Economist at the University of Ghana Business School, Prof Lord Mensah, has disclosed that the suspension of the fiscal responsibility act in the country during the COVID–19 period emboldened finance minister, Ken Ofori-Atta, to borrow from the Central Bank unnecessarily.

According to him, the current woes of the Bank of Ghana which recorded a loss of some GHC60.8 billion is as a result of such moves by government. He revealed that the impact of certain decisions such as the Central Bank taking a hit with some haircut on its principals in the Domestic Debt Exchange Programme (DDEP) has been “so huge”, as there have been both economic and psychological impact.

Prof Mensah indicated that the Central Bank that is supposed to be a lender of last resort, seems to be taking a loss on its balance sheet, and that being in a situation where a bank is getting impaired, the “Central Bank, which is supposed to come for a rescue, may not be in a good position to take up that rescue”, and doesn’t bode well for the country.

“What is happening on the ground seems to give me a sense of direction, looking at how we took out the fiscal responsibility act that was limiting the Central Bank’s lending to the government – we took it out and never replaced it. I was expecting that during the COVID, which in the Act, it gives room for the government to ask for a step aside of the Act and once we come out of the situation, the Act comes back. As we speak now, the finance minister has not gone to parliament to restore the Act, so that gave the finance minister room to borrow from the Central Bank unnecessarily…”
Prof Lord Mensah

Furthermore, Prof Mensah concerted that overtime, things are going to work out well because “taking a loss is one of the economic hits”. He explained that usually, what happens is that per the executive power, sometimes the government can trigger the Central Bank to come to its rescue.

“Another thing we may have to look at is the trust that is built between the Central Bank and external agencies – that trust is gone and that is why if you look into the IMF programme, we are being forced to do zero financing… Under normal circumstance, the Central Bank is to come in to hold up the government financing from January to March… So, that financing gap is always needed for the Central Bank, but here is the case because of what happened, we are being forced to do zero financing.”
Prof Lord Mensah

Implication of BoG involvement in DDEP

Elaborating on the Bank of Ghana being the only entity which took a haircut on principal during the DDEP, Prof Mensah revealed that considering the government’s debt portfolio, clearly, Central Bank was part of the portfolio, as the country is looking at a situation where for political reasons, government couldn’t gather the confidence to go all out as far as the DDEP is concerned.

He highlighted that prior to the DDEP, and because of the economic dip the country found itself in, if government should strike the DDEP in such a way which puts much burden on Ghanaians, it would have been a tough situation.

“So, government found it easier to deal with the Bank of Ghana rather than coming to the pensions and other things that individuals hold investments in them. Looking at the Central Bank and creditor of one entity, it became easier for the government to deal with the Central Bank rather than negotiating with the banks who are diversified in terms of their credit to the government, dealing with the pensions, who are also managing assets for workers and all sorts of investors in that manner.”
Prof Lord Mensah

Moreover, Prof Mensah indicated that government saw it easier to deal with the Central Bank, because as Central Bank, it is running a balance sheet which comes with liabilities and assets. In light of this, he stated that the Central Bank giving a loan to government was more or less like an asset they were holding.

“So, for government not to be able to pay them, then it means their asset became impaired and that is why they’re running at a loss… So, from where I sit, I think the government found it easier to deal with the Central Bank, rather than doing a DDEP that will cover all its creditors locally.”
Prof Lord Mensah