By J. Atsu Amegashie
THE Bank of Ghana has defended its breach (in 2022) of the limit on lending to the government by appealing to section 30(6) of the Bank of Ghana Act (2002): “In the event of any emergency, the Governor, the Minister and the Controller and Accountant-General shall meet to decide the limit of borrowing that should be made by the Government and the Minister shall submit a report on the issue to Parliament within seven sitting days.” and section 19(1): “Where there is an internal disorder, external exigencies, national disaster or critical financial or economic crisis or other exigencies requiring immediate action and there is insufficient time to call a meeting of the Board, the Governor may, after giving notice to the Minister, exercise the powers of the Board and take necessary action.”
But, in May 2023, the governor of the Bank of Ghana, Dr Ernest Addison, said that “What do you call an emergency, let’s define it very carefully and to make it clear the conditions under which the rules can be breached. The procedural issues and law are not very clear.”
However, the governor was quick to add that “… all of these issues have to be properly clarified in the law and I believe that there is a need to do that. But even if you had the most perfect law, what happened in 2022, would not have been different because the choice of either to grind the economy to a halt or allow government operations to come to a standstill, which is worse than the problem itself. So, the issue of the law is fine, but when you’re in an economic crisis, things have to be done differently.” (https://3news.com/bank-of-ghana-act-needs-clarity-addison/).
In some (rare) circumstances, a central bank’s financing of government budget deficits (i.e., monetary or deficit financing) is necessary. But monetary financing is a tool that is prone to abuse by politicians. Adair Turner, Chairman of the UK’s Financial Services Authority during the 2008-2010 global financial crisis, made this point poignantly as follows:
“In response to … the macroeconomic harm which excessive monetary finance has produced in many economies, modern economic policy has gravitated to the consensus that the only way to contain the dangers of monetary finance is to prohibit it entirely. Many central bank mandates therefore make monetary finance illegal (e.g. European Central Bank Article 123.1), and even when not prohibited by law, monetary finance is considered a taboo policy option.
There can indeed be a logically consistent and entirely respectable point of view which recognises that monetary finance is technically feasible and in some circumstances an optimal policy instrument. But nevertheless prohibits the use of monetary finance in all circumstances in order to prevent its excessive use. The central issue with money finance therefore is a political one – whether we are capable of designing a set of political economy rules, responsibilities and relationships which can allow us to obtain the technically possible benefits of money finance while constraining the dangers of excessive misuse.”
Dr Addison has challenged us to think about ways of strengthening the law (e.g., “What do you call an emergency, let’s define it very carefully and to make it clear the conditions under which the rules can be breached”). This is similar to Adair Turner’s point about “… whether we are capable of designing a set of political economy rules, responsibilities and relationships which can allow us to obtain the technically possible benefits of money finance while constraining the dangers of excessive misuse”. I want to look at a related issue. Even if we agree that there is an emergency (e.g., the government cannot borrow from the international capital market), how should that emergency be handled? To answer this question, let me quote Dr Addison again. In a special press briefing on August 21, 2023, the governor said that:
“The Bank extended additional overdraft to the government to address auction failures and prevent domestic default, and enabled government to meet domestic debt obligations and other critical payments needed to avoid a disorderly halt to economic activity. … Throughout the first half of 2022, there was no new foreign financing until July when the Afrexim Bank stepped in to support with US$750 million … You would recall that many people doubted if the economy was in crisis because they did not hear that interest payments on bonds were not being paid in early 2022; they did not see queues at the pump for petrol and diesel; there were no shortages of essential items on the market; and they did not hear that public sector workers, including civil servants, the Police and the Military, were not being paid their salaries. The reason was that the Bank of Ghana had provided the needed support to keep the economy going.”
Regarding the governor’s point about the absence of “queues at the pump for petrol and diesel” and the absence of “shortages of essential items on the market”, the bulk of these items (e.g., the imports of petrol and diesel) are provided by the private sector (e.g., by the Ghana Chamber of Bulk Oil Distributors). The Bank of Ghana may have provided funds to these private importers. But that is not part of government expenditure. I am interested in the central bank’s financing of the government’s budget.
