IMF

This is despite the decision of, the Parliament of Ghana, which a fortnight ago passed the Bank of Ghana amendment law which now allows the central bank to finance the government up to 5% of the previous year’s revenue, instead of the zero financing as enshrined in the IMF agreement with Ghana.

IMFThe IMF, in a swift response to the passage of the new Bank of Ghana amendment law, maintained that, under the Fund-supported program, the government had committed to eliminating regular financing from BoG, adding that “There has been significant progress toward this objective and government has not received any new financing from BOG since the beginning of 2016.”

“This is an important feature to support the credibility and effectiveness of the inflation-targeting framework for monetary policy,” the IMF said.

It maintains that it is critical that this important feature is retained to support the credibility and effectiveness of the inflation targeting framework of the BoG, which is critical to the success of the three-year program and beyond.
However, it is revealed that the IMF will in the coming days engage government on the status of the country’s program with the Fund.
The IMF gave this indication, in a response to an email sent to the IMF in Washington DC. Under the IMF program, an agency agreement was signed between the monetary and fiscal authorities to limit government borrowing from the BoG to zero percent.

To give the agency agreement a legal backing, the IMF needed to enshrine the agency agreement into law and therefore as a key structural benchmark, the IMF required the passage of the BoG bill to reflect the key provision of zero financing from the central bank, which was agreed to by government.

The Fund noted that “IMF staff will now assess and discuss with the authorities the possible implications for the program of the adoption by Parliament of the amended Bank of Ghana Act allowing the central bank financing of government”.

Economists have posited that it was interesting that Parliament rejected IMF’s proposal of zero financing.
Professor Peter Quartey, Head of the Economics Department at the University of Ghana, had previously pointed out that, the condition in the US$918 million Extended Credit Facility (ECF) that requires the central bank to reduce government’s financing to zero which began this year, has left government cash-strapped, hence, pushing it to the European market for the fifth time.

“There is a big revenue gap that government needs to fill. Since the IMF programme does not allow the Bank of Ghana to finance government any longer, it has become necessary that government must find alternatives to raise revenue. So I think this influenced the decision of government to attempt issuing a fifth Eurobond so it can raise money to close the revenue gap.”
However, there is a provision in the Ghana’s program with the Fund that still gave government a window of opportunity to borrow from the Central Bank in times of emergency of up to two percent of the previous year’s revenue and repayable over a 90 day period.

However, the government, on the other hand, has insisted that it has stuck to the provisions of the program and has no intention of borrowing from the Central Bank.

From government’s point of view, the non-passage of the Amendment Bill in the form that the IMF wanted makes no difference since the zero financing has been followed through since the beginning of the year.

Meanwhile economists and financial analysts will be watching government closely, in the coming weeks, especially from August ending to September – as this is the time that serious budget overruns usually begin to take place ahead of elections – to ensure that, the government remains in line with its promise not to over spend in this year.
Prof Quartey, has asked that government considers renegotiation of the IMF deal to reverse the conditionality which prohibits the central bank from financing government.

His call is necessary at a time when the government is in dire need of cash but has had to abandon the sale of its fifth Eurobond of US$1 billion, as investors demand higher yield to cushion against risk in the year the country prepares to go to the polls.

The fourth Eurobond issued last October raised US$1 billion with a yield of 10.75 percent, although the target was to raise US$1.5 billion at a 9.5 percent yield.

Government, he said, “must sit down with the IMF again and renegotiate some of the conditions, specifically the one that calls for zero financing from the central bank. It is possible and it can be done.”

He further advised government to find alternative ways of raising revenue, keep its spending under control and fight corruption in order to protect the limited public purse.

In line with this advice, a financial analyst, Samuel Ampah, has advised the government to consider raising money by using municipal and district bonds since the current state of the economy is not that solid.

He said all government subventions should be cut so that these assemblies work efficiently for their revenue. In addition, the MMCEs and DCEs should be elected for them to be accountable to the masses.

Ghana could not sign on to the Eurobond because the rate is very high and doing so would have adverse effects on our already stretched economy, he explained.

He said there is the need to focus on the domestic market to generate revenue and as well prioritize projects to avoid overspending.
Similarly, Economic Policy think-thank Institute for Fiscal Studies (IFS) has equally questioned the relevance of the zero-financing arrangement, calling for its retraction.

In an interaction with the media last month to review the IMF programme, Executive Director for IFS, Professor Newman Kusi, said: “Strengthening the central bank’s independence is supported, but reduction of the bank’s financing for government to zero in 2016 is unrealistic”.

Previously, the BoG Act required that the central bank could finance government, but not beyond 10 percent of the previous year’s fiscal revenues.

In the wake of the Eurobond failure, the Finance Ministry has said it will tap into the Sinking Fund to raise revenue to settle maturing debts.

In a press statement last week, the ministry said: “The purpose of the Fund is to periodically redeem our external and domestic debt, especially current bullet loans. As at April 2016, an amount of about US$100.0 million had accumulated in the Sinking Fund.”

“Under our Eurobond “buy-back” program (repurchase of outstanding bonds under favourable market conditions), Government has used a portion of the Sinking Fund proceeds to redeem US$30.0 million of the Sovereign Bond issued in 2007, incrementally from the markets,” Terkper explained to Parliament.

He said, however, that government will continue to build on its dialogue with international investors while monitoring the markets and the International Monetary Fund (IMF) Board process with respect to the Third Review of the ongoing US$918 million Extended Credit Facility arrangement.

Source: Adnan Adams Mohammed

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