The International Monetary Fund has indicated that the Bank of Ghana Act will be revised to strengthen the Central Bank’s independence and mitigate fiscal dominance by the government.

According to the Fund, the amendments to the Central Bank Act will feature a stricter limit for monetary financing, mechanisms to monitor and enforce compliance, and a clear definition of emergency situations under which the limit can be temporarily lifted.

“Pending legislative changes, the BoG and the Ministry of Finance signed an MoU (prior action) to eliminate monetary financing during the programme. An ongoing updated Safeguards Assessment will provide additional support for designing changes to the BoG Act”.

The Fund further said the revised Act will review the government gold purchase and gold-for-oil programmes and associated risks for the Central Bank.

It noted that the Bank of Ghana’s balance sheet will be affected by the debt restructuring. Therefore, the government and the Bank of Ghana will assess the impact and develop plans for its recapitalization with Fund technical assistance support.

Financial sector stability robust before debt restructuring

The Fund also said Ghana’s financial sector was relatively robust before the debt restructuring, thanks to the financial sector cleanup conducted in recent years.

As part of the cleanup, a thorough asset quality review had been conducted.

To this end, the aggregate Non-Performing Loans had declined from 17% in 2019 to about 15% at end-2022, and the sector had been well-capitalized except for a few institutions.

However, it noted that several steps under the financial sector cleanup were yet to be implemented.

DDE presents substantial challenge for health of financial sector

The Bretton Wood institution again said the Domestic Debt Exchange (DDE) presents a substantial challenge for the health of the financial sector given its exposure to government debt.

“Domestic bonds were widely distributed across the financial sector in Ghana, representing the most important asset class held by commercial banks, pension funds, asset management companies, and insurance companies. Banks held 30 to 50% of their total assets in government securities before the DDE—with especially high exposures in the state-owned banks—and relied significantly on income from these securities”.

It stressed that the coupon reductions and maturity extensions in the recently completed DDE mean that the value of these assets will decline to about 70% of the par value.

This revaluation, it pointed out, represents a significant shock to the balance sheets of these financial institutions.