I had gone to find spare parts for my now ageing Toyota Fortuner vehicle at Abbosey Okai. I was highly amused listening to some of the submissions during a heated debate on how the cedi has depreciated against the major foreign currencies.
As I haggled over the prices of the spare parts to fit my emaciated pocket on that January afternoon, I said to myself: “what a wonderful Ghana we shall all have if financial literacy rates were accelerated; at least, enough to become the reason for voting for Party A or B and why we should pack Parliament with men and women who understand basic economics, among other key issues affecting our lives”!
“Bank of Ghana MUST supply more dollars into the system to stem the cedi depreciation!”
This submission was loudly cheered by the people present, epitomising the sentiments of most of the people and attracting ‘credence’ coming, as it were, from an influential opinion leader in their midst.
With permission from my brother who is also a respected spare parts dealer, I explained that one cannot give what one does not have and Bank of Ghana has no capacity to print dollars and infuse same into Ghana’s currency market. I further explained that the dollar is the sovereign currency of the United States Government and its supply across the world is the sole responsibility of the Federal Reserve Bank.
No nation or authority has the power to print dollars beyond the Federal Reserve Bank which, like Bank of Ghana, has to go through lengthy regulatory and administrative processes before increasing the supply of its local currency.
A country’s reserves in dollars or any other foreign currency is the culmination of its total receipts and payments for imports and exports with other trading partners at any particular time.
I added the ominous possibility that the US Government might consider it a pretext to wage war on any nation or agency outside the US which prints the US dollar, seeing it as an act with intent to destabilise the economy of the United States.
This seemed to have been received with incredulity as many presents felt that printing the US dollar was a simple process and wondered why Bank of Ghana could not supply enough dollars to control the pressures on the cedi. Printing even the Ghana cedi cannot be done haphazardly, as this needs to align with the replacement of worn-out notes and real expansion in the GDP, I explained to the curious listeners.
The cyclical first quarter cedi depreciation
December 31, 2023 ended with all the usual fanfare, prophesies and resolutions. Many financially illiterate people appear to be unaware that the period marks the financial accounting period for most firms operating in Ghana to declare their profits and losses for the year.
As I write, many of the banks and financial institutions and major firms are busy making adjustments to declare their financial results. When these are finalised, their external auditors will provide audit assurance of the sanctity of the figures presented by the various boards to give account of their stewardship to shareholders and other regulatory agencies. The stock exchange and its stakeholders will be keenly interested in the respective results.
Thereafter, the results will be published and presented at the respective Annual General Meetings of the listed companies. One key thing that is less appreciated is that once these figures have had the blessings of shareholders and the tax authorities, profit repatriation begins as massive outflows on the balance of payments. This triggers a demand for foreign currencies and consequential fall in the exchange rate of the cedi, ceteris paribus (other things being equal).
Perhaps, a shift from the rhetoric of import substitution strategies and a conscious promotion of local business champions, as being done for Dangote in Nigeria, will insulate the country from these capital flights and conserve scarce forex resources.
This development, coupled with speculation have, bedevilled attempts to stabilise forex rates, especially in the first quarter of each year. The events are exacerbated by demand for forex by diaspora Ghanaians returning to their bases overseas, while other traders frantically access forex to now pay for their Christmas wares to overseas counterparts. The third quarter also reflects blips in the cedi depreciation as demand by traders usually outstrip supply in the quest for importing goods for the Christmas season.
Deepening financial literacy across board.
Perhaps, Bank of Ghana could consider it a social responsibility to explain to the populace through radio and television programmes how foreign exchange is generated and utilised in the country and how our individual and collective actions determine the rate at which the cedi is exchanged for foreign currencies.
Simple explanations on the major line items in the Balance of Payments structure on both receipts and payments could help in deepening the financial literacy and hopefully add value to public discussions on banking and monetary issues.
Hopefully, this will deepen understanding of the rather complex web of forces that affect the demand and supply of forex; why we should all obey the foreign exchange regulations and possibly ensure stability in the forex eco-system.
To buttress the need for this structured financial literacy approach, I recall a church forum where I was one of the speakers. I was amazed at the look of incredulity on the faces of some of the participants when I stated that banks are not philanthropic organisations to indiscriminately dole out credit to every loan applicant. I thought that was obvious but I could have been lynched if this had probably been said at Kejetia or Ashaiman market, as I discovered later.
When I dropped a joke that banks are not established for poor people in response to a questioner with very pregnant expectation of how and why banks MUST finance start-up businesses, I knew I had disturbed a beehive and should be prepared for multiple stings. That appeared to have been too much of an expensive joke for my audience, most of whom were youth expecting to find what they considered to be cheap sources for financing start-up businesses in Ghana.
