Two economists, Professor Eric Osei-Assibey and Professor Peter Quartey have backed the Bank of Ghana’s (BoG) decision to support the government’s 2020 budget with GH¢10 billion.
Although the BoG has a memorandum of understanding with the International Monetary Fund (IMF) not to support government’s budget, the two economists believe the period the global economy finds itself in required that central banks support governments to finance their deficits.
In separate interviews, they said the BoG’s decision was ,therefore, a step in the right direction as it would help quicken the country’s economic recovery in the wake of the Covid-19 pandemic.
Speaking in an interview with the Graphic Business on May 18, Associate Professor at the Department of Economics, University of Ghana, Professor Eric Osei-Assibey, said, “I don’t think this is out of place at all. We are not in normal times and all over the world central banks are supporting governments with some kind of monetary and fiscal stimulus.”
“It is true that we have a freeze on central bank financing although the law guarantees up to five per cent but given the exigencies of time and given the shock, there is always an exclusive or exit clause where you can set aside some of these things in times of emergency and look at the greater picture of national interest,” he noted.
He said it was ,therefore, in order for the BoG to rise up to provide that kind of needed support to the government.
Quicken economic recovery
Prof. Osei-Assibey, also noted that it was necessary for the BoG to bail out the government now and not wait for the economy to slump to a level where it becomes very difficult to recover, as such a situation would affect the BoG’s monetary policy.
“Going forward, I think that law should even be relaxed to allow at least up to about five per cent of financing government budget for the next four to five years to quicken the recovery process over the medium-term.
“Emergency situations require emergency solutions and this situation was not caused by government overspending but a shock and there is nothing wrong with the central bank stepping in to support,” he stated,
Threat to inflation
Prof. Osei-Assibey, said his only concern about the bailout was to ensure it did become inflationary.
“We need to ensure it does not trigger higher prices, that is if we have too much liquidity without having an enhanced production base, you are likely to fuel inflation and that could be counterproductive,” he stated.
For that not to happen, he said the government must ensure that the money was directed to more productive sectors of the economy.
“The government should ensure that this support goes into enhancing the productive activities of the country and support businesses that are under this pandemic,” he said.
"Emergency situations require emergency solutions and this situation was not caused by government overspending but a shock and there is nothing wrong with the central bank stepping in to support."
In an interview on a radio programme which was monitored by the Graphic Business, the Director at the Institute of Statistical, Social and Economic Research (ISSER) at the University of Ghana, Professor Peter Quartey, said the decision of the BoG had become necessary as most economies, through their finance ministers were re-prioritising their expenditure to determine the shortfalls in revenue; both projected and actual.
“So far in the past couple of years, the central bank has provided zero financing to the government but we are not in normal times, and I believe it is just proper for the central bank to step in if it has surplus funds to help the government,” he noted.
He also advised the government to channel the resources into supporting the health and agriculture sectors of the economy.
“Large-scale commercial agriculture I believe could be one area that the government can pick about 10 farmers to support and then within the health and pharmaceutical sectors. These for me are two critical areas that the Finance Ministry can look into,” he stated.”
The Governor of the Bank of Ghana, Dr Ernest Adisson, at the last MPC press conference announced the central bank’s decision to support the 2020 budget with GH¢10 billion.
He said the Covid 19 pandemic had 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.
He noted that preliminary assessments show that the financing gap that was estimated at the time of applying for the IMF RCF in March had widened significantly, resulting in a large residual financing gap.
“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 the BoG’s purchases of government securities in the event of any emergency to help finance the residual financing gap.
“Today, under the Bank of Ghana’s Asset Purchase Programme, the bank has purchased a Government of Ghana Covid 19 relief bond with a face value of GH¢5.5 billion at the Monetary Policy Rate with a 10-year tenor and a moratorium of two years (principal and interest).
“The bank stands ready to continue with its Asset Purchase Programme up to GH¢10 billion in line with the current estimates of the financing gap from the COVID-19 pandemic,” he stated.