The institute is rather proposing a new lending limit of five per cent of government revenue, half of the previous limit of 10 per cent, which also included the government’s borrowing from the rest of the economy.
“The proposal in the new Act to eliminate completely Bank of Ghana (BoG) lending to government starting from 2016, except in extreme emergency cases, is premature and counterproductive and should be revisited,” the institute said in a 24-page evaluation of the IMF board's second review of Ghana’s extended credit facility-backed programme.
“In a developing country context such as Ghana’s, where the domestic debt market is underdeveloped, it is necessary for the central bank to be ready to provide some limited financial accommodation to government when needed,” the report, which was issued in Accra last Wednesday, added.
High interest rates
The IFS report noted that the country has prohibitively high interest rates, which implies a high cost of borrowing by the government. In the view of the think tank, the high cost of borrowing would further be compounded by the elimination of government borrowing from the Bank of Ghana.
"This means that future government debt will be issued only to the rest of the economy. This restriction will not only put further pressure on the yields, but could also crowd out private sector borrowing,” the report noted.
“Rather than abruptly eliminating government borrowing from the central bank, the borrowing should be phased out gradually over several years,” the IFS report added.
The institute fears that the programme with the IMF faces risks such as tight-financing conditions at home and abroad, which is one of the reasons it suggests that borrowing from the central bank should not be stopped as planned, but limited borrowing should be in place for a while as the domestic capital market develops.
Election cycle factor
But the biggest risk to the IMF programme, according to IFS, is the election-cycle factor, which entails spending overruns every election year since 1992.
Though the government has given a strong assurance to keep to its spending limits, the IFS warns that any slip would plunge the economy into another major crisis that might necessitate an unwarranted post-election return to the IMF for another bailout.
The policy think tank also welcomed reforms that would deepen the foreign exchange market and reduce the volatility, but called for caution in the proposal to eliminate surrender requirements.
It suggested steps to equip the BoG to be able to check potential foreign exchange leakages through the financial system before the new mechanism became operational.
It also called for measures to reduce retention of export proceeds abroad, especially by mining companies.
“Ensuring that export proceeds are repatriated into the country is important in deepening the domestic foreign exchange market and thereby reducing exchange rate volatility.
Debt sustainability
On debt sustainability, the IFS said the two key ingredients to bring the public debt back to a sustainable path were strong fiscal adjustment and an appropriate financing package.
Regarding financing package, it said there was a need to carefully balance the use of external and domestic resources so as to reduce the overall cost of borrowing.
“There is merit in deepening the domestic debt market to ensure ready availability of affordable financing.”
Inflation management
The institute described the inflation management by the Bank of Ghana as generally ineffective.
“This is largely because the bank has solely relied on a policy rate, essentially a demand-management instrument, to tackle current inflation that is largely supply-driven.
“To be effective, the bank needs to broaden its arsenal of instruments and adopt a “micro-approach” that directly targets the primary sources of inflation, such as food supply, administered prices and the exchange rate.
“This appraoch should be employed in tandem with overall government policy tailored to addressing the problems associated with these primary drivers of inflation
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