MONETARY POLICY AND FINANCIAL SECTOR REFORM IN AFRICA: GHANAS EXPERIENCE

by Mahamudu Bawumia OVERVIEW The book inter alia undertakes an in-depth review of Ghanas monetary policy regimes since independence: Direct Controls, Monetary Targeting, and Inflation Targeting under different governments (including Nkrumah, NLC, Busia, Acheampong, Rawlings, Kufuor). Financial sector development and reforms that have taken place alongside the monetary policy regimes are also placed under the microscope. These include regulatory and legal reforms, capital market and money market reforms, banking reforms, currency redenomination, reforms, payment system reform, rural banking reforms, and Ghanas debut sovereign bond issue. Why were these monetary policy regimes and financial sector reforms adopted? What role did the political economy play in the reforms and outcomes? What was the impact of the different monetary regimes and financial sector reforms on the performance of Ghanas economy? Monetary Policy and Financial Sector Reform in Africa: Ghanas Experience provides a detailed and chronological account of these issues in the context of developments in the global economic system such as the Great Depression, Structural Adjustment, HIPC, and the recent global financial crisis. What are the lessons for Ghana and Africa? KEY MESSAGES/HIGHLIGHTS OF THE BOOK Ghana has generally been moving in the slow lane compared to its contemporaries like South Korea at Independence.
Ghanas income per capita was almost exactly equal to South Korea's at $490 (in 1980 dollars). Fifty three years later, the economic fortunes of the two countries could not be more different. The World Banks purchasing power parity calculations show that South Koreas gross national income per capita was $28,120 while Ghanas was at $1,430 at the end of 2008. This basically tells the story that while South Korea has been growing very fast, Ghana has for long periods stagnated. GNI/Capita has been increasing on average by $20 annually in Ghana since independence while it has been increasing by an average of $545 annually in South Korea over the last 53 years. If Ghana performs along the same trajectory observed since independence then it will take at least 500 years to get to South Koreas per capita income in 2008!

Interest rates for bank loans remain high because inter alia, savings in the financial system are low. More than 70% of the population in Ghana do not have access to a bank account. The banking system is elitist. The supply of savings is therefore low. For the most part, the banking system has developed into an elitist one. The experience of other more developed economies is that the key to sustainable low interest rates is to increase access of the population to financial services alongside maintaining macroeconomic stability. Macroeconomic stability on its own is not sufficient. . The monetary policy of direct controls of interest rates and state interference in the banking sector (largely implemented between 1957-1983), only served to reduce saving, did not result in a sustainable expansion in the financial system and enhanced macroeconomic instability.

 Ghanas home grown Economic Recovery Program (ERP), the IMFs Stabilization program and World Banks Structural Adjustment Program (SAP) resulted in a remarkable recovery of the economy from negative GDP growth to register an average of some 5.0 percent per annum between 1984 and 1991. The period after 1991 through to 2000 was however characterized by relative macroeconomic instability. The SAP included the liberalization of prices, interest rates, exchange rates and privatization of state enterprises. The total divestiture proceeds for all the 192
state enterprises divested between 1989 and 1999 was the equivalent of some US$747.7 million. The divestiture included the sale of Governments interests in Ashanti Goldfields Company, (US$462.4 million), state-owned banks (US$65.2 million) and a 30% strategic stake in Ghana Telecom (US$38 million), Ghana National Trading Corporation (GNTC), State Fishing Corporation, Achimota Breweries Company, Star Hotel, Continental Hotel, Juapong Textiles, Lever Brothers, GIHOC, GHACEM, Aluworks, Neoplan Ghana Ltd, Pioneer Tobacco, Ghana Aluminium, Tema Food Complex etc.

Ghana has taken a leadership role in Africa and around the world in the area of payment system reform with the implementation of reforms such as the Real Time Gross Settlement System, Central Securities Depository, Codeline Cheque Clearing, Automated Clearing House, e-zwich platform, etc. However, the move from a cash-based economy to an electronic payment based economy will not happen without a concerted effort and support by Government. The move from cash to electronic payments involves behavioral change which takes time.
Even in the most advanced economies like the United States, the transition was very long. Experience from other countries like Malaysia and Singapore in this area shows that unless a country is willing to wait at least another 200 years to get there, the transformation from cash to predominantly electronic payments requires the active support and participation of government, the central bank and the private sector. The transition from cash to electronic payments is qualitatively similar to the transition from driving on the left to driving on the right hand side of the road in the 1970s. It didnt just happen. It had to be made to happen. For Ghana, thanks to the efforts of the Bank of Ghana and the banks, the infrastructure required for this transition is already in place and no new money has to be spent on that to make it happen.