The Bank of Ghana played a crucial, important, and necessary role because Ghana could not borrow from the international capital market in 2022, a market from which Ghana had borrowed about $3 billion annually. However, it is important to note that the Bank of Ghana was not obliged to give the government exactly what the government asked for. This is why the Bank of Ghana Act provides that “in the event of an emergency, the Governor, the Minister and the Controller and Accountant-General shall meet to decide the limit of borrowing that should be made by the Government and the Minister shall submit a report on the issue to Parliament within seven sitting days.” Thus, in such circumstances, lending (including transfers) by the bank to the government should involve discussions, disclosure of fiscal information, etc. To hold the government fiscally accountable, the Bank of Ghana can give the government less than what the government wants with the goal of forcing the government to cut frivolous expenditures and/or delay nonessential/nonurgent expenditures. Central banks are supposed to be independent.
Suppose the Bank of Ghana gave the government exactly the amount of money that the government had asked for. In his special press briefing on August 21, 2023, the governor could have given the public specific figures, so that the impression will not be created that the Bank of Ghana overfinanced the government (taking into account the government’s budget deficit in 2022, the $750 million that the government got from Afrexim Bank, other loans to the government, etc).
Section 30(6) of the Bank of Ghana Act (2002) requires that, in the event of lending above the statutory limit, “… the Minister (of finance) shall submit a report on the issue to Parliament.” The parliament of Ghana approved the government’s budget in 2022. Paragraph 28 of the 2022 annual public debt report states that “The 2022 budgetary outcome shows an overall budget cash deficit of GH¢50,497.0 million against a revised programme deficit target of GH¢38,900.3 million.” On page 96 of its 2022 annual report, the Bank of Ghana stated that “Loans and advances to Government were all on-lending facilities from IMF. This constituted Extended Credit Facility and IMF Allocations of US$1.38 billion and US$621 million respectively (2022 GH¢17.2 billion)”, an implied exchange rate of $1 = 8.63 cedis. The government’s revenue/grants in 2022 could not have included the $750 million (about 6.48 billion cedis, using the exchange rate of $1 = 8.63 cedis) loan from Afrexim Bank. Thus, there were inflows of 6.48 billion cedis (from Afrexim Bank) and 17.2 billion cedis (from the Bank of Ghana via the IMF) to the government for a total of 23.68 billion cedis. This should have reduced the government’s maximum fiscal need from the Bank of Ghana from 50.497 billion cedis (its estimated budget deficit) to about 26.817 billion cedis.
In a press statement on August 11, 2023, the NDC alleged that the Bank of Ghana printed an amount of 42 billion cedis and transferred it to the government in 2022. What is the source of the NDC’s figure? In its 2022 annual report, the Bank of Ghana stated that “Loans and advances to Government were all on-lending facilities from IMF”. These on-lending facilities (loans denominated in dollars granted by the IMF to the Bank of Ghana for onward lending to the government. Thus, the 17.2 billion cedis above was not money printed by the Bank of Ghana and lent to the government. It appears that the NDC added this amount to other amounts and claimed that the Bank of Ghana printed “… a whopping GHS 35 billion in 2021 and GHS 42 billion in 2022 to finance the Akufo-Addo/Bawumia/NPP government.” The governor of the bank, in his special press briefing on August 21, 2023, disputed this claim. He said that “It is not true that the Bank of Ghana has been providing financing for the Government every year. There has been zero financing in 2017, 2018, 2019 and 2021. The Bank of Ghana has only had to support in the pandemic year of 2020 and the crisis year of 2022. …. . Almost all lending from the IMF, including the Extended Credit Facility and the Rapid Credit Facility during the Covid 19 pandemic, and all financial sector resolution bonds have all been added as Bank of Ghana lending to Government. This is not factual.”
I do not know the source of the NDC’s information that the Bank of Ghana printed an amount of 42 billion cedis to finance the government’s budget in 2022. However, information in the Bank of Ghana’s press release titled “Bank of Ghana’s response to statement by honorable Isaac Adongo” on November 11, 2022 is instructive (https://www.bog.gov.gh/wp-content/uploads/2022/11/BANK-OF-GHANAS-RESPONSE-TO-STATEMENT-BY-HONOURABLE-ISAAC-ADONGO-11-11-22.pdf). Adding the cash flow from the IMF’s facilities on-lent to the government (17.774 billion cedis) and government overdraft (25.623 billion cedis) and subtracting total government deposits at the BoG (4.042 billion cedis) gives a net cash flow of 39.364 billion cedis from the Bank of Ghana to the government between January 2022 and October 2022. Was there an additional cash flow in November and December 2022 from the Bank of Ghana to the government? The difference between the the IMF’s on-lent facility of 17.774 billion cedis reported in November 2022 and the IMF’s on-lent facility of 17.2 billion cedis in the bank’s 2022 annual report may be the result of revaluation of these claims in the Bank of Ghana’s books to account for changes in the exchange rate.
