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Ghana’s government to stop borrowing from central bank

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‘Zero financing’ agreement deal with finance ministry helps pave way for $3bn IMF bailout
Ghana has moved one step closer to securing a $3bn IMF bailout after its monetary policymakers and ministry of finance signed a memorandum of understanding to end central bank lending to the government.

Ernest Addison, governor of the Bank of Ghana, told the Financial Times that a “zero financing” agreement was signed last week between the central bank and the ministry headed by Ken Ofori-Atta.

The agreement — a precondition to unlocking relief from the fund — will take effect when the fund’s board approves Ghana’s programme, Addison added.

Government officials in Accra are optimistic of IMF approval this month, and believe the $3bn loan, to be disbursed over three years, will help set its battered economy on the path to recovery. However, the fund’s final vote on implementing a staff-level agreement, made in December, is still pending.

The country is restructuring $58bn worth of debt after halting payments on most of its external bonds in December. The terms of about $11bn of domestic debt have also been renegotiated, with 85 per cent of bondholders in agreement.

Other conditions of the IMF loan include measures to raise revenue through new taxes and tariff increases on public utilities. Value added tax has been increased to 15 per cent and three new tax bills were passed by parliament last month.

Ghana’s economy, which relies heavily on commodity exports — including gold, oil and cocoa — is vulnerable to external events. A sharp fall in the cedi currency against the dollar and a surge in global borrowing costs over the course of last year sparked turmoil in the west African economy. The crisis led the government to turn to the central bank to plug revenue shortfalls. The government owes about 40bn cedis ($3.4bn) to its central bank, according to Bloomberg.

Central bank financing has become a political issue, with Cassiel Ato Forson, an opposition MP in Ghana’s evenly-split parliament, alleging last year that the central bank printed 22bn cedis ($1.9bn) to fund the budget without parliamentary approval. The central bank denied the allegation.

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Ghana’s economic performance has improved in recent months, with gross domestic product growing by a better than expected 3.7 per cent in the last quarter of 2022. Addison said the improvements meant the government should be able to “operate without access to central bank financing”.

Inflation remains high, at 45 per cent, although it has slowed from the two-decade record of 54.1 per cent it reached in the year to December.

Addison expected price pressures to continue to fall “barring any unforeseen external shocks”. Addison, who has been central bank chief since 2017, is targeting a 29 per cent inflation rate by the end of the year. That is still far from the Bank of Ghana’s inflation target of 8 per cent, which the governor now hopes to meet by 2025.

The bank has raised its benchmark interest rate by 12.5 percentage points since March 2022 as it battles inflation. At its most recent meeting, it increased interest rates to 29.5 per cent, much to the dismay of private sector executives.

Joseph Obeng, president of the Ghana Union of Traders Association, a trade body, said the terms of commercial loans were “scary” and had left businesses short of capital.

“The commercial lending rate is over 40 per cent,” he said. “How can a business survive at that rate? It’s exhaustively high and it’s not pro-business.”

Addison would not be drawn on what the bank would do at its next policy meeting, due later this month, only saying that the bank would “remain focused on its objectives”. Businesspeople were being “short-termist” in criticising rate rises.

“We’re not bringing a higher policy rate as an end to itself; the end [goal] is to have a low-inflation environment and create an environment in which business would be profitable and sustainable,” he said. “They should be looking at the medium to long-term objective of policy, which is in their interest and the interest of the economy as a whole.”

Copyright The Financial Times Limited 2023