Ghana, IMF press on with review of Central Bank Act

• Pursue independence, policy credibility for BoG 
• Concerns over implementation difficulties, inconsistencies
• Aim to mitigate fiscal dominance

By Isaac AIDOO in Accra, Ghana 

Plans by the Ghanaian government and the International Monetary Fund (IMF) to review the existing Bank of Ghana (BoG) Act 2002 (Act 612) are set to change the functioning of Ghana’s central bank. 

Ernest Addison, governor of the BOG, has himself lamented inconsistencies and difficulties with implementation of the Act, justifying the IMF’s push for its revision. 

Act 612 BoG Act, 2002 establishes the BoG as the central bank of Ghana with a primary function to regulate, supervise and direct the banking system and credit system to ensure the smooth operation of a safe and sound banking system. 

According to Addison, “there are measurement issues which need to be clarified.”  

The governor at the Bank’s latest Monetary Policy Committee (MPC) press briefing wondered what constituted emergency under the Act. 

“What do you call an emergency? We need to define that very carefully and make it clear the conditions under which the rules can be breached,” he opined.

Procedural issues 

Addison further argued that the procedural issues of the Act “are not very clear.” He asked, “who does the reporting to Parliament? Is it the Governor or is it the Minister of Finance?”

IMF on the Act 

The Fund in the bailout package approved for Ghana says among others that “to strengthen central bank independence and thus monetary policy credibility, the Bank of Ghana Act of 2002 (Act 612), as amended, will be revised with a view to reduce the overdraft limit, enhance compliance, refine the emergency conditions under which the limit can be temporarily breached, and the extent of the permissible breach under each emergency category.”

The BoG Act will be revised to mitigate fiscal dominance, the IMF document said.

The document said “an ongoing updated Safeguards Assessment will provide additional support for designing changes to the BoG Act. It will review the authorities’ gold purchase and gold-for-oil programmes and associated risks for the BoG.

The BoG’s balance sheet will be affected by the debt restructuring. The Government and the BoG will assess the impact and develop plans for its recapitalization with Fund technical assistance support.

Expert welcomes review 

Commenting on the development, Dennis Nsafoah, Assistant Professor of Economics, Niagara University in Canada, said the IMF’s objective to strengthen the independence of the BoG was in line with international best practices. 

According to Nsafoah, a central bank with greater independence can make monetary policy decisions based on economic fundamentals rather than being influenced by short-term political considerations. 

“This can contribute to maintaining price stability and fostering economic growth,” he stated.

Nsafoah maintained that mitigating fiscal dominance was another important goal of the IMF’s plan. 

He explained that “fiscal dominance occurs when the central bank’s ability to conduct effective monetary policy is constrained by excessive government borrowing or fiscal pressures. By reducing fiscal dominance, the central bank can maintain greater control over monetary policy and better manage inflation and other macroeconomic variables.”

The professor of economics who is also a member of the Research Committee of Tesah Capital, said The BoG governor’s concerns about inconsistencies and implementation difficulties with the current Act suggest that there might be limitations in its effectiveness. A revision of the Act could address these issues, potentially leading to a more streamlined and effective framework for the central bank’s operations.

“If the Act is successfully revised, several changes could potentially occur. These changes may include enhancing the independence of the BoG, strengthening its ability to conduct effective monetary policy, and addressing any inconsistencies or implementation difficulties. These revisions could contribute to a more stable and resilient financial system, better control over inflation, and improved economic outcomes,” he explained. 

He further cautioned that  the specific details and implications of the proposed revisions would depend on the specific provisions that are modified or introduced. The success of the revision and its ultimate impact would also depend on various factors, including the commitment to implementation, the cooperation of relevant stakeholders, and the broader economic and political context in Ghana.

The Act saw some amendment in 2016 but still has issues which defeat the objectives for which it was passed. 

It is hoped that the revision would boost the work of the central bank and help cure some of the difficulties in managing Ghana’s economy.