Efficacy of fiscal and monetary stimulus packages in Ghana under covid-19

ECONOMIC AND SOCIAL IMPACT OF COVID-19

The economic and social impact of covid-19 on the Ghanaian economy cannot be over emphasized.  These include the following:

1. Increase in health and its related expenditure
2. Short fall in petroleum receipts to Ghana
3. Reduction in tax revenue
4. Reduction of Hotel occupancy rates
5. Unemployment from staff layoffs.
6. Slow down of Foreign Direct Investment (FDI)
7. Reduction in trade volumes and values (both domestic and international)
8. Decline in the international price of crude oil
9. Exchange rate volatility and debt service difficulties
10. Reduction in GDP growth

The Minister of Finance (MoF) indicated that measures are required to close a fiscal gap of GHȼ11.4 billion (2.9% of revised GDP).

What is a Stimulus Package

In an attempt to reduce the negative economic and social impact of covid-19, stimulus packages have been put forward by various governments including the Ghana government. Covid-19 has therefore made stimulus packages very popular in the news but what really does it mean? A stimulus package is a number of economic measures put together by a government to stimulate a struggling economy. The objective of a stimulus package is to revitalize the economy and prevent or reverse a recession by boosting employment and spending.  Theoretically, Keynesian economists argue that the impact of a recession can be lessened with increased government spending.  The goal is therefore to increase aggregate demand through increased employment, consumer spending and investment.

A stimulus package is therefore a coordinated effort to increase government spending and lower taxes and interest rates in order to stimulate an economy out of a recession or depression.  It includes a number of incentives and tax rebates offered by a government to boost spending in a bid to pull a country out of a recession or to prevent an economic slowdown.  A stimulus package can be in the form of a monetary stimulus or a fiscal stimulus.

 FISCAL STIMULUS VRS MONETARY STIMULUS

When a government opts for a fiscal stimulus, it cuts taxes or increases its spending in a bid to revive the economy. When taxes are cut, people have more income at their disposal. An increase in disposable income means more spending in the country to boost economic growth. When the government increases its spending, it injects more money into the economy, which decreases the unemployment rate, increases spending, and eventually, counters the impact of a recession.

 A monetary stimulus involves cutting interest rates to stimulate the economy. When interest rates are reduced, there is more incentive for people to borrow as the cost of borrowing is reduced.  This is an expansionary monetary policy because an increase in borrowing means there’ll be more money in circulation, less incentive to save, and more incentive to spend.

Quantitative easing is another form of expansionary monetary policy in which the central bank of a country purchases a large number of financial assets, such as bonds, from commercial banks and other financial institutions. The purchase of these assets in large amounts increases the excess reserves held by the financial institutions, facilitates lending, increases the money supply in circulation, drives up the price of bonds, lowers the yield, and lowers interest rates.  A government will usually opt for quantitative easing when a conventional monetary stimulus is not very effective.

GLOBAL RESPONSE TO COVID 19

Several countries have put in place coordinated fiscal and monetary stimulus packages in response to the global coronavirus pandemic. These include cutting interest rates and providing stabilization mechanisms to the financial markets in conjunction with tax breaks, sector bailouts, and emergency unemployment support to displaced workers.  Below shows a summary of some stimulus packages by the governments of the United Kingdom (UK), United States of America (USA), European Union (EU),Japan, just to mention a few.

United Kingdom (UK) – The Bank of England (BoE) designed a stimulus package to prevent the country from going into a recession. Part of the stimulus package included a quantitative easing plan to purchase £10 billion worth of corporate debt from a pool of £150 billion in order to drive down borrowing costs.  Interest rates were also cut to 0.25% from 0.50% and then again to 0.1%.

 United States of America (USA) – The U.S. Senate voted to approve a $2 trillion stimulus bill on March 26, 2020, with a supplementary budget of additional about $1 trillion totaling $3 trillion to backstop the economy from impact of the coronavirus.  President Trump also signed the CARES Act into law on March 27 and later the Heroes Act.

European Union (EU) – The European Commission approved a proposed €750 billion (about $826 billion) stimulus package to help the European Union recover from a recession brought on by the coronavirus pandemic.

