IFS cautions over amendment of BoG Act
Policy think tank, Institute of Fiscal Studies (IFS), has urged the government to consider setting up an independent committee to review the Bank of Ghana Act, 2002 (Act 612) to table amendments that will strengthen the performance and efficiency of the central bank.
Advertisement
The policy analysis institute argued that the amendments should also come out with recommendations that could cure a major weakness of the Bank of Ghana Act – the lack of a formal mechanism for ensuring that the Bank of Ghana operates in consonance with the economic policy of the elected government.
“This weakness risks dis-coordinated fiscal and monetary policies and is a recipe for general policy disharmony. The government, being the elected body, has overall responsibility for the management of the economy and should be supported by the central bank to achieve its national policy objectives,” the IFS said in a policy paper on the proposed amendment of the Bank of Ghana Act.
Reasons for amendment
As part of Ghana’s programme with the International Monetary Fund (IMF), the fund has advised an amendment to the BoG to significantly strengthen the Central Bank’s functional autonomy, governance, and ability to respond to banking sector crisis. The process also seeks to plug the loopholes identified in the Act.
The amendment also seeks to separate the autonomy provisions from other objectives of the Bank to strengthen its functional autonomy in the performance of its functions, while ensuring that its financial statements are prepared in compliance with generally accepted accounting practices.
Terms of Reference
The IFS believes setting up a Committee, made up of people with technical competence on the subject, would bring credibility to the process as it would be seen by all parties as fair and productive.
The Committee’s terms of reference should include to recommend amendments to improve coordination of economic policy and monetary policy; enhance accountability of the Bank of Ghana and to allow the government to invoke reserve powers when there is an economic necessity or emergency, as was the case with the Bank of Canada taking such directives from the Treasury (Finance Ministry).
IFS suggests
The IFS was minded that central banks’ Acts internationally sought to carefully balance the issue of autonomy with accountability, stressing that the proposed Bill to amend the Bank of Ghana Act should, beyond seeks to strengthen the operational independence of the Bank, similarly reinforce the Bank’s accountability.
The policy think tank cautioned that any proposal to make price stability the “sole objective” of the Bank of Ghana would appear misplaced as that would imply that the Bank should pursue price stability exclusive of other important and related economic goals.
“The original construction in Section 3(1) of Act 612 whereby price stability is the “primary objective” of the Bank is appropriate and should be maintained. That is in line with international best practice (Bank of England, Bank of Canada, and Reserve Bank of New Zealand, European Central Bank System, US Fed) and Bank of Ghana should not be an exception,” it said.
Secondly, it said, in line with best practice, the government should be vested with the authority to set the monetary policy goal or the inflation target, while the Bank of Ghana was charged with the responsibility to use whatever instruments available to it to achieve the set target.
“In other words, government sets the target but the Bank of Ghana has operational independence in deciding how the target will be achieved,” the IFS stated in a study which contained its proposals.
It wants provisions in Bank of Ghana Act, 2002, that the Bank “shall support the general economic policy of the Government” to be maintained. That was because the central bank’s role to ensure price stability was only one component of government’s broad policy objectives, as they include economic growth, maximum employment, exchange rate stability and external balance, the IFS posited.
Interestingly, the policy think tank wants expunged from the Act provisions that the Bank should be “independent of instructions from the Government or any other authority”, arguing that the Bank should not operate with absolute independence but rather work in harmony with the government, which has overall responsibility for the management of the economy.
“No central bank has absolute independence but just an operational or functional independence to achieve the set target. All central banks are accountable to some level of “government”, either the Executive and/or the Legislature.”
The bank’s enhanced independence should, however, be accompanied by increased accountability and transparency – to the legislature and the public at large.
“To this end, and also in line with international best practice, we propose the addition of a clause that enjoins the Governor of the Bank of Ghana to appear regularly before the Finance Committee of Parliament to give account of the bank’s performance of its statutory mandate.”