Financing of govt’s 2022 budget caused inflationary pressures – Financial Analyst

A Financial Analyst, Mr Joe Jackson has observed that the Bank of Ghana’s (BoG) financing of the 2022 budget of the government contributed to the high inflation rate.

“When the BoG finances the government in a way it did, that effect is very inflationary. Whiles, you were doing that, you were actually adding to the inflationary part of the economy. It is of great concern,” he said on the Big Issue on TV3 Monday, February 13.

Regarding the BoG’s agreement with the Finance Ministry to commit to zero financing of this year’s budget and subsequent ones, Mr Jackson said “I’m glad that BoG has signed on to zero financing for the government.”

On the issue of zero financing, Speaking at the launch of the 60th-anniversary celebrations by the Institute of Chartered Accountants Ghana (ICAG), Head of Banking Supervision at the Bank of Ghana, Osei Gyasi, said the move was necessary to contain the country’s rising debt as well as control inflation.

“Monetary financing of the government deficit which was pursued to prevent domestic default arising from systemic auction failures during 2022 will end under the programme”, he said.

Mr. Gyasi added “to achieve this, the Bank of Ghana and the Ministry of Finance will commit to zero-financing of the budget in 2023 and beyond which is expected to trigger a disinflation path and downward trends in the policy rate as well as restore the country’s reserve buffers to at least three months of import cover by end-2025.”

The central bank earlier justified its financing of the budget in 2022.

The BoG said while this particular issue has been comprehensively addressed in an earlier press release, dated 11th November 2022, and more recently at the Monetary Policy Committee press conference on 30th January 2023, “Bank of Ghana is compelled to re-state its earlier assessment and address misinformation and inaccuracies, and to anchor the discussions in the public domain.”

First, it explained that it will be important to recall the circumstances under which the Government of Ghana decided to seek International Monetary Fund (IMF) support.

A statement issued by Secretary to the Bank Sandra Thompson on Thursday, February 9 explained that Ghana had lost access to the International Capital Market, domestic revenue was significantly underperforming and not realized, pushing the state of government finances into near external and domestic default. With the above, the policy choices were not that of business as usual but rather a more challenged conduct of macroeconomic policy in the context of crisis.

The government needed to finance critical expenditures for which Bank of Ghana needed to provide the necessary financing to avert a disorderly default of both servicing for domestic and external debt including financing critical imports to keep the economy on a stable path.

“In fact, while the team from the International Monetary Fund (IMF), who assessed the situation of the economy noted that this outcome is sub-optimal, it was agreed that this temporary arrangement was needed as part of a comprehensive solution to be addressed in the Government’s economic policies and programmes to be supported by the IMF. And so, the indication in the media that the IMF came and uncovered the extent of the overdraft is wholly inaccurate,” the statement said.

It added that secondly, it must be recognized that the ongoing debt operations are part of the corrective measures designed to address the financing problem of the budget.

Bank of Ghana financing was part of a crises management tool used in dealing with the difficulties of 2022. In 2020, the Parliament of Ghana suspended the Fiscal Responsibility Act, 2018 (Act,982) in view of the crises precipitated by the COVID-19 pandemic.

“The Fiscal Responsibility Act has not yet been reinstated by Parliament. Against this backdrop, below are details of the Bank of Ghana’s claims on the Government as at December 2022:  GH¢ 7.2 billion, representing Bank of Ghana’s purchase of treasury bonds from banks to provide them with liquidity to enable them meet their obligation to customers;  GH¢ 8.9 billion, representing on-lending facilities granted by the International Monetary Fund (IMF) for onward lending to Government;  GH¢ 37.9 billion, representing overdraft extended to Government, solely meant for the purpose of addressing auction shortfalls and paying customers whose bonds had matured and for which Government did not have adequate resources;  At the same time, Government Deposit liabilities at the Bank of Ghana recorded an increase of GH¢ 9.5 billion 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 the Government by GH¢ 44.5 billion.

“We would like to draw the public’s attention to the statement made by Hon. Haruna Iddrisu during the 2023 budget discussions in Parliament in which he requested the Finance Minister to brief Parliament on the extent of Bank of Ghana’s financing of the Government’s budget and on the new limit agreed. We expect that this will be complied with.”