Question

Question two

Globally, central banks have supported financial markets to reduce the impact of the covid-19 pandemic. Analyze critically what kind of support the central bank of Ghana should introduce (or may have introduced) on the financial market of Ghana to manage the negative impact of this pandemic.

NOT LESS THAN A PAGE

Answer 1

When itimes iget itough, icentral ibanks itypically iact ias ithe ifirst iline iof idefense.

However, imodern ieconomies iare iincredibly icomplex—and icalamities ilike ithe i2008 ifinancial icrisis ihave ialready ipushed itraditional ipolicy itools ito itheir ilimits. iIn iresponse, isome icentral ibanks ihave iturned ito inewer, imore iunconventional istrategies isuch ias iquantitative ieasing iand inegative iinterest irates ito ido itheir iwork.

In iresponse ito ithe iCOVID-19 ipandemic, icentral ibanks iare ionce iagain itaking idecisive iaction. iTo ihelp ius iunderstand iwhat’s ibeing idone, itoday’s iinfo igraphic iuses idata ifrom ithe iInternational iMonetary iFund i(IMF) ito icompare ithe ipolicy iresponses iof i29 isystemically iimportant ieconomies.

Many icentral ibanks ihave ienacted iexpansionary imonetary ipolicies ito iboost islowing ieconomies ithroughout ithe ipandemic.

One iwidely iused itool ihas ibeen ipolicy irate icuts, ior icuts ito iinterest irates. iThe itheory ibehind irate icuts iis irelatively istraightforward—a icentral ibank iplaces idownward ipressure ion ishort-term iinterest irates, idecreasing ithe ioverall icost iof iborrowing. iThis iideally istimulates ibusiness iinvestment iand iconsumer ispending.

If ishort-term irates iare ialready inear izero, ireducing ithem ifurther imay ihave ilittle ito ino ieffect. iFor ithis ireason, icentral ibanks ihave ileaned ion iasset ipurchase ischemes i(quantitative ieasing) ito iplace idownward ipressure ion ilonger-term irates. iThis ipolicy ihas ibeen ia icornerstone iof ithe iU.S. iFederal iReserve’s i(Fed) iCOVID-19 iresponse, iin iwhich inewly-created icurrency iis iused ito ibuy ihundreds iof ibillions iof idollars iof iassets isuch ias igovernment ibonds.

When ithe imedia isays ithe iFed iis i“printing imoney”, ithis iis iwhat ithey’re iactually ireferring ito.

Central ibanks iare ioften itasked iwith iregulating ithe icommercial ibanking iindustry, imeaning ithey ihave ithe iauthority ito iease irestrictions iduring ieconomic icrises.

One ioption iis ito iease ithe icountercyclical icapital ibuffer. iDuring iperiods iof ieconomic igrowth i(and iincreased ilending), ibanks imust iaccumulate ireserves ias ia isafety inet ifor iwhen ithe ieconomy ieventually icontracts. iEasing ithis irestriction ican iallow ithem ito iincrease itheir ilending icapacity.

i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i

i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i iThe iCentral iBank iof iGhana ihas itaken imeasures ito imitigate ithe inegative iimpact iof ithe ioutbreak, iincluding icutting iinterest irates iand ireserve irequirements, iand idecreasing ibanks’ iconservation ibuffers.

Monetary ipolicy

1. Cut iof ikey iinterest irate ito i8-year ilow ifrom i16% ito i14.5%;

2. Lowering ireserve irequirements ifor ilenders ifrom i10% ito i8% iin iorder ito iprovide iliquidity isupport ito icritical isectors;

3. Decrease iin ithe ibanks’ iconservation ibuffer ifrom i3% ito i1.5%, iwhich icuts ithe icapital-adequacy iratio ifrom i13% ito i11.5%.

4. Asked ithe iIMF ifor ia irapid idisbursement iof ia icredit ifacility ito ihelp ithe icountry iface ithe inegative ieconomic iimpact icaused iby ithe iCovid-19 ioutbreak.

5. The iBank iof iGhana ihas idecided ito idecrease ithe icost iof ifund itransfers ithrough imobile imoney, iin iorder ito iavoid ia ilow iin itransactions. iBesides, ino imobile imoney itransactions ibelow iGH100 i(USD18) iwill ibe icharged iby iservice isuppliers ifor ithe inext ithree imonths.

As iof iJune i25, i2020, iGhana irecorded i15,473 iconfirmed iCOVID-19 icases iand i95 ideaths. iStarting iMarch i16, ithe igovernment iadopted isweeping isocial idistancing imeasures iand itravel irestrictions ito iavert ian ioutbreak, iincluding i(i) isuspension iof iall ipublic igatherings iexceeding i25 ipeople ifor ifour iweeks; i(ii) iclosure iof iall iuniversities iand ischools iuntil ifurther inotice; iand i(iii) imandatory i14-day iself-quarantine ifor iany iGhanaian iresident iwho ihas ibeen ito ia icountry iwith iat ileast i200 iconfirmed icases iof iCOVID-19, iwithin ithe ilast i14 idays. iOn iMarch i23, iGhana iclosed iall iits iborders ito itravelers. iOn iMarch i30, ia ipartial ilockdown iof imajor iurban iareas iwas iimplemented. iAs ian ioil iexporter, iGhana iis isignificantly iaffected iby ithe ilarge idecline iin ioil iprices.

