IMF Sets Deadline For Monetary Policy Overhaul

As part of the recently announced IMF US$918million bailout programme, the Bank of Ghana has been given a December 2015 deadline to eliminate entirely its financing of government deficit.

The Washington-based lender had initially in its announcement of the bailout in February said the central bank will be given till 2016 to eliminate its monetary financing of government deficit, but upon further consultation with government officials the Bretton Woods institution has brought the deadline forward.

“Monetary policy aims at achieving a single digit inflation rate over the medium-term, with the support of government’s fiscal consolidation. The independence of the Bank of Ghana (BoG) will be strengthened, with central bank financing of the government gradually reduced to zero in 2016,” the Fund had said.

But the Fund in its Memorandum of Economic and Financial Policies (MEFP) -- the bedrock document that fleshes out the agreement in the programme with the IMF – said the central bank is to submit to Parliament a revised Law that sets a zero limit on monetary financing to government and public institutions.

Currently, the BoG Act requires that the central bank’s monetary financing must not exceed 10 percent of the current year’s fiscal revenues. But, consistently, the BoG has not been able to keep to this limit.

In 2012, for instance, domestic borrowing by government amounted to 42.6 percent of total revenues and grants; in 2013 it was 36.3 percent; while in the first three quarters of 2014 it was 14.7 percent.

In 2012, BoG lending to government alone was 13.2 percent of revenues compared to the central bank's operational target of 5 percent; in 2013 it was 6 percent; and in the first three quarters of 2014 it was 10.2 percent.

According to the IMF, the move will strengthen the central bank functional autonomy. The Fund further instructed the central bank to “set rules for emergency lending to banks in distress; and ensure compliance with International Financial Reporting Standards (IFRS)”.

Also, as part of measures to ensure a stable cedi, the central bank has until next month to adopt a plan to eliminate the compulsory requirement of foreign exchange as well as stop provisions of foreign currency funding for priority sector imports.

Oil importers are likely to be worst hit by these new directives, meaning they will have to now source their forex on the open market just like any other sector -- as the central bank will not be in any position to provide them with forex.

The cedi has had about 16.1 percent depreciation since beginning of the year, and the measures announced by the IMF are expected to offer some respite as well as quell the inflationary pressures it has been stoking.  

Source: B&FT