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 t
he 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.
