COVID-19 is indeed a revealer. It has revealed that the economy of Ghana has inadequate liquidity buffers.
The Minister of Finance reported to parliament as required by section 30 of Bank of Ghana Act, 2002 (Act 612) as amended by Act 918 in 2016 requesting a GHC10bn financing from Bank of Ghana.
Some Ghanaians are of the view that the government is using COVID-19 to add on to the already burdensome debt levels from all available source.
There are some questions and answers to better understand the issues.
Question 1
Does COVID-19 period mean anything requested by government is correct?
Answer
No. Where the request is not in line with the rules, the request is inappropriate. Some people create the impression that we are not in normal times and that government needs money so government is right in asking for anything. Some even explain that some laws should be shelved for now to allow government execute its programs. The truth is that the emergency powers granted the president does not overthrow our democracy nor the requirements of the public financial management framework and debt management objectives .
Whatever government requests for must be within the rules. If such misconception that we are in a crisis, we are not in normal times is the reason why government would like to deplete the heritage fund and again ask BoG for whatever amount even when it is outside the rules, then very soon, public institutions will be asked to surrender their funds and the public will also be requested to surrender private savings, simply because “we are not in normal times”.
Question 2
What is the meaning of BoG financing government?
Answer
According to section 30 of Act612 as amended, it is a short term loan to government by BoG and the interest on this loan is to be determined by the Board of BoG and the Minister of Finance as an over-the-counter transaction. For the avoidance of doubt, the heading of section 30 is temporal advances and subsection 3 requires the repayment within three months. Any money taken or to be received that has the obligation of repayment either with or without interest is called a loan.
Question 3
What is the limit or amount allowed by law to be borrowed by government from the BoG?
Answer
According to Act 918, which amended Act 612 by introducing subsection 7, total loans, advances, treasury bills and other securities MUST not be more than 5% of previous year’s revenue. Any borrowing more than this requirement is illegal and the explanation that we are not in normal times does make it legal.
In 2019, the total revenue was approximately GHC52Bn and 5% of this gives about GHC2.6Bn. The BoG has already provided GHC4.5Bn to government which is a clear violation of the statutes.
Question 4
What happens in an emergency in terms of Ghana’s public finance?
Answer
Section 6 of Act 612 authorizes the Minister of Finance, the Governor of the Bank of Ghana and the Controller and Accountant-General to meet and determine the limit or the amount to be borrowed above the earlier 5% of previous year’s revenue rule. It means, in an emergency, government can borrow from BoG more than the GHC2.6Bn but only after the amount determined by the three parties is submitted to parliament for approval.
The approval rules in article 181 and section 56 of the public financial management Act require prior approval by parliament before borrowing takes place especially when government has already received funding from the Stabilization fund($219million), worldbank ($100million) and IMF ($1billion) with same parliamentary approval.
Question 5
So what is wrong with The GHC10Bn loan?
Answer
1. BoG has disbursed above the 5% rule before reporting to parliament for approval.
2. The entire section 30 is about short term loans to government to be repaid in three months but BoG is lending this money through a ten – year bond in which repayment of interest and principal starts after two years. This means it is no more a short term loan. Section 30 does not give such authority to the parties to convert the short term arrangement to a long term loan agreement.
Question 6
Why the limitation to short term loan?
Answer
The general rule is government does not borrow from itself through short term loan. Also to avoid what fiscal management experts call fiscal dominance, which may undermine the monetary policy role of BoG with contagion effects.
In exercising the authority granted the trio to determine the amount to borrow from BoG in an emergency, they should not overlook the risk to the economy if excessive amounts are borrowed from the BoG.
Section 30 is therefore a special arrangement with clear conditions.
That is the reason why the Public Financial Management Act prohibits public institutions from buying treasury bills.
So borrowing from BoG is meant to address short term financial needs even under emergencies.
Question 7
What is the conclusion?
Answer
The conclusion is that there is a 5% rule of borrowing from BoG by government.
The borrowing should be short term and not long term as the government is seeking to do.
Parliament should give prior approval for any amount determined. Also, this arrangement is not an ordinary support, it is a loan. The interest rate on the loan is the BoG policy rate and it is a floating interest rate which means if the policy rate goes up the repayment burden goes up.