In 2022 when revenue growth flattened and the borrowing window shut, what many expected was an economy without money, where salary payments will delay, imports, including fuel will shrink, businesses and consumers will face shortages, the country will default in its debt repayment and an economic chaos will set in similar to what occurred some four decades ago.
But that did not happen. Public sector workers continued to receive their salaries, there was no default while goods and services were readily available to businesses and consumers albeit at ridiculously high and unpredictable prices.
This prevented the imminent fuel and consumable shortages and the resulting queues, disorder and the tension that these beget.
In between these similar economic periods that produced different outcomes is the role of central banking in times of crises.
As lenders of last resort, central banks the world over are the last sources of hope when an economy is at the verge of collapse. How they exercise their novel power on money supply in response to those emergencies determine the extent to which the crises will impact the citizens.
In the United States of America and the United Kingdom, the large purchase of Treasury and mortgage-backed securities by their respective central banks ostensibly to inject liquidity into their economies and keep them afloat are recent examples.
Case of BoG
In the case of Ghana, the story is not different hence the need to contextualise discussions around the Bank of Ghana’s funding of government expenditures last year.
In 2022 when the borrowing window, which had become the most reliant avenue to plugging the revenue gap, closed, it became evident that the economy was literally out of the usual good choices. Instead, it had been pushed into survival mode and only hard options capable of steadying the ship to calm waters for standard policy choices to be discussed and taken were needed.
In response, the Bank of Ghana (BoG) turned to its deficit financing mandate which allows it to lend money to the government in sustenance of the economy in times of emergencies.
As the Governor of BoG, Dr Ernest Addison, said last month on the issue, there was no option or plan ‘B’ for the economy as far as keeping it together was concerned.
As a result, that gesture of the central bank helped to finance critical expenditures, including paying salaries and meeting fuel demands.
It also prevented a disorderly default of both servicing for domestic and external debt and that kept the system together until this year when a comprehensive debt management strategy has been discussed, adopted and now being rolled out.
Indeed, this support to the government, which the BoG said totaled GH¢44.5 billion last year, emerged as the real insulator that shielded the citizens and businesses from the real effects of the crisis.
Breakdown
In a recent press release that attempted to contextualise public debate on the matter, BoG explained that it purchased treasury bonds from banks worth GH¢7.2 billion to help provide the lenders with liquidity to meet their obligation to customers.
It also unlended GH¢8.9 billion of IMF resources to the government and used GH¢37.9 billion of its own resources to cover auction shortfalls.
While this took place, the government’s deposit liabilities at BoG totalled GH¢9.5 billion in 2022, bringing BoG’s net claims to the government for the year to GH¢44.5 billion.
Zero deficit financing
It is instructive to note that these events took place at a time the country had submitted itself to the International Monetary Fund (IMF) for a fund-assisted programme to stabilise the economy.
Given the fund’s strong opinion against deficit financing, it is clear that the fund signed them off, hence the government’s ability to still secure a staff-level agreement (SLA) in record time last December.
But as BoG said in its release, the central bank and the fund had agreed that the practice was suboptimal but a necessary arrangement to bailing the economy out of the crisis for a comprehensive solution to be adopted from this year onwards.
Indeed, the central bank cut lending to the government in 2016 as part of the terms of a memorandum of understanding (MOU) between the Ministry of Finance and the bank to implement a zero deficit financing mechanism.
That MOU, which was at the behest of the IMF, remained until 2020 when the effects of the COVID-19 pandemic led to it being set aside for BoG to lend GH¢10 billion to the government to resuscitate the economy.
The zero deficit financing continued in 2021 although the MOU had expired in 2019 only for the events of last year to necessitate the lending of the GH¢44.5 billion to the government.
Way forward
There is no belabouring the point that unrestrained deficit financing is counterproductive: It crowds out the private sector, fuels inflation, depresses demand and ultimately slows down economic growth.
This explains why the IMF is strongly opposed to it and has insisted on a zero deficit financing in Ghana.
However, as laws are made for man and not the reverse, it is a mark of prudence to bend backwards to save a situation with a temporary but emergent arrangement than allow an entire system to crash in a supposed defense for a standard.
Examples about in developed economies, including the USA, UK and Europe where central banks have stepped in during emergencies to keep economies afloat.
What should not be countenanced though is the abuse of these emergency windows. Fortunately, the BoG Governor has already admitted that the central bank cannot continue to hold the system together through continuous financing of government expenditure.
It is, therefore, heartwarming that plans to revert to the zero deficit financing policy are well grounded by all parties – BoG, IMF and the Ministry of Finance.
Also, the Minister of Finance, Ken Ofori-Atta, needs to rectify the anomaly by reporting the practice to Parliament in the spirit of transparency and good governance.
Although the BoG Act (Act 612), 2002 allows the central bank to finance the deficit of up to five per cent of the previous year’s revenues, that amount can sometimes be exceeded as happened last year.
In situations like that the same law requires the Finance Minister to report to Parliament for the necessary corrections to be done.
In the case of this very one, Mr Ofori-Atta could use the opportunity to further clarify the urgency of last year’ deficit financing for people to properly appreciate its role in keeping the economy and the country as a whole together till now.