PRH: The Bank of Ghana plays a crucial role in formulating and implementing policy in the banking sector. What are you doing to ensure Ghana’s balanced and sustainable economic growth?
Dr. Addison: The core mandate of the Bank of Ghana as the Central Bank is price stability. In broad terms, you have to look at Ghana as a small open economy which is subject to both internal and external shocks. Therefore, there is need for a policy framework that will deliver stability and as a central bank, our part in that policy framework is to use our monetary policy tools and instruments to deliver on price and exchange rate stability. We argue that macroeconomic stability creates a conducive economic environment that provides certainty to the private sector and allows it to take appropriate decisions to invest and grow the economy – this is the theory underlying the importance of stability. The channels affect both producers in terms of the allocative efficiency associated with a stable environment and for consumers who can receive a stable real wage and therefore afford higher levels of consumption than you otherwise would in an unstable environment. For instance, implementation of policies to ensure stability this year has yielded positive results. Alongside fiscal consolidation that the government has undertaken, with the monetary policy stance of the Central Bank, we have seen the rates of inflation come down from 15.4% to the latest figure of 11.7%. The exchange rate has also remained relatively stable, and we are seeing a higher build-up in foreign exchange reserves. These are all supporting the higher quarterly growth rates we are witnessing which results are almost to the letter in terms of what the theory says. On the financial markets, Ghana’s sovereign spread started the year at about 600 basis points and at the end of the year we are at 350 basis points, reflecting the progress we are making in terms of macroeconomic stability.
PRH: Could you comment on the loosening of monetary policy and what it could eventually impact in terms of lending rates across the banks?
EA: I don’t even see that as a loosening of monetary policy, but rather the dividends that come with the decline in inflation rates because the overall objective of monetary policy is low and stable inflation. As we see the inflation rate going down at least we derive the dividend of a lower policy rate and then we expect this will transmit into lower lending rates which would allow the private sector to grow. The broad assessment is that the macroeconomic risks associated with the Ghanaian economy are being reduced, which supports the sovereign spreads on Ghana’s instruments becoming tighter and tighter because the perceptions about the risks have eased considerably.
PRH: What do you expect in terms of the exchange rate fluctuations?
EA: In terms of the currency we have also been, in a sense, fortunate because apart from the impact of the policy framework that has been put into place, we have benefited from a relatively strong export performance this year. This has been underpinned by higher oil output leading to higher oil export revenues; higher gold production also leading to higher receipts from gold and cocoa production has remained relatively robust so the trade balance recorded a surplus this year compared to a deficit of a similar magnitude a year ago. That obviously has helped us build additional reserves which are currently around US$7.4 billion dollars, 4.1 months of import cover. This is reflected in the behaviour of the local currency in terms of the stability. Obviously, in the last quarter of this year, we have seen a little bit more volatility due to some imperfections of the market which does not reflect the fundamentals. Currently, we have a stronger and growing economy; inflation is trending down and we are building up more foreign exchange reserves. All these are supportive of a relatively stable local currency.
PRH: What can we expect for next year in terms of GDP growth?
EA: The budget estimated real GDP growth of about 6.8%, which is consistent with what we have in the medium-term macro framework where the objective is to grow at above 6% per year. Obviously, the current growth rates are mainly oil-driven but looking ahead, we expect that improvement in private sector credit extension, together with the implementation of growth-enhancing government initiatives such as “One District One Factory”; “Planting for Food and Jobs”, would provide a stronger impetus for non-oil growth and keep overall GDP growth robust at above 7% over the medium-term.
PRH: From my small sample of the market I had the feeling that the economy retracted in the last year as there was little liquidity in the private sector, but there does still seem to be a lot of hope that 2018 will see better times across all sectors of the economy…
EA: This is where I bring in the banking sector. We saw at the beginning of the year that the banking sector took the brunt of the slow growth in 2016 due to high non-performing loans, energy sector problems with credit having to be extended to the sector etc. So, this year, we have had the banks focus on cleaning up their books. We started the year with about nine banks not meeting the capital adequacy ratio of 10%, but at least seven of them were able to improve to meet the minimum capital adequacy requirement over the period while we had to resolve two banks i.e. given them to GCB Bank through the Purchase and Assumption agreement. We also announced the new minimum capital requirement for banks for next year and looking back, I think we have gone through the worst in terms of the numbers in the slowdown in private sector credit. If you look at the recent data, you would see that credit to the private sector is beginning to pick up and we expect that to continue through next year.
PRH: You have raised the minimum capital requirement twice in 2017…?
EA: The first one had to do with the minimum capital adequacy ratio and the second one was the minimum capital requirement which was increased from GH₵120 million to GH₵400 million. At the time that the GH₵120 million was announced, I think that the Cedi to US dollar exchange rate was around 2.1, so essentially, we moved backwards from a banking sector that had a US$55million dollar minimum capital requirement to about US$30 million due to exchange rate depreciation. In fact, the new minimum capital is now being moved to around US$90 million.
