The Bank of Ghana (BoG) has now obtained the powers to bail-out financial institutions in liquidity troubles following the passage of the Bank of Ghana Amendment Bill, 2016 on Tuesday.
The new BoG Bill, which now awaits Presidential assent to become law, has now strengthened the central bank’s capacity to be a lender of last resort to save banks or non-bank financial institutions that are “illiquid but solvent” from collapsing.
According to the bill, the provision of any rescue package to a zombie company will be at the prerogative of the central bank, which will prescribe the terms and conditions for the grant of such emergency liquidity assistance.
The inclusion of the ‘bail-out’ clause in the bill approved by parliament comes after the recent collapse of several licensed financial institutions, which left thousands of customers in financial and emotional distress.
Parliament side-steps zero financing agenda
The passage of the bill has also brought to an end government’s push to eliminate completely Bank of Ghana lending to government starting from 2016, except extreme emergency cases; a proposal that was flatly rejected by the 275-member legislature.
The MPs instead passed the Bank of Ghana (BoG) Amendment Bill,2016 to allow the central bank to finance the government’s budget deficit of up to five percent of the previous year’s total revenue.
The proposal to make it ‘illegal’ for government to borrow from the central bank in what eventually became the zero financing clause, has been very unpopular with stakeholders despite the enduring support from the International Monetary Fund (IMF), which is currently assisting the government to manage the economy under a US$918 million Extended Credit Facility programme.
Lawmakers from both the ruling NDC party and opposition NPP all questioned the rationale behind the zero financing agenda, suspecting a ‘manipulative hand of the IMF.
They argued that passing a zero financing bill could affect the country’s development aspiration if a law to ban the central bank from financing a government of a developing economy is passed; despite reported fears that the IMF could withhold the release of the next tranche of its credit facility if the zero financing clause is altered since it will be a breach of agreement.
Other economic policy think-tanks such as the Institute for Fiscal Studies also raised concerns about the zero financing proposal describing it as ‘premature’ at one of its press conference in June.
Parliament in passing the BoG Amendment bill thus upheld the need to keep the central bank as one of the financiers of the budget even though it restricted such a financing support to up to five percent of government revenue; down from the existing upper band of 10 percent.
The current Bank of Ghana Act 662 states that the total of the loans, advances, purchase of treasury bills and securities together with money borrowed by the Government from other banking institutions and the public at the close of a financial year shall not exceed 10 percent of the total revenue of the fiscal year in which the advances were made.
The IMF is concerned continuous funding the Bank of Ghana could negatively affect the prospects of the economy especially as central bank in 2012 for instance financed government’s deficit to the tune of GH¢2.2 billion which was more than 13 percent of total revenue recorded in that fiscal year.
However, despite the setback from parliament, government insists it will keep to its commitment of ‘zero financing’ which it says has been the case since the beginning of this year.
The Deputy Finance Minister, Cassiel Ato Forson told the press on Tuesday that government “has no incentive going back to the central bank to borrow” since it is more expensive than the markets.
“We are still committed to zero financing even in the long run. Our objective is to ensure that fiscal consolidation is maintained.
“In spite of the fact that Parliament says government can go to the central bank to borrow up to five percent does not necessarily mean we are going for five percent. We will stick to zero financing.
“From today, I do not have any justification to go to the central bank to borrow. Borrowing from the central bank is expensive than going to the markets. If I am the one managing this economy, we will stick to market financing, and I think that is the way to go. We are committed to zero-financing and we will ensure it is maintained” he told B&FT immediately after the passage of the BoG Bill in Parliament.
Source: B&FT