The Bank of Ghana (BoG) has been under scrutiny recently for its decision to finance the budget post Covid-19, a move that has raised concerns about the bank’s independence and the long-term implications for the country’s economy. The BoG’s policy of zero financing of the budget between 2015 and 2020 was a key pillar of its efforts to maintain price stability and promote sustainable economic growth. However, the Covid-19 pandemic presented unprecedented challenges, leading to a significant drop in government revenue and a sharp increase in expenditure.
Against this backdrop, the BoG was forced to reconsider its stance on financing the budget. The bank’s Director of Research, Dr Philip Abradu-Otoo, recently spoke at the University of Ghana 75th Anniversary Public Lecture on “Ghana’s Economic; The need for Paradigm Shift,” where he defended the BoG’s decision to finance the budget post Covid-19. According to Dr Abradu-Otoo, failure to do so would have spelled doom for the economy.
Dr Abradu-Otoo acknowledged the concerns about fiscal dominance but argued that the bank had no choice but to act in the interest of protecting the economy from collapse. He explained that “there were choices that had to be made, should we allow the economy to collapse or we should stick strictly to issues of fiscal dominance and then who picks up the pieces after the economy has collapsed?” In other words, the bank was faced with a difficult trade-off between adhering to its policy of zero financing of the budget and preventing a catastrophic economic collapse.
Dr Abradu-Otoo further clarified that the financing provided by the BoG was mainly to deal with investors, particularly domestic investors whose bonds had matured and for which the government had no resources. He explained that “100% of that amount [BoG financing] was due to domestic bonds that had matured for which we had to step in to save these domestic investors.” The BoG’s actions were therefore motivated by the need to protect domestic investors and prevent a crisis in the financial sector.
Despite the BoG’s assurances, concerns remain about the long-term implications of its decision to finance the budget post Covid-19. Critics argue that the move undermines the bank’s independence and sets a dangerous precedent for future governments to rely on central bank financing to fund their budget deficits. There are also fears that the increased money supply resulting from the financing could lead to inflation and currency depreciation, eroding the value of people’s savings and making imports more expensive.
Moreover, the BoG’s decision to finance the budget post Covid-19 raises questions about the government’s fiscal management and its ability to generate revenue and control expenditure. Critics argue that the government needs to adopt more effective measures to boost revenue and cut unnecessary expenditure, rather than relying on central bank financing to fund its budget deficits.
The BoG’s decision to finance the budget post Covid-19 is therefore a contentious issue that raises important questions about the trade-offs between fiscal and monetary policy, the role of the central bank in maintaining economic stability, and the government’s fiscal management. While the BoG’s actions were motivated by the need to prevent a catastrophic economic collapse, the long-term implications of its decision remain to be seen. It is therefore essential for the government and the central bank to adopt effective measures to promote sustainable economic growth and prevent future fiscal crises.
Source: Norvanreports