The Bank of Ghana (BoG) has justified again its financing of the budget post Covid-19, saying, failure to do so will have spelt doom for the economy.
The BoG has been under scrutiny recently for its decision to finance the budget post Covid-19, a move that has raised concerns about the bank’s independence and the long-term implications for the country’s economy.
Before Covid-19 struck, the Central Bank between 2015 and 2020 had a policy of zero financing of the budget – which was a key pillar of its efforts to maintain price stability and promote sustainable economic growth.
However, the Covid-19 pandemic presented unprecedented challenges, leading to a significant drop in government revenue and a sharp increase in expenditure.
Against this backdrop, the BoG was forced to reconsider its stance on financing the budget.
The Bank’s Director of Research, Dr. Philip Abradu-Otoo, speaking at the University of Ghana 75th Anniversary Public Lecture on “Ghana’s Economic; The need for Paradigm Shift”, said the Bank of Ghana had no choice but to save the economy from collapsing.
Dr. Abradu-Otoo acknowledged the concerns about fiscal dominance but argued that the bank had no choice but to act in the interest of protecting the economy.
In other words, the bank, he said, was faced with a difficult trade-off between adhering to its policy of zero financing of the budget and preventing a catastrophic economic collapse.
“So, 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?”
Dr. Philip Abradu-Otoo
Dr. Abradu-Otoo added that the Bank of Ghana stepped in as a lender of last resort as it always does to protect the financial sector.
“Hundred percent 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. And that is where this fiscal dominance issue came in. So yes, it came in but we did that to save domestic investors.”
Dr. Abradu-Otoo
Experts Points Out Consequences Of BoG’s Financing Of The Budget Post Covid-19
Despite the BoG’s assurances, concerns remain about the long-term implications of its decision to finance the budget post Covid-19.
Critics and Economic experts argue that the move undermines the bank’s independence, and sets a dangerous precedent for future governments to rely on central bank financing to fund their budget deficits.
According to these experts, there are also fears that the increased money supply resulting from the financing could lead to inflation and currency depreciation, eroding the value of people’s savings and making imports more expensive.
Critics argue that the government needs to adopt more effective measures to boost revenue and cut unnecessary expenditure, rather than relying on central bank financing to fund its budget deficits.
While the BoG’s actions were motivated by the need to prevent a catastrophic economic collapse, economic experts disclose that the long-term implications of its decision remain to be seen.
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