Additional monetary measures required – IMF

The International Monetary Fund (IMF) is recommending additional monetary measures to be implemented by the Bank of Ghana, in view of worsening effects of the COVID-19 across both the advance and emerging economies.

Although, the central bank has already implemented some monetary measures, the IMF in its Staff report on Ghana’s request for disbursement under the rapid credit facility, advised that BoG considers stepping up open market operations and further cutting reserve requirements, and providing Emergency Liquidity Assistance (ELA).

The Fund has suggested that; “if needed, the BOG could consider stepping up open market operations and further cutting reserve requirements, and providing Emergency Liquidity Assistance (ELA) within the BOG’s collateral framework, possibly allowing collateral normally not accepted for monetary policy operations.”

Ironically it was the IMF that prodded the BoG to start insisting on collateral from banks to underpin the ELA it gives them.

A Senior Economist at DataBank, Mr. Courage Kingsley Martey explained in an interview that, these measures by the central bank would boost the already high liquidity in the market.

This would make available more funds that can be directed to industry, so as to drive growth, as well as dampen the impact of the current downturn on the economy.

Currently, Banks have more capital and liquidity than in the past, and they have been subject to stress tests and greater supervisory scrutiny in recent years, putting them in a better position to mitigate the economic impact of the virus.

Nonetheless, the IMF in its Global Financial Stability report stated that the resilience of banks may be tested in the face of a sharp slowdown in economic activity that may turn out to be more severe and lengthy than currently anticipated.

Given that there is a serious risk of a deep recession in the global economy, the IMF further has suggested to the central bank the need for, in extreme conditions, liquidity support for non-banks financial intermediaries too. However, such support should be targeted, temporary, driven by financial stability considerations, and should also be backstopped by the government.

“This would open the door for further cut of the benchmark interest rate, provided inflation does not spiral beyond the upper band of the BoG target band or provided that even if inflation exceeds the target band, it will return quickly back to the limits of the band,” Mr. Martey said.

According to the latest Africa’s Pulse, the World Bank’s twice-yearly economic update for the region, growth in Sub-Saharan Africa is forecast to fall sharply from 2.4 percent in 2019 to -2.1 to -5.1 percent in 2020, the first recession in the region over the past 25 years, due to the significant impacted by the ongoing Coronavirus outbreak.

To alleviate the potential liquidity strains, the BoG slashed its benchmark interest rate by 150 basis points on March 18 to combat the economic impact of the virus, as well as a reduction in banks’ reserve requirements from 8.0 percent from 10 percent. The Bank also halved the capital buffer to 1.5 percent from 3.0 percent, which effectively cut the capital-adequacy ratio to 11.5 percent from 13 percent.

The Bank of Ghana further indicated that it would continue to monitor the evolving impact of the pandemic on banks and SDIs and on their customers, and would issue further directives as required.