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June 13 ,2014 | by Sarah Parkin

Bank of Ghana criticised for funding budget deficit

Bank of Ghana criticised

Ghana’s central bank has attracted criticism for funding the government’s entire budget deficit.

Ghana’s central bank has drawn criticism from analysts by making the controversial decision to fund the government’s entire budget deficit.

Bloomberg reports that Bank of Ghana has confirmed it made use of its right to give a “short-term advance” to the government to make up the deficit. Grace Akofi, head of research at the central bank, told the source that the bailout became necessary due to “shortfalling government revenue”.

 

In practice, this means that the Bank of Ghana is basically printing money to finance the deficit – a dangerous move for an economy that is already vulnerable.

The African economy is struggling with its highest rate of inflation in four years, close to 15 per cent, and its currency is particularly weak. Indeed, the cedi has lost over a fifth of its value against the dollar since the start of this year.

Commentators fear that Bank of Ghana’s new policy of paying for the budget deficit could make the economy more vulnerable. It risks fuelling further inflation and speeding the decline of the cedi, which is already the worst-performing currency in Africa.

That’s certainly a cause for concern for Fitch, the credit ratings agency, which warned the moves could affect its next review of the country’s ratings in September.

 

There are plenty of other challenges facing the nation. According to specialists, job creation needs to be a top priority in the next few years.

The World Bank Ghana Country Office said Ghana will have to generate anything between six and seven million new jobs by 2030 to cope with the number of expected entrants to the workforce.

Whether that would be achievable if the economy weakened even further is doubtful.

But in the meantime, the central bank itself remains fairly optimistic about its drastic decision. The government did not actually spend more money than it had planned, Ms Akrofi told Bloomberg. Rather, the expected revenues simply didn’t come in, which she claims is a common occurrence towards the start of the financial year. Even so, the stakes are high for one of the most tenuous economies in Africa.

Sarah Parkin

Sarah Parkin used to work as News Writer for LSBF.  Sarah is specialised in finance, technology and business news.

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