Central bank deficit financing in a constrained fiscal space

This policy note addresses central bank financing of fiscal deficits in Ghana and the macroeconomic implications thereof. Alternative configurations of deficit financing and the experiences of developing countries with a history of zero tolerance for central bank financing are addressed. Briefly, the note argues that sound public finances are predicated on sound rules on public spending. While central bank financing may be inevitable in environments with less tax revenues and undeveloped financial systems, borrowing from the central bank should be limited to only the state, and on transitory basis. Where such borrowing is undertaken, the loans should be repaid within the same fiscal year, and gradually, the government should wean itself off central bank financing of deficits. While the optimal central bank financing that is consistent with growth and stability is an empirical matter, a de jure rule may be useful when it is binding, and the operational autonomy of the central bank preserved.