Japan – The Cabinet of Japan approved a 117 trillion yen ($1.1 trillion) plus another supplementary budget of $1.08 trillion totaling $2.18 trillion (40% of GDP) to deal with a set of measures that includes financing help for struggling companies, subsidies to help firms pay rent and several trillion yen for health care assistance and support for local economies.

GHANA’S FISCAL STIMULUS PACKAGE AGAINST COVID-19

The Ministry of Finance is leading the implementation of the proposed fiscal stimulus on behalf of the government of Ghana, and these include the following measures:

1. The establishment of a Coronavirus Alleviation Programme (CAP) with to protect job losses and livelihoods as well as support small businesses. The Ministry of Finance immediately released an amount of One Billion Ghana Cedis (GHc1.0 billion) upon approval by Parliament.  The Ministry also proposed to use the equivalent of USD219 Million from the Stabilization Fund.
2. The Government launched the COVID-19 National Trust Fund with the former Chief Justice (Rtd) Sophia Akuffo as the Chair to the Board of Trustees to manage the Fund on behalf of government to help alleviate the negative impact of COVID-19 on individuals and institutions. Since the launch of the Fund, many private sector players have donated significant cash and other assets into the Fund.
3. GH¢600 Million Stimulus Package to SMEs for businesses (estimated 200,000 SMEs) to sustain affected industries and address disruption in economic activities caused by the COVID-19 pandemic.
4. Government Distributed Food Items to Needy Individuals and Households affected by Lockdown through the Ministries of Finance and Gender, Children and Social Protection in collaboration with faith based organizations.
5. Lower the cap on the Ghana Stabilization Fund (GSF) from the current US$300 million to US$100 million in accordance with Section 23 (3) of the Petroleum Revenue Management Act (PRMA). This measure was to  enable the excess amount in the GSF account over the US$100 million cap to be transferred into the Contingency Fund for use. This was expected to provide an estimated GHȼ1,250 million for the Coronavirus Alleviation Programme;
6. Arrange with BOG to defer interest payments on non-marketable instruments estimated at GHȼ1,222.8 million to 2022 and beyond;
7. Adjust expenditures on Goods & Services and Capex downwards by GHȼ1,248 million;
8. Secure World Bank DPO of GHȼ1,716 million and IMF Rapid Credit Facility of GHȼ3,145 million;
9. Reduce the proportion of Net Carried and Participating Interest due GNPC from 30% to 15%;
10. Amend the PRMA to allow a withdrawal from the Ghana Heritage Fund to undertake urgent expenditures in relation to the Coronavirus pandemic. There is an estimated US$591.1 million in the Ghana Heritage Fund but this was unacceptable by a section of the populace;
11. A syndication facility of GHȼ0 billion to support industry especially in the pharmaceutical, hospitality, service and manufacturing sectors;
12. A call on the pension funds and other assets managers and investors to follow the lead of the Banks to support by accepting a 200 basis points (2 percent) reduction on short term instruments including T-bills and 364-day paper. This should reduce government expenditure on interest expense by over GHS300 million to help close the fiscal gap.
13. Engaging the Telcos to reduce the cost of data and telecommunication services to households and small businesses;
14. Tax, grants and loans, the Ghana Revenue Authority (GRA) to provide some reliefs to businesses and households.

According to the MoF, the implementation of the above measures is expected to create a fiscal deficit of 6.6% of revised GDP still higher than the 5% limit imposed by the fiscal responsibility act.

GHANA’s MONETARY STIMULUS PACKAGE AGAINST COVID-19

The Bank of Ghana on behalf of the Government of Ghana has carried out a number of monetary policy initiatives aimed at reducing the negative economic impact of covid-19.  These measures include the following:

1. Reduction of the Monetary Policy Rate by 150 basis points to 14.5%.
2. The Primary Reserve Requirement has been reduced from 10% to 8% to provide more liquidity to banks to support critical sectors of the economy.
3. To further boost foreign exchange liquidity, the Bank of Ghana (BOG) concluded a US$1 billion Repurchase Agreement (Repo) facility with the U.S. Federal Reserve under its Repo facility for Foreign and International Monetary Authorities (FIMA Repo Facility).
4. In line with section 30 of the Bank of Ghana Act, 2002 (Act 612) as amended, the Bank of Ghana triggered the emergency financing provisions, which permits the Bank to increase the limit of BOG’s purchases of government securities in the event of any emergency to help finance the residual financing gap
5. The BoG purchased a Government of Ghana COVID-19 Relief Bond with a face value of GH¢5.5 billion at the Monetary Policy Rate with a 10-year tenor and a moratorium of two (2) years (principal and interest). The BoG stands ready to continue with its Asset Purchase Programme up to GH¢10 billion in line with the current estimates of the financing gap from the COVID-19 pandemic.
6. Activated section 46A of the Bank of Ghana Act 2002 (Act 612) as amended, to provide liquidity support to savings and loans and finance house companies facing temporary liquidity challenges.
7. Strengthen the capacity of the ARB Apex Bank to provide liquidity support for rural and community banks as well as microfinance institutions facing temporary liquidity challenges.
8. Extended the deadline for SDIs (MFIs and RCBs) to meet new capital requirements to December 2021. This is expected to provide temporary relief to SDIs, given current economic conditions.
9. Reduced the 8 percent primary reserve ratio for savings and loans companies, finance house companies, and rural and community banks to 6 percent, and the 10 percent primary reserve ratio for micro finance companies to 8 percent
10. The Capital Conservation Buffer (CCB) for banks of 3.0% is reduced to 1.5%. This is to enable banks provide the needed financial support to the economy. This effectively reduces the Capital Adequacy Requirement from 13% to 11.5%
11. Provisioning for Loans in the “Other Loans Especially Mentioned” (OLEM) category is reduced from 10% to 5% for all banks and Specialised Deposit-Taking Institutions (SDIs). This should provide capital relief to banks and SDIs in these uncertain times.
12. Loan repayments that are past due for Microfinance Institutions for up to 30 days shall be considered as “Current” as in the case for all other SDIs.
13. BoG has indicated that Ghanaian banks are not allowed to pay dividends.

CONCLUSION

Fiscal Stimulus

The Ministry of Finance on behalf of the government of Ghana has done well in putting together the fiscal stimulus package outlined above.  It is important that the whole program is well coordinated and it must be implemented not only to ensure proper accountability but also only needy companies and individuals should receive the stimulus packages.

Government should also be mindful of the downside risk of fiscal stimulus which include a higher debt-to-GDP ratio and the risk that consumers will hoard any cash given to them instead of spending it, which could render the stimulus package ineffective.

Monetary Policy

Given the large informal sector of the economy, monetary stimulus may not be as effective as fiscal stimulus.  To this end, BoG must be credited with its quantitative easing measures outlined above.

The downside of lowering interest rates could also weaken the exchange rate of Ghana with its negative consequences on the economy.  For the reduction in interest rate to be effective, it must complement an export led economy which looks only feasible in the medium to long term.  The FIMA Repo Facility by BoG is however expected to provide an important foreign exchange buffer to boost dollar liquidity amid the COVID-19 global pandemic, and will further enhance the BOG’s dollar liquidity.

 Bank of Ghana formulates and implements monetary policy to achieve price stability, contribute to the promotion and maintenance of financial stability and ensure a sound payment system.  To this end, BoG must be concerned with the activities of all players within the financial services space.  The collapse of 7 banks, 386 microfinance institutions, 23 savings and loans, and the 53 Fund Management firms, have created loss of trust and confidence, fear and panic within the financial systems.  It is a known fact that some of the existing BoG regulated institutions are suffering from liquidity crises and thus impacting negatively on the whole financial system.  BoG’s intended liquidity support under section 46A Act 612 must be extended to cover fund management firms and not only savings and loans/finance houses because the former is also a critical component of the financial system.  Solving the liquidity problem in the financial space must be holistic and all embracing.  To improve liquidity within the Fund Management sector, BoG should be encouraged by MoF as part of the quantitative easing measure to purchase the current 5-Year zero-coupon bond to ensure that clients of financial services including fund management companies get 100% payment of their deposits and/or investments. 

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