Corporate social responsibility is integral to the business philosophy of many banks. But when a questioner asked me – innocently or mischievously – why banks do not liberally grant credit to poor people to demonstrate their social obligation, I quietly prayed for divine intervention, lest I fumbled with my response!
Seeing the now melancholic faces staring at me, I could easily discern that my assurances to explain other non-bank sources of financing failed to ameliorate their disappointment.
When I further explained to my audience how many mobile phone users were and are still reluctant to register their SIM cards merely to avoid repaying MoMo loans they had contracted, many appreciated the concept of non-performing loans and how these impact credit providers and their capital.
Anytime you want to transfer funds to a friend or relative and they ask you not to send the money through their regular phone number, there is a high probability that they are afraid the Telco will seize any incoming funds to offset default on outstanding loans. Let us all help to deepen credit creation within the system by honouring debt obligations.
Some truths are hard to accept, but must not be embellished with fantasies. It is easier to obtain loans in many advanced countries because the systems for personal identification and residential addresses, among other structures like prompt judicial processes, promote responsible lending and borrowing – something that is strangely resisted in this country.
The sordid history of some financial institutions, which previously operated with reasonable profits in the savings and loans sector but which quickly obtained universal banking licenses, should convince all about the peculiarities of banking business which do not permit sentimentalism or recklessness in the credit delivery chain.
The desire of GUTA and GREDA to establish their own universal or development banks to ostensibly afford members “reasonable and regular credit” must be seen with measured scepticism, particularly in the absence of clearly defined sources of sustainable deposits or long-term funding and most importantly, the culture of loan repayment among Ghanaian businesses. It is imperative also to appreciate the potential difficulties that may arise from concentration risk, if these aspirations come to fruition.
The two institutions mentioned earlier must recognise that even commercial banks which depend largely on owners’ equity, customer deposits, subordinated debt and retained profits cannot grant loans below their cost of funding; the true magnitude of which is not known to many with fantastic dreams of liberal credits at lower interest rates.
Commercial banks and credit creation.
Commercial banks will ordinarily help business loan applicants who have proposals which can be vouched to be profitable enough to make ample returns for the business owner. Ultimately, the loan applicant should be able to make repayments in line with prior covenants agreed between the bank and its counter-party.
Unbridled optimism of the loan applicant about the prospects inherent in a project should not sway the banker from appropriately charging for the embedded risk, especially in start-up operations.
Areas that permit some flexibility for the banker in the approve or decline decision usually have to do with the assessment of the risk categorisation of the business being financed. Most importantly, the competence and integrity of the persons/directors sponsoring the loan application are assessed; gleaned from past records or other verifiable references.
The risk/return dynamic is almost invariably at play. The final cost/interest charged to the applicant will reflect this in addition to other non-financial factors like the bank’s desire to win the applicant from a competitor or simply being a strategic decision to enter a sector with verifiable growth prospects.
Thus, even for the same amount of loan and tenor, Applicant A may be charged differently from Applicant B not so much based on raw discrimination, but on purely qualitative factors which ultimately translate into economic factors beneficial to the bank.
A bank will fund a business only when there is demonstrable commitment of the applicant himself to risk his own capital; hence, the tradition of banks not funding more than hundred percent of the entrepreneur’s own equity through loans. The availability of suitable collateral is a secondary consideration based mainly on stability in value and ease of realisation, inter alia.
There is a positive relationship between economic growth and bank credit in many economies, including Ghana. The expansion of credit to the private sector is essential for economic growth.
However, this does not mean that all banks should ignore time-tested determinants of credit creation simply because of a government’s call to spur start-up operations irrespective of perceived risks.
Some mistakenly consider financial inclusion to be liberal extension of credit to marginalised groups. Efforts could be geared toward this, provided the government can be trusted with guarantees for these perceived vulnerable groups so that repayment is not impaired.
Another salient area which should be addressed is cultivating the culture of loan repayment. Uncertainties abound in every business endeavour. It is appropriate, however, to contact one’s financial institution for rescheduling of loan repayment, rather than just refusing to pay back loans. Loans in default constitute a huge cost to the banks and imperil their profitability.
The notion that when a loan has been written off, the defaulter is left off the hook must be debunked. The borrower still has an obligation to pay back the loan even after a 100 percent write off, lest the bank reserves the right to realise any collateral security held.
Welcome declining inflation.
One of the key factors inhibiting business growth in our part of the world is the high levels of interest rates charged on loans, especially for start-up businesses. It would be a welcome relief for local investors to be able to obtain single digit interest rates charged on their loans.
Thus, with inflation now trending downwards from the 54 percent a few months back to the now 23.2 percent in December 2023, businesses and individuals can heave a sigh of relief, in that their costs of production may reduce significantly enough to enable them compete fairly with their foreign counterparts.
A critical analysis of the key components of the downward inflation, however, reveals that food prices have largely accounted for the drop. Is the downward trend sustainable when one considers that food prices follow a seasonal trend and production is still heavily weather dependent?
