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BoG’s zero-financing directive not feasible - IFS

July 7, 2016, 9:24 a.m.

The Institute for Fiscal Studies (IFS) has raised concerns about demands from the International Monetary Fund (IMF) for the Bank of Ghana (BoG) to cease its funding of government.

According to the Institute, the measure is premature and counterproductive as it will stifle government of much needed support.

The IFS has therefore called for a review of the directive 

At a news conference to detail the Institute’s evaluation of the Second Review of Ghana’s Extended Credit Facility-Supported Programme by the IMF Executive Board, Dr John Kwakye Senior Research Fellow with the Institute said the proposal for the bank to stop lending to government except in emergency cases might be premature.

“The new Bank of Ghana (BoG) Act should carefully balance the Bank’s independence with its accountability in line with international best practice,” he said.

He reckoned that while there was a need to strengthen the Bank’s monetary policy autonomy, it was also important that monetary policy supports the overall policy of government as the elected manager of the economy.

Dr Kwakye said in Ghana’s situation where the domestic debt market is underdeveloped, it is necessary for the central bank to be ready to provide some limited financial support to government when needed.

“We should have started with a lending ceiling of five per cent of government revenue (compared with the previous limit of 10 per cent, which also included government borrowing from the rest of the economy),” he said.

On the specific of the IMF Board second review of Ghana’s programme, the IMF decision to revise key macro-economic targets showed that the programme had encountered challenges.

He said the revisions made were in the right direction largely because they were ambitious, and needed to be revisited.

However, the new targets suggest that macro-economic instability would remain prolonged while economic growth would be suboptimal as it is being driven largely by services and extractives, which do not have the potential to generate employment.

The Institute, particularly, calls for concrete interventions to support agriculture and manufacturing, which have the potential to generate more jobs, he said.

On inflation, the IFS underscored the shortcomings in inflation management due mostly to BoG’s over-reliance on demand-management tools to tackle a problem that is essentially supply- or structurally-driven.

The Institute advised the Bank to broaden its arsenal of instruments so as to be able to carry out its mandate more effectively.

In particular, given the range of factors that affect inflation, both supply and demand factors, reliance on the Policy Rate alone may not be sufficient and may have to be supported by other instruments.

For example, better coordination of monetary policy and government’s overall economic policy is an important instrument in fighting inflation, Dr Kwakye said.