Bank of Ghana (BoG) Governor, Dr. Ernest Addison, has justified the bank’s decision to fund government spending in 2022 – stating that not doing so would have destabilised the economy.
As of November 2022, broad fiscal deficit exceeded the target of 6.7 percent of gross domestic product (GDP) – standing at 9.8 percent of GDP. With underperforming domestic revenue and no access to the international capital market, there was a risk of default. The central bank’s intervention, Dr. Addison explains, was therefore necessary to prevent an economic standstill.
In all, the central bank’s net claims to government amounted to GH¢44.5billion at the end of 2022.
“It is important to recognise that we could have gone into this crisis much earlier than we did; if the BoG hadn’t stepped in, investors in government bonds were not going to be paid the interest,” Dr. Addison said at the State Interest and Governance Authority (SIGA) annual stakeholder meeting at Kwahu Abetifi in the Eastern Region.
“We need to remember where we were coming from at the beginning of 2022 when we lost access to the capital market,” said Dr. Addison. “This is a government that had access to the capital market for at least US$3billion each year, but we started 2022 with a downgrading of the economy – and therefore the source of financing was not available.”
Governor Addison explained that the situation became unsustainable by mid-2022, leading to government’s decision to seek support from the International Monetary Fund (IMF).
He added that revenue measures were not successful, leading to financial distress: “In addition to that, the revenue measures were not working – with the revenue projections performing below targets. All those meant that government finances were in trouble, as expenditures needed to be funded but there was no money,” he narrated.
Overwhelmed, he said, government admitted the need for financing from the central bank while it explored other options. “We had been discussing this plan with the IMF over the last three to six months, and finally had a staff-level agreement in December.”
The plan, according to Dr. Addison, involves fiscal consolidation and debt restructuring.
“So when people speak as if we have been reckless, I disagree completely,” he said.
The Bank in an earlier statement issued last week revealed that the GH¢37.9billion overdraft was extended solely for the purpose of addressing auction shortfalls, paying matured bonds and financing critical imports. This was in addition to GH¢7.2billion which represented the bank’s purchase of Treasury bonds from banks to provide them with liquidity; and also GH¢8.9billion as on-lending facilities granted by the IMF for onward lending to government.
The BoG also highlighted the increase in government’s deposit liabilities at the Bank, which recorded an increase of GH¢9.5billion in the course of 2022.
“On a net basis, therefore, putting together all claims and netting-off all deposit liabilities, these transactions resulted in an increase in Bank of Ghana’s net claims to government by GH¢44.5billion,” the BoG said.
One of the IMF programme’s key objectives, according to Dr. Addison, is to ensure that the revenue and expenditure plan for 2023 does not require BoG financing – so as to make the central bank’s interest rate policy more effective.