Reopening iof ithe ieconomy i. iThe ipartial ilockdown iwas ilifted ion iApril i23 ifollowing iaggressive icontact itracing, iexpansion iof itreatment iand iisolation icenters, ienhanced itesting icapacity, ibetter iunderstanding iof ithe ivirus icontagion idynamics, iincreased icapacity ito iproduce isanitizers iand imedicines, iand isevere iimpact iof ithe ilockdown ion ithe imost ivulnerable. iStage iOne iof ithe iprocess iof ieasing irestrictions ibegan ion iJune i5. iReligious iservices ifor ifewer ithan i100 icongregants iare iallowed, iprovided isocial idistancing irestrictions iare imet. iStarting iJune i15, ischools iand iuniversities ire-opened ito iallow ifinal iyear ijunior ihigh, isenior ihigh iand iuniversity istudents ito iresume iclasses iahead iof iexams, iagain iwith ismaller iclass isizes iand iother isocial idistancing irestrictions iin iplace. iGhana’s iborder, iby iair, iland iand isea, iremains iclosed iuntil ifurther inotice ifor ihuman itraffic.

Key iPolicy iResponses ias iof iJune i25, i2020

FISCAL

The igovernment icommitted iUS$100 imillion ito isupport ipreparedness iand iresponse, iand iabout iUS$210 imillion iunder iits iCoronavirus iAlleviation iProgrammed ito ithe ipromotion iof iselected iindustries i(e.g., ipharmaceutical isector isupplying iCOVID-19 idrugs iand iequipment), ithe isupport iof iSMEs iand iemployment, iand ithe icreation iof iguarantees iand ifirst-loss iinstruments. iAdditional ifunds ihave ibeen iearmarked ito iaddress iavailability iof itest ikits, ipharmaceuticals, iequipment, iand ibed icapacity. iOn iApril i26, ia imajor iinvestment iin ihealthcare iinfrastructure iwas iannounced, iincluding ithe iconstruction ior iupgrade iof i100 idistrict iand iregional ihospitals.

To icompensate ifor ilarger ispending irelated ito ithe iCOVID-19 icrisis, ithe igovernment iplans icutting ispending iin igoods iand iservices, itransfers, iand icapital iinvestment i(also ireflecting ithe ilower iabsorption icapacity iof ithe ieconomy idue ito ithe ipandemic), ifor ia itotal iof iat ileast iGHc i1.1 ibillion i(0.3 ipercent iof iGDP). iAlso, ithe igovernment ihas iagreed iwith iinvestors ito ipostpone iinterest ipayment ion inon-marketable idomestic ibonds iheld iby ipublic iinstitutions ito ifund ithe ifinancial isector iclean-up ifor iabout iGHc i1.2 ibillion i(0.3 ipercent iof iGDP).

To ireduce ithe ifinancing ineeds, ithe igovernment iwill idraw iUS$218 imillion ifrom ithe istabilization ifund, iand iwill iborrow iup ito iGHc i10 ibillion ifrom ithe iBank iof iGhana.

MONETARY iAND iMACRO-FINANCIAL

The iMonetary iPolicy iCommittee i(MPC) icut ithe ipolicy irate icut iby i150 ibasis ipoints ito i14.5 ipercent ion iMarch i18, iand iannounced iseveral imeasures ito imitigate ithe iimpact iof ithe ipandemic ishock, iincluding ilowering ithe iprimary ireserve irequirement ifrom i10 ito i8 ipercent, ilowering ithe icapital iconservation ibuffer ifrom i3 ito i1.5 ipercent, irevising iprovisioning iand iclassification irules ifor ispecific iloan icategories, iand isteps ito ifacilitate iand ilower ithe icost iof imobile ipayments. iThe icommittee ialso isignaled iit iwould icontinue ito imonitor ithe ieconomic iimpact iof iCOVID-19 iand itake iadditional imeasures iif inecessary.

At iits iMay i15 imeeting, ithe iMPC ikept ithe ipolicy irate iunchanged iand iannounced ia inew ibond ipurchasing iprogram ito iprovide iemergency ifinancing ito ithe igovernment iin ilight iof ia ihigher iprojected ifiscal ifinancing igap. iA i10-year ibond iwith ia iface ivalue iof iGHc i5.5 ibillion i(1.4 ipercent iof iGDP) ihas ibeen ipurchased, iand ithe iMPC iindicated ithat ifuture ipurchases imay iincrease iup ito iGHc i10 ibillion. iThe iMPC ialso iannounced irelief imeasures ifor ismall idepository iinstitutions iand ia iUS$1 ibillion irepo iagreement iwith ithe iU.S. iFederal iReserve iunder iits iFIMA ifacility.