BoG justifies financing of budget post COVID-19

The move by the central bank has come under massive scrutiny, due to the concerns raised about the bank’s independence and the long-term implications for the country’s economy.

But the bank’s Director of Research, Dr Philip Abradu-Otoo, at a public lecture at the University of Ghana opined that if the BoG had failed to support the government’s budget it would have spelt doom for Ghana’s economy.

Even though he acknowledged the concerns about fiscal dominance, he argued however, that the bank had no choice but to act in the interest of protecting the economy from collapse. He explained that “there were choices that had to be made, should we allow the economy to collapse or we should stick strictly to issues of fiscal dominance and then who picks up the pieces after the economy has collapsed?” In other words, the bank was faced with a difficult trade-off between adhering to its policy of zero financing of the budget and preventing a catastrophic economic collapse.

Dr. Abradu-Otoo further clarified that the financing provided by the BoG was mainly to deal with investors, particularly domestic investors whose bonds had matured and for which the government had no resources. He explained that “100% of that amount [BoG financing] was due to domestic bonds that had matured for which we had to step in to save these domestic investors.” The BoG’s actions were therefore motivated by the need to protect domestic investors and prevent a crisis in the financial sector.

The BoG’s policy of zero financing of the budget between 2015 and 2020 was a key pillar of its efforts to maintain price stability and promote sustainable economic growth.

But according to the BoG official, the Covid-19 pandemic presented unprecedented challenges, leading to a significant drop in government revenue and a sharp increase in expenditure.

The Bank of Ghana was thus forced to reconsider its stance on financing the budget.