The International Monetary Fund (IMF) has captured the reduction in the policy rate of Ghana’s central bank by 150 basis points as one of the measures sub-Sahara Africa countries are introducing to deal with the ravages of the coronavirus on the economy.

The IMF noted in its Regional Economic Outlook report that amid limited fiscal space, some authorities have relied on monetary policy to help provide emergency support, with cumulative policy rate reductions since January 2020 of as much as 500 basis points (bps) in Zambia, 275 bps in South Africa 250 bps in Namibia, 200 bps in Uganda, and 150 bps in Ghana.

“They have also introduced facilities to inject liquidity into the banking system ranging from 0.5 percent of GDP in Angola to 3 percent of GDP in Zambia.

“In addition to lowering interest rates and providing extra liquidity, the monetary authorities in many countries have encouraged banks to work with their clients to help them weather the crisis, either through a temporary moratorium on loan payments (Botswana, Namibia, São Tomé and Príncipe,) or through a restructuring of existing obligations (Botswana, Eswatini, Ethiopia, Kenya, Namibia, Nigeria, Uganda).

“To the extent that such measures ensure that crisis-related risk remains on the balance sheets of the banking sector, they have often been accompanied by government loan guarantees, which bring some of that risk to the government balance sheet.

“South Africa, for example, has put in place a new loan guarantee program for small and medium enterprises of up to 4 percent of GDP, which comes on top of an existing stock of guarantees on state-owned enterprise loans of 11 percent of GDP, along with significant other contingent liabilities. Government guarantees to banks (or firms or households) do not usually have an immediate impact on the fiscal deficit but will instead create an off-budget contingent liability, which increases public debt only when the guarantee is called.

“Some authorities have also relaxed prudential constraints, for example, by easing capital requirements (Botswana, Ghana) or by delaying the transition to Basel III norms (West African Economic and Monetary Union). These measures can be helpful in mitigating the immediate impact of the crisis and boosting the effectiveness of stimulus efforts.”

But authorities should strike a careful balance between supporting activity over the near term and maintaining financial stability.

Undercapitalized banks would undermine the effectiveness of future stimulus efforts and compromise the financial sector’s ability to support investment and growth over the longer term.

Overall, governments are doing their best to relieve the burdens of the private sector, but authorities must be mindful of the limits of such emergency measures, given short-term resource constraints and the longer-term risks associated with overburdening public and private sector balance sheets, the IMF observed.

They should also keep in mind the broader risk that, by repeatedly resorting to ad hoc emergency measures, they may undermine hard-won institutional norms and practices that will be essential for ensuring longer-term credibility and stability.