The Bank of Ghana has defended its breach (in 2022) of the limit on lending to 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)says: “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 Bank of Ghana Governor, Dr Ernest Addison said: “What do you call an emergency; let’s define it very carefully to make 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 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 was 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 to make 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., 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:

“The Bank extended additional overdraft to 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$750million.

“You will recall that many people doubted 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 pumps 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 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 pumps 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 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 US$3billion annually. However, it is important to note that the Bank of Ghana was not obliged to give government exactly what 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 government should involve discussions, disclosure of fiscal information, etc. To hold government fiscally accountable, the Bank of Ghana can give government less than what it wants with the goal of forcing it to cut frivolous expenditures and/or delay non-essential/non-urgent expenditures. Central banks are supposed to be independent.

*Suppose* the Bank of Ghana gave government exactly the amount of money it 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 would not be created that the Bank of Ghana overfinanced government (taking into account government’s budget deficit in 2022, the US$750million that government got from Afrexim Bank and other loans to 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 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¢50,497million against a revised programme deficit target of GH¢38,900.3million.”

On page 96 of its 2022 annual report, the Bank of Ghana stated: “*Loans and advances to government were all on-lending facilities from the IMF*. This constituted Extended Credit Facility and IMF Allocations of US$1.38billion and US$621million respectively (2022 GH¢17.2billion)”, an implied exchange rate of US$1 = 8.63 cedis. Government’s revenue/grants in 2022 could not have included the US$750million (about 6.48 billion cedis, using the exchange rate of US$1 = 8.63 cedis) loan from Afrexim Bank.

Thus, there were inflows of GH¢6.48 billion (from Afrexim Bank) and GH¢17.2 billion (from the Bank of Ghana via the IMF) to government for a total of GH¢23.68billion. This should have reduced government’s maximum fiscal need from the Bank of Ghana – from GH¢50.497billion (its estimated budget deficit) to about GH¢26.817billion.

In a press statement on August 11, 2023, the NDC alleged that the Bank of Ghana printed an amount of GH¢42billion cedis and transferred it to 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 were on-lending facilities (loans denominated in dollars granted by the IMF to the Bank of Ghana for onward lending to government). Thus, the GH¢17.2billion above was not money printed by the Bank of Ghana and lent to government.

It appears that the NDC added this amount to other amounts and claimed that the Bank of Ghana printed “… a whopping * GH¢35billion in 2021* and GH¢42billion in 2022 to finance the Akufo-Addo/Bawumia/NPP government”. The Bank’s Governor, in his special press briefing on August 21, 2023, disputed this claim.

He said: “It is not true that the Bank of Ghana has been providing financing for government every year. There was 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 GH¢42billion to finance 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 government (GH¢17.774billion) and government overdraft (GH¢25.623billion) and subtracting total government deposits at the BoG (GH¢4.042billion) gives a net cash flow of GH¢39.364billion from the Bank of Ghana to government between January 2022 and October 2022.

Was there an additional cash flow in November and December 2022 from the Bank of Ghana to government? The difference between the IMF’s on-lent facility of GH¢17.774billion reported in November 2022 and the IMF’s on-lent facility of GH¢17.2billion 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 government:

(1) 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 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 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 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¢9,401.1million”. Using the formula in (1), government’s fiscal need from the Bank of Ghana in 2022 was GH¢50.497billion – GH¢9.401billion – 17.774 billion – 6.48 billion = GH¢16.842billion. Then, using the formula in (2), the Bank of Ghana’s overfinancing of the government = GH¢25.623billion – GH¢4.042 – GH¢16.842billion = GH¢ 4.739billion, which is 28.13% of government’s fiscal need from the Bank.

Implicit in this analysis is treatment of the central bank as a lender of last resort to government. That is, government’s fiscal need from the central bank was determined after taking account of all of government’s cash inflow (including loans). In reality, when the central bank lends to government or finances government’s budget, some of 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 government’s budget may not be deliberate or anticipated.

This may not be a problem if government must repay the loan (with interest). However, when 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, government’s ability to repay the loan is questionable. To minimise the risk of overfinancing, the central bank should – like the IMF – give its loans/advances to government in tranches while monitoring its other cash inflows, especially loans from other sources.

In its justification of the direct purchase of government of Ghana COVID-19 relief bonds (GH¢10billion) 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 “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 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 scrutinises 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 government accountable is consistent with the spirit of the Bank of Ghana Act (612) provision that limits financing of government to 5 percent of the previous year’s tax revenue.

*Reference*

Adair Turner’s ‘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, 2015.