Can other variables like oil and other utility prices also reduce significantly for the MPC to reduce the prime rate to trigger falls in interest rates? What about the outlook for investors’ decisions to hold cedis or foreign currencies as a store of value?
Where are the complementary structural improvements in road and rail infrastructure, internal production of agricultural inputs and a vigorous pursuit of an agricultural revolution beyond the hyped slogans and increased visibility of a fleet of pick-up vehicles in the Ministry of Agriculture?
The excitement does not end with declining inflation, though. It is the expectation of investors that interest rates will equally trend downward to help prop up production in the real economy.
With the realisation in our environment that the government is the key borrower and its appetite for borrowing largely determines the trajectory of interest rates, we are keenly observing if the assurance to operate within the budget deficit parameters will be observed in this election year 2024.
If past trends are anything to go by, one would be excused for being sceptical about government assurances not to overblow the budget deficit threshold this year.
We have heard it all before and are persuaded to stay with our scepticism, considering that in this year’s election, the stakes for continuity or change appear higher than any previous one in the 4th Republic.
With so many unfulfilled promises and an electorate burning with “the desire to blackmail the government to heed to their needs”, public expenditure may be hard to rein in, IMF conditionalities notwithstanding.
Ghana Beyond Aid revisited
With less than twelve months for 2024 to end and for the people to have an opportunity to assess the myriad of promises against reality, excuses and performance, perhaps, one slogan that was pregnant with so much expectation was the Ghana Beyond Aid mantra.
The confidence with which we approached this strategy and the faith that it is doable raised so much expectation that following its proclamation, we all thought it was going to be followed by a carefully selected choice of development programmes that tie into a new development paradigm of self-reliance and a determination to give real meaning to economic independence.
The stark truth, though, is that not much has been achieved. Instead, we have had to eat the humble pie by going to the IMF for the seventeenth time! What lessons have we, as a nation, drawn from this one step forward, two steps backwards paradigm?
When shall we sincerely look inward to undertake a national SWOT analysis to redeem ourselves from this uninteresting history since independence.?
The youths are beginning to ask real questions. Those who have taken our collective mandate to positively change our political and economic fortunes owe us a duty to offer candid reasons why there is so much despondency among the youth now than say 30 years ago.
Back to ethical business transactions
Business ethics enjoin citizens to accept morality as central when they become part of the commercial landscape. Issues of right and wrong must be addressed as core to the sustenance of a business. There is an inextricable connection between business and ethics. This must not be broken for the sake of profit. Contemporary emphasis on economic and social risk management attests to this.
Indeed, the sustainability of any business cannot be assured when a business operator consciously jettisons morality in the quest for profit. The moment consumers become aware of a business’ unethical practices, the business’ market share comes under siege, leading to a possible collapse.
The place of morality is central to any religion. The last population census clearly shows that Christians and Muslims, together, make up over 80 percent of the population in Ghana. It is gravely inexcusable, therefore, that our value systems appear to be declining. With this massive proportion of religious adherents, who then are responsible for the crimes, thievery and corruption that have engulfed this country and stifling our growth?
Each time I observe the frenzy associated with church services and the sanctimonious manner in which some Christians accept communion, I tell myself that if all of us could live promoting the love of neighbour as Paul expounded in 1 Corinthians 13, what a wonderful world we shall have! Sadly, my wishes evaporate at the same speed as my thoughts for a morally sound society emerges.
Unethical practices from regulators cannot be left out. If a businessperson consciously ignores ethical standards to produce and sell harmful products, one would expect the appropriate regulatory agency to keep them in check for the general good. If your conscience pricks you to report the unethical practices, you suddenly become a victim when you are exposed to the villainous producer against the accusation that you are attempting to ruin their business.
For the sake of national reputation and cohesion, I refuse to mention which regulatory agency has disappointed me to the point of writing this piece, but it is real and I feel really disappointed. Where were the regulatory agencies when our water bodies were desecrated from galamsey activities?
A deficit of ethical morality that puts individual interests above the collective is ruining our civilisation. We must not continue to make religion appear so abstract and only fit for reciting quotations and engaging in frenzied prayer sessions. God cannot be mocked!
Let us allow our religious principles to permeate our business activities, even in the absence of legislation and effective law enforcement. After all, integrity has been defined elsewhere as reflecting what we do when no one is watching. Corrupt officials and thieves should not revel in the wrong notion that a thief is only someone who has stolen and has been caught……. as long as you have not been caught, you are a gentleman or lady. God is watching from a distance!
The writer is a Fellow of the Chartered Institute of Bankers, a former adjunct Lecturer at the National Banking College, a farmer and the author of “Risk Management in Banking” textbook.
Email: [email protected] Tel. 0244 324181