Bank of Ghana must temporarily support govt budget -IEA

The Institute of Economic Affairs (IEA) has urged the Bank of Ghana to amend its Act which requires zero financing of government budget to enable it to temporarily support the budget of government in these difficult times.

The institute believes the central bank must exercise its mandate as banker and financial adviser to government by lending to the government.

A press release issued by the institute said: “This will require amendment of the Bank’s (Amendment) Act, which reduced the previous ceiling on lending to government from 10 per cent of previous year’s revenue to zero per cent.

“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.

“The 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,” it noted.

Adequate foreign reserves
The institute, however, pointed out that for the BoG to provide the needed support to the economy and government in a less inflationary way, the bank must have adequate foreign exchange reserves to back the domestic currency.

“It is important, therefore, for the bank to build up its reserves substantially above the current US$7-8 billion dollars level. And, to that end, one important low-hanging-fruit is for Ghana to increase its share of the world chocolate market, which is worth US$100 billion, rather than continuing, 63 years after independence, to share only the raw-beans market that is worth a paltry US10 billion.

“To be able to do this, the BoG should spearhead concrete, beyond-lip-service policies to add value to our cocoa beans through scaled-up local processing and refinement, which will have the additional benefit of creating jobs here in Ghana.

“It is for this reason that we support our President’s recent polite rejection of the suggestion by the President of Switzerland that Ghana should increase its cocoa exports to that country,” the institute explained.

Enforcing policies
The IEA also urged the BoG to ensure that the measures it has rolled out to combat the COVID 19 pandemic do not remain mere paper directives, but strictly enforced and observed by banks and other financial institutions.

At its March sitting, the Monetary Policy Committee of the Bank of Ghana reduced the Policy Rate by 150 basis points from 16 per cent 14.5 per cent.

The central bank also reduced the primary reserve requirement of banks from 10 per cent to eight per cent, while also directing banks and Specialised Deposit-Taking Institutions to ease repayment of loans that may experience difficulty due to the slowdown in economic activity.

The IEA believes the slashing of the policy rate was a necessary step to induce lower lending rates for business and consumer loans.

It also noted that the reduction of the primary reserve would free locked-up liquidity for banks to support the economy and was, therefore, a step in the right direction.

The IEA, however, cautioned the BoG to ensure that these directives inure to the benefit of the economy as a whole and not only remain on paper.

“For instance, we know that banks invariably show inertia in responding to policy rate adjustments, particularly in the downward direction. The BoG also expressed concern about the possibility of banks using the extra liquidity freed up for them to buy treasury bills rather than lending it to the private sector.

“Therefore, to make the monetary policy rate cut effective and also ensure that banks lend their freed-up reserves to the private sector, the BoG should, as of necessity, follow up with a strong directive to banks to act accordingly.

“We are even calling on the bank to set up a multi-stakeholder committee that comprises representatives from the Bank of Ghana, Ministry of Finance, Ghana Bankers Association, Association of Ghana Industries and civil society to enforce the measures,” the institute pointed out.

Commends govt’s response
The IEA in the press release also commended the government for its response to the economic impact of COVID 19.

The government has mobilised a GH¢1 billion stimulus package to support small businesses which have been affected by the pandemic.

The IEA described it as an important initiative that would prevent these businesses that constitute the backbone of the economy from going down and taking with them many households and livelihoods.

“Our wish is that the National Board for Small-Scale Industries (NBSSI) will administer the package fairly and judiciously for the maximum benefit of the affected businesses, while also calling on the businesses to use the funds prudently and productively,” it stated.