Bank of Ghana's independence questioned

The Chief Executive Officer of Dalex Finance, Kenneth Thompson, has raised doubts about the independence of the Bank of Ghana being strong enough to put government’s spending in check.

He said government’s budget deficit, which has become a grave concern to the economy amidst rising interest rates, is nearing unsustainable levels due to inability of the central bank to put government’s spending within limits.

“The independence of the central bank needs to be strengthened so that it is able to control expenditure. A lot of countries have independent central banks. The central bank needs to be strengthened to be able to stand against the government when it wants to overspend,” he said.

Currently, the gap between government’s spending and revenue is estimated at about 9.6 percent, which the Finance Minister Seth Terkper hopes will be brought down to 8.8 percent of GDP by end of this year.

According to Mr. Terkper domestic financing of government’s expenditure this year will be 5 percent of GDP, which is more than the 4.7 percent recorded for 2013.

Mr. Thompson said as government is borrowing from the domestic market at a rate of at least 25.7 percent, it is squeezing capital away from the private sector operators.

“When you have a situation where government goes out every week to borrow and people who have money go to the government which offers high interest rates, instead of taking it to the banks, then there is a problem. This is what is pushing up the rates and crowding out the private sector,” Mr. Thompson added.

Under Section 30 of the Bank of Ghana Act, 2002 (Act 612), total lending to government by the Bank of Ghana, banks, non-banks and the public at the close of a financial year is supposed to not exceed 10percent of total revenue for the fiscal year in which the advances were made.

This ceiling is meant to prevent government from crowding the private sector out of the credit market, as unrestrained government borrowing could drive interest rates beyond the reach of private businesses.

Also, the central bank has committed itself internally to lend only up to 5 percent of the mandated 10 percent. But government is hardly within its limits, and the BoG has failed to enforce the legal ceiling. In 2012, the ratio of government’s domestic borrowing to total revenue and grants generated stood at a staggering 42.6 percent; in 2013 it stood at 36.3 percent; and in the first three quarters of 2014 it was 14.7percent.

In 2012, BoG lending to government alone was 13.2 percent of revenue compared to its operational target of 5 percent; in 2013 it was 6 percent; and in the first three quarters of 2014 it was 10.2 percent. Banking analyst Nana Otuo Acheampong, who also is the Executive Head, School of Banking & Management at the Osei Tutu II Centre for Executive Education & Research in Kumasi, said even though it is the BoG’s responsibility to hold government in check, if there is an emergency situation the central bank does not have any option but to give in to government demands.

“The BoG is independent, but at the same time it has to assist government in achieving national objectives,” he said.

Samuel Ashitey Adjei, Managing Director of Ecobank, also told the B&FT that the central bank is doing its very best within the current economic challenges.

“It is not very easy to manage an economy like ours, and I think the central bank is doing the best it can under the circumstances. We should rather support it, and if anybody has any suggestion he/she should let it know so it continues to deliver.”