesses and consumers that are expected to be impacted by the pandemic.
Besides the central bank’s financing and intervention in the banking industry, the IEA says government got it right in going to the IMF to access the US$1billion Rapid Credit Facility, and also tapping into the Ghana Stabilisation Fund – saying that sourcing all of these funds is in order, given the gravity and urgency of the situation.