a. Government borrowing via securities (e.g., T-bills, bonds) expands money supply when banks purchase them, as it injects funds into the economy. In credit creation theory, banks lend reserves created by central bank purchases. If BoG buys securities (monetizing debt), it credits banks’ reserves, enabling multiple deposit expansion via the money multiplier (1/CRR). For example, in Ghana’s 2022 fiscal crisis, government issued T-bills to banks, increasing broad money (M2+) by absorbing excess liquidity but crowding out private lending.

Impact:

• Expansionary: Banks buying securities with deposits increase money supply; e.g., post-DDEP, BoG’s zero-coupon bonds to banks boosted liquidity, per BoG reports, leading to M2 growth of ~30% in 2023.
• Contractionary if Sterilized: BoG sells securities to mop up liquidity, reducing reserves; during 2018 inflation control, OMOs contracted money.
• Interest Rate Effects: High borrowing raises yields (e.g., 2022 T-bill rates hit 35%), attracting funds but increasing costs, per term structure theory.
• Crowding Out: Reduces private credit; Ghana’s government domestic borrowing rose to 50% of GDP in 2022, per IMF, limiting SME financing.
• Inflationary Pressure: Excessive borrowing fuels inflation (quantity theory: MV=PY); Ghana’s 54% inflation in 2022 partly from fiscal dominance.
• Balance Sheet Interplay: Increases bank assets (securities) and liabilities (deposits if government spends proceeds), as in PSBR financing.

In practice, under BoG Act limits, direct monetization is capped, but indirect via banks (e.g., Stanbic holding T-bills) amplifies effects, requiring vigilant MPC oversight.

b. Constraints limiting money supply growth:

• Reserve Requirements: High CRR (e.g., BoG’s 8%) reduces multiplier.
• Leakages: Cash holdings or excess reserves by banks limit expansion.
• Monetary Policy Tools: High MPR (29% in 2025) discourages borrowing.
• External Factors: Forex outflows or trade deficits drain reserves.
• Regulatory Caps: Capital adequacy rules under Act 930 restrict lending.