IMF: Amendments to BoG Act to strengthen Central Bank independence, reduce fiscal dominance
The International Monetary Fund (IMF) has stated that the Bank of Ghana Act will be revised in order to enhance the independence of the Central Bank and address fiscal dominance by the government. The IMF has proposed amendments to the Central Bank Act that include stricter limits on monetary financing, mechanisms for monitoring and enforcing compliance, and a clear definition of emergency situations in which the limit can be temporarily lifted.
The IMF has also mentioned that an Memorandum of Understanding (MoU) has been signed between the Bank of Ghana (BoG) and the Ministry of Finance to eliminate monetary financing during the program. Additionally, an updated Safeguards Assessment is underway to provide support for designing changes to the BoG Act.
The revised Act is expected to review the government gold purchase and gold-for-oil programs, as well as associated risks for the Central Bank. Furthermore, the debt restructuring will have an impact on the Bank of Ghana’s balance sheet, and therefore, the government and the Bank of Ghana will assess the impact and develop plans for recapitalization with technical assistance from the IMF.
The IMF acknowledges that Ghana’s financial sector was relatively robust prior to the debt restructuring, thanks to the cleanup efforts undertaken in recent years. As part of this cleanup, an asset quality review had been conducted, resulting in a decrease in the aggregate Non-Performing Loans from 17% in 2019 to approximately 15% at the end of 2022. The sector was also well-capitalized, except for a few institutions.
However, the IMF has noted that certain steps related to the financial sector cleanup are yet to be implemented. In particular, it highlights the Domestic Debt Exchange (DDE) as a substantial challenge for the health of the financial sector due to its exposure to government debt. Domestic bonds were widely held across the financial sector in Ghana, including commercial banks, pension funds, asset management companies, and insurance companies. The coupon reductions and maturity extensions resulting from the DDE will cause the value of these assets to decline to approximately 70% of their par value, creating a significant shock to the balance sheets of these financial institutions.