In general, the following straightforward formulas determine the central bank’s overfinancing of the government:
(1) The government’s fiscal need from the Bank of Ghana = “Government budget deficit (defined as expenditure minus revenue/grants)” minus “domestic loans (treasury bills, etc)” minus “foreign loans (eurobonds, IMF, etc)”.
(2) Bank of Ghana overfinancing = Bank of Ghana’s loans/advances to government minus government deposits at the Bank of Ghana minus the government’s fiscal need from the Bank of Ghana, if the fiscal need in (1) has a positive value.
(3) Bank of Ghana overfinancing = Bank of Ghana’s loans/advances to government minus government deposits at the Bank of Ghana, if the fiscal need in (1) has a non-positive value, in which case the government’s fiscal need is zero.
We may put this measure in the form of a ratio by expressing the Bank of Ghana overfinancing as a percentage of the government’s fiscal need (as defined in (1)).
Paragraph 52 of the 2022 annual public debt report states that “Net borrowing in 2022 was GH¢9,401.1 million.” Using the formula in (1), the government’s fiscal need from the Bank of Ghana in 2022 was GH¢50.497 billion – GH¢9.401 billion – 17.774 billion – 6.48 billion = GH¢16.842 billion. Then, using the formula in (2), the Bank of Ghana’s overfinancing of the government = GH¢25.623 billion – GH¢4.042 – GH¢16.842 billion = GH¢ 4.739 billion, which is 28.13% of the government’s fiscal need from the Bank.
Implicit in this analysis is the treatment of the central bank as a lender of last resort to the government. That is, the government’s fiscal need from the central bank was determined after taking account of all of the government’s cash inflow (including loans). In reality, when the central bank lends to the government or finances the government’s budget, some of the government’s annual inflows may be estimated flows, some loans may be negotiated later or some bonds may be issued later, there may be less or more than expected tax revenue, etc. Therefore, the central bank’s overfinancing of the government’s budget may not be deliberate or anticipated. This may not be a problem if the government must repay the loan (with interest). However, when the government’s fiscal need from the central bank is the result of an emergency triggered by an unsustainable debt and/or there is no credible signal of fiscal discipline, the government’s ability to repay the loan is questionable. To minimize the risk of overfinancing, the central bank should, like the IMF, give its loans/advances to the government in tranches while monitoring the government’s other cash inflows, especially loans from other sources.
In its justification of the direct purchase of the government of Ghana Covid-19 relief bond (GHc 10 billion) in 2020, the Bank of Ghana stated that:
“The COVID-19 pandemic has put a severe strain on the budget, manifesting in petroleum revenue shortfalls as a result of plunging crude oil prices, shortfalls in import duties, other tax revenues, and non-tax revenues. Preliminary assessments show that the financing gap that was estimated at the time of applying for the IMF RCF in March 2020 has widened significantly, resulting in a large residual financing gap. Current market conditions in the wake of the pandemic, will not allow the financing of the gap from the domestic debt capital markets without significantly increasing interest rates. Under the circumstances and in line with section 30 of the Bank of Ghana Act, 2002 (Act 612) as amended, the Bank of Ghana has triggered the emergency financing provisions, which permits the Bank to increase the limit of BOG’s purchases of government securities in the event of any emergency to help finance the residual financing gap.”
The Bank of Ghana’s reference to a “residual financing gap” is similar to what I have referred to as the “government’s fiscal need from the Bank of Ghana”, although the “residual financing gap” may take account of only flows from revenues, not loans. In the interest of fiscal transparency and accountability, this residual financial gap and the magnitude of overfinancing (if any) should be published in the government’s annual budget statements. In fact, overfinancing is possible even if the 5% limit in the Bank of Ghana Act is not exceeded.
Before the IMF, an international central bank of last resort, gives financial support to countries in a crisis (an emergency), it scrutinizes their expenditure and economic plans over several weeks or months. National central banks should not act differently. Central banks are supposed to be independent. While lending to their central governments in an emergency, they should also hold their central governments accountable. Holding the government accountable is consistent with the spirit of the provision of the Bank of Ghana Act (612) that limits financing of the government to 5 percent of the previous year’s tax revenue.
Adair Turner, The Case for Monetary Finance – An Essentially Political Issue, Paper presented at the 16th Jacques Polak Annual Research Conference hosted by the International Monetary Fund, November 5 – 6, 201