FINANCIAL SECTOR REFORM

Financial Sector Reform Programme (FINSAP) 1988 2000 Financial Sector Strategic Plan (FINSSIP) 2001 - 2008

liberalization of interest rates and abolition of directed credit, restructuring of financially distressed banks, strengthening of the regulatory and supervisory framework, promotion of non-bank financial institutions:

o o o

discount houses, finance houses, acceptance houses,

Bank of Ghana Act 2002 Monetary Policy Committee (MPC) process - Transparency Universal Banking Abolishing Secondary Reserve Requirements Banking Act 2004 Banking Amendment Act 2007 Offshore Banking Long Term Savings Act 2004 Venture Capital Trust Fund Act 2004

o o

leasing companies, mortgage finance companies

liberalization of the foreign exchange market, establishment of forex bureaux, and the establishment of the Ghana stock exchange Banking Act 1989 Bank of Ghana Law 1992, PNDCL 291 Securities Industry Law 1993, PNDCL 333 NBFI Law 1999, PNDCL 328 Insurance Act 1989, PNDCL 227 Social Security Act 1991, PNDCL 247

Payment System Act, 2003 Foreign Exchange Act 2006 Anti-Money Laundering Act 2008 Credit Reporting Act 2008 Licensing of first Credit Reference Bureau Establishment of a Collateral Registry Borrowers and Lenders Act 2008 Insolvency Act, 2003 Home Finance Act 2008 Non-Bank Financial Institutions Act 2008 Central Securities Depository Act 2007 Insurance Act 2006 (Act 724) National Pensions Act 2008 Treasury Single Account Rural Banking Reforms:

o o o o o o o o o

ARB Apex Regulations 2006 (L.I. 1825) Governance Reforms, Millennium Challenge Account networking, computerization, etc.

Payment and Settlement System Reforms Real Time Gross Settlement System (RTGS) Central Securities Depository (CSD) Automated Clearing House (ACH) Cheque Codeline Clearing (CCC) National payment system with a common interoperable platform that is inclusive of the unbanked in rural and urban areas (e-zwich) Ghana Interbank Payments and Settlement System (GHIPSS)

Strengthening of the regulatory and supervisory framework

o o o o

Risk Based Supervision

Electronic Financial Analysis and Surveillance

System (eFASS) Stress Testing Publication of Annual Percentage Rates (APRs) of banks

ISO 27001 Certification for the Bank of Ghana Redenomination of the Currency

The wide ranging reforms that were implemented in the FINSSIP period, resulted in a significant deepening of the financial sector in the 2001-2008 period compared to the 1988-2000 period (using all key measures like deposit/GDP, M2/GDP, credit to the private sector/GDP, etc.).

Sovereign Bond Issue

History was made in 2007 when Ghana issued its debut $750 million Sovereign Bond on the international capital markets, the only Sub-Saharan African country other than South Africa, and joined only Egypt, Morocco and South Africa on the entire continent to do so. To monitor and

transparently track the use of proceeds, a dedicated sovereign bond proceeds account was established at the Bank of Ghana into which all sovereign bond proceeds were lodged and out of which all related expenditures were to be made. As it turned out, by the end of 2008 the proceeds the proceeds of Ghanas debut sovereign bond were spent mainly on the energy and road sectors. The 2009 Government of Ghana Budget Statement indeed notes that An immense proportion (76 per cent) of the Sovereign Bond proceeds was earmarked under the Government of Ghana (GoG) 2008 Supplementary Budget to cover capital expenditures for VRA, GRIDCO, ECG and Bui Power Authority (BPA).

Monetary Policy Regimes Of all the monetary policy regimes implemented since independence the inflation targeting regime (and the accompanying fiscal framework) has yielded the best performance thus far in terms of the key macroeconomic indicators. The Ghanaian economy was also more resilient to external shocks under the inflation targeting regime (2001-2008) than under the monetary targeting regime (1983-2001) and the direct controls regime (1957-1983) See Table 11.3. The Bank of Ghanas inflation targeting regime as implemented has been very supportive of economic growth. Durable Macroeconomic Stability The experience of Ghana shows that while monetary policy regimes matter (for example the

inflation targeting regime has produced the lowest average inflation since the 1970s), fiscal policy regimes matter even more. There is yet to be invented a monetary policy framework in the world that can withstand a sustained onslaught from the fiscal authorities as we saw in Ghana in 2000 and 2008.

What is therefore required is a period of macroeconomic stability long enough for it to be the
expected norm by market participants. This requires a commitment to the goal of price stability and a monetary policy framework that is transparent and market driven to be able to anchor inflationary expectations.

Empowering the Private Sector One of the keys to dealing with the problem of fiscal dominance and its threat to Unwritten Rules of the Game International development is very competitive and therefore countries try to wrest a

macroeconomic stability is empowering the private sector to deliver projects and services that can be done more efficiently by it or in partnership with government.

competitive advantage at every turn. Unlike the game of football where the rules are clearly defined for all participants, not all the rules of the international development game are written down. A unique identification number, an address system and financial inclusion (banking the unbanked) are basically some of the key unwritten rules for effective monetary policy and financial sector development in particular and overall development in general. Without these systems and institutions in place, no monetary policy framework will be sufficient in the long run to engender the type of financial sector that will be critical in the growth process

There is room for forging a Ghanaian Consensus in the area of economic policy one cannot help but notice the irony of the free-market oriented NPP government
implementing policies that were to some extent more social democratic in orientation on the one hand, and the social democratic government of the PNDC/NDC on the other hand adopting a free market approach in the management of the economy under IMF guidance. One can only hope that this is the beginning of the forging of a Ghanaian Consensus on the management of the economy across the political divide.