PRH: The local press reported that early last year only three banks fulfilled the minimum capital requirement?
EA: There were about four or five of them that would meet the GH₵400 million already.
PRH: So how do you expect the banking sector to look this time next year?
EA: We expect that the banks will consolidate. We are aiming for banks that will be big enough to help finance high-valued projects that would be transformative. This is the idea that the banks will finance transformative projects. You would be surprised at the interest that people have in the banking sector, coupled with the recent development in terms of improved confidence and macro consolidation, we continue to receive a lot of interest in the sector. I don’t think that the problem [with banks] will be meeting the capital requirement. The cultural issues with the domestic capital owners who want to preserve ownership controls and do not want to be diluted may be factor but ultimately, they will have to make the choice at the appropriate time. Banks that are willing to merge with other banks will find willing partners.
PRH: The intention being to boost the overall strength of the banking sector….
EA: But not only that, our banking sector is also confronted with the problem of very high cost of doing business and prone to very high interest rates. For instance, lending rates are around 30%. We cannot make a difference with those high interest rates, so we expect that when we have larger banks, they will take advantage of the economies of scale and unit costs associated with banking. This coupled with the on-going macro stabilisation should see lending rates come down significantly.
PRH: The cost of financing was a major issue in Ghana seven years ago already. How are we going to change what we weren’t able to under previous governments?
EA: In the past, we had a model where we liberalised entry into the banking system so you had over thirty banks, each one carrying very high overheads costs relating to software, buildings, transport, wages, rents etc. These were very demanding, especially for relatively small banks, and they had to find the revenue through higher interest rates to pay for these high overhead costs. Now we are saying let’s consolidate, let’s have bigger operations – once you have bigger operations, your fixed costs, though relatively high, would be run based on higher operations, so in that sense the unit costs surrounding the provision of banking services should go down. Just by re-examining that model you should be able to see interest rates responding.
PRH: When do you think we could expect to see this reflected in the numbers?
EA: First, we need to see the consolidation happening. Once that kicks off, I don’t know how many banks we will end up with, but you will then see more efficient pricing in the market.
PRH: How do you think you are improving the operating environment for banks in the country as a whole, for example with the US$7.4 billion dollar foreign reserve you mentioned?
EA: The reserve adequacy ratio keeps an assurance in the foreign exchange market. That assurance helps to maintain the exchange stability that we are seeing. Once you have a stable exchange rate and improved economic environment, doing business should be easier. In seeking to improve the operating environment for banks, we are currently collaborating with banks to draft a new corporate governance framework which is intended to reinforce public trust and enhance credibility in the entire financial system.
PRH: And in terms of investor confidence, there seems to still be a sense of renewed confidence in Ghana? Do you feel partly responsible?
EA: I think it is part of the package. The Central Bank is part of that policy package and that renewed confidence, we are seeing it in our bond market where non-resident investors are picking up local currency bonds, if they didn’t have confidence in the Central Bank to maintain a stable economy, no non-resident investor would put money into government bonds. We definitely feel partly responsible for that renewed confidence.
PRH: On the subject of bonds could you comment on the importance for the country of raising capital through government bonds?
EA: The first ever bond was successfully issued in 2007 and that demonstrated strong economic management after completion of the HIPC program and significant improvement in the country’s credit worthiness. This was demonstrated very well when the bond was twice over subscribed. Since then, many other African countries have gone to the capital market. I think Ghana is one of the few African countries that has opened its domestic market to non-resident investors. That for me is also another attestation of the confidence that non-residents have in terms of the economic management because they are sure that after investing in Ghana’s three or five-year bonds, they can repatriate that investment on maturity and not lose value due to large exchange rate depreciation.
PRH: What are the next priorities to further strengthen the current economic performance?
EA: You are looking at a three-year macro framework, this is only the first year. Maybe we should stress the importance of consistency of policy, we need to be consistent and deliver this on a longer-term basis. It is not about two or three years it is about five, ten-year periods of stability, which would roll in the real dividends to the Ghanaian economy and we have only seen one year of successful implementation of that policy framework so far. I think the effort must be in sustaining the progress that we have made, staying the course of fiscal consolidation, keeping monetary policy on track to ease inflation towards the low single digits and implementing policies that would help boost export earnings. All those measures would help us in terms of delivering stability on a more sustainable, longer-term basis.
PRH: Drawing on your extensive and distinguished academic and professional precedents, what would you say has been your most challenging role to date?
EA: I think that the job of the Governor is very challenging. As you know, I came into the position with nine banks on the line for possible closure. We resolved only two and by way of purchase and assumption model which is the least costly option, which preserved depositors’ funds, saved jobs and safeguarded the stability of the financial sector.
RH: Thank-you!
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Credit
Interview by Eleanor Legge-Bourke
Transcribed by Thomas Robinson
