My fascination with the role of a Governor in the economic management of a country dates back to my days as a sub-officer in the then Social Security Bank Ltd. in the early 1980s. My colleagues then nicknamed me ‘Governor’ – an empty ‘title’ that I cherished so much even without any perks.
I ‘earned’ this title from the exceptional passion with which I carried out my functions as the reconciliation staff responsible for the bank’s clearing account at the central bank.
From that time when I began my journey toward professional banking certification, I have been intrigued by functions of the Governor. This is a position that requires the incumbent to wear multiple hats – some of which emphasise his independence over monetary policy considerations toward price stability while still carrying implied obligations to help the government in power to execute its mandate.
As normally happens, this role pushes the Governor to help plug/finance budget deficits in fulfilment of, sometimes, wild electioneering promises of the government in power.
From a distance, I have observed that, remarkably, many governors locally and abroad appear to have similar characteristics apart from their usually high academic credentials.
This person has usually been a man or woman of steel: conservative, prudent, speaks less unless it is absolutely necessary, is reasonably shy of the media and drinks less – lest a sip of some whisky leads to an overflow of information with unpredictable effects on investor confidence and country risk analysis.
Ever since I completed the professional banking examinations and earned the privilege of dining with colleagues at the annual Governor’s Day dinner, I have watched with awe how even the Governor’s dance steps appear to be so measured as to make one think erroneously that he pays foreign exchange even for the intricate dance steps!
Usually, the bottles of expensive whisky on their tables at social or official functions stay un-opened after the various events. This speaks volumes of their intricately measured life-styles.
Another observation has been that they deliberately speak only from prepared scripts at the annual Governor’s Day of the Chartered Institute of Bankers and at the various Monetary Policy Committee sessions where they report on various economic indices. On very few occasions do they speak without written scripts. What they say invariably signals the way forward for the economy in the foreseeable future, particularly the direction of interest and exchange rates, against which economic analysts and banking executives make their short, medium and long-term predictions and strategies respectively.
What is gleaned from the Governor’s utterances has grave implications for movements in the structure of bank balance sheets and the effect of market risk on the profitability of banks and other financial institutions. It is common for mischievous journalists, usually from the opposition, to tweak their conversations for self-seeking ends.
As head of the central bank, he and his team are charged with the ultimate goal of sanitising the banking and finance industry to ensure economic growth and stability. In particular, the Governor must strike an appropriate balance among key variables like interest rates, exchange rates, inflation, the money supply, liquidity and sound supervision of the commercial and non- bank financial institutions.
Such responsibility is made even more arduous when viewed in the context of sharp rises in inflation and continuous depreciation of the cedi. The situation becomes even more complex under conditions like when inflation as at July 2022 hit 31.7 %, while the MPC rate is now at a distant 23% – thus distorting the yield curve.
The primary reserve ratio of the commercial banks has been raised from 12% to 15%, to be implemented in phases between now and November 2022. The idea is to dampen liquidity which is deemed to be “sponsoring excess demand’’ and partly fuelling inflation.
A correction by further rises in the MPC rates has ominous consequences on the cost of borrowing. It can seriously damage the cost of doing business. Holders of fixed income instruments will be grossly disadvantaged and may rush to sell to buy short-term instruments to reduce uncertainty and take advantage of current high yields on Treasury instruments.
Mr. Investa, a shareholder in imaginary Excellence Bank PLC, will look at his return on equity of say 28 % and ask himself what his real rate of return has been.
Assets and liability management in the various banks becomes a tough assignment, given the tenor of assets previously created at fixed rates – now visibly lower than current short-term rates. Overdrafts, by nature, may be re-priced; except that this measure shoots up potential default rates and gravely affects profitability.
Most likely, holders of long- term liabilities will attempt to reduce their losses by renegotiating new and higher rates that make the composite cost of funds higher. This erodes expected profits and negatively affects banks’ prior budgets.
The high interest rates equally have adverse effects on the profitability of business borrowers, not all of whom enjoy price elasticities to make adjustments that will not derail sale prospects. Ultimately default rates rise to impair bank profitability. Market risk has become more real than can be imagined, even when one ignores current movements in exchange rates! On and off-balance sheets exposures in foreign currency have suddenly shot up, exacerbating probability of default.
The Governor has a difficult role in balancing the interests of bank executives, of shareholders, investors, the general public and those of the ruling government. The government will usually be labouring under a huge burden to fulfil the numerous and often conflicting election promises made to a highly expectant electorate during heated campaigns.
To compound the Governor’s dilemma, this is the same time that government is busy negotiating a bail-out with the IMF. These critical times are made even more precarious because of the responsibility to ensure compliance to IMF conditionalities which tend to be pro- fiscal and monetary disciplined but not always supportive of development in a third-world context. He still has to walk a tight-rope, given the obligation to implement tight monetary policies under IMF bail-out conditionalities.
The Governor’s functions and aspirations become even more complex viewed against a government’s incapacity to observe the 5% budget deficit level. Fiscal discipline is but only an economic term here, considering the myriad of sod cutting of projