Since 2016 when Ghana entered into an Extended Credit Facility (ECF) programme with the IMF, the central bank’s financing of government’s budget ceased – all in the interest of restoring fiscal discipline. However, with the coronavirus pandemic set to widen the budget deficit to 7.8 percent of GDP from a previous target of 4.7 percent, it has become necessary for desperate measures to be taken.
In fact, a provisional first-quarter report on the economy published by the Bank of Ghana shows the deficit has stretched to 3.4 percent from a target of 1.9 percent of GDP – highly occasioned by shortfalls in tax revenues from international trade, taxes on goods and services, and spending on some unbudgeted COVID-19-related expenditure.
It is against this background that the Bank of Ghana Governor, Dr. Ernest Addison, says the Bank has triggered the emergency financing provisions in section 30 of the Bank of Ghana Act 2002 (Act 612) to purchase a government of Ghana COVID-19 relief bond with a face value of GH¢5.5billion at the monetary policy rate with a 10-year tenure and a moratorium of 2 years.
“For some time, it hasn’t been necessary for the central bank to purchase any of those securities at the primary level; but given the conditions due to the pandemic, we think this is the time for the central bank to also provide the appropriate liquidity.
“We signed a memorandum of understanding during the IMF programme that we were not going to finance the budget through whichever method – whether it was an asset purchase programme, overdraft or some other window. But, for now, we are suspending that memorandum of understanding which would have expired at the end of 2020 in order to be able to participate in the debt market,” he said at a meeting with the media in Accra.
The Governor further stated that the central bank stands ready to continue with its asset purchase programme up to GH¢10billion, in line with current estimates of the financing gap from the COVID-19 pandemic.
Finance Minister Ken Ofori-Atta said earlier in March that the deficit will increase from the programmed GH¢18.9billion to GH¢30.2billion, the variance equivalent to 2.9 percent of GDP. The primary balance will also worsen from a surplus of GH¢2.8billion to a deficit of GH¢5.6billion, representing 1.4 percent of GDP.
External sector development
Despite unfavourable global developments, the Governor maintained that performance of the external sector has been strong in the first-quarter of 2020, reflecting in a higher trade surplus and higher capital inflows.
The trade balance, Bank of Ghana data indicate, recorded a surplus of US$936.4million; which is equivalent to 1.4 percent of GDP compared with a surplus of US$642.4million, 1 percent of GDP, recorded in 2019. This, Dr. Addison said, resulted from lower imports and a marginal fall in export receipt.
Again, the Gross International Reserves position has also been strengthened – thanks to the decision to access the Eurobond market earlier in the year that brought in US$3billion; and the US$1billion Rapid Credit Facility from the IMF, which has taken the reserves to US$10.3billion as of the end of April and represents 4.8 months of import cover.
To further boost foreign exchange liquidity, the Governor said the Bank of Ghana has concluded a US$1billion Repurchase Agreement facility with the US Federal Reserve for at least six months. This, he said, will provide an important foreign exchange buffer to boost dollar liquidity amid the COVID-19 global pandemic, and will enhance dollar liquidity.