The International Monetary Fund (IMF) has cautioned the Central Bank of Ghana to amend the Bank of Ghana Act to strengthen the bank’s independence and reduce fiscal dominance by the government.
The modifications to the Central Bank’s Act, according to the global lender, will include a tougher restriction for monetary financing, measures to monitor and enforce regulation, and a clear description of emergency situations – under which the limit can be temporarily lifted.
“Pending legislative changes, the BoG and the Ministry of Finance signed an MoU (prior action) to eliminate monetary financing during the programme. An ongoing updated ‘Safeguards Assessment’ will provide additional support for designing changes to the BoG Act.”
International Monetary Fund (IMF)
The revised Act, as stated by the IMF, will examine the government’s gold purchase and gold-for-oil programs, as well as the dangers they pose to the Central Bank.
The Fund further communicated that the debt restructuring will have an impact on the Bank of Ghana’s balance sheet. As a result, the government and the Bank of Ghana will assess the impact and formulate strategies for recapitalization with technical assistance from the IMF.
DDEP Disrupted Ghana’s Financial Sector Stability
According to IMF, Ghana’s financial industry was fairly stable before the debt restructuring, adding that “thanks to the financial sector cleanup conducted in recent years.”
As part of the cleanup, a thorough asset quality review had been conducted.
To this end, the aggregate Non-Performing Loans had declined from 17% in 2019 to about 15% at end-2022, and the sector had been well-capitalized except for a few institutions.
However, the IMF noted that several steps under the financial sector cleanup were yet to be implemented.
It can also be recalled that the Bretton Wood institution disclosed that the DDEP presented a substantial challenge for the health of the financial sector given its exposure to government debt.
“Domestic bonds were widely distributed across the financial sector in Ghana, representing the most important asset class held by commercial banks, pension funds, asset management companies, and insurance companies.
“Banks held 30 to 50% of their total assets in government securities before the DDEP – with especially high exposures in the state-owned banks, and relied significantly on income from these securities.”
Bretton Wood Institution
Bretton Wood emphasized that the recently concluded DDEP’s coupon reductions and maturity extensions indicate that the value of these assets will fall to around 70% of their par value.
This reassessment, it said, poses a significant shock to these financial institutions’ balance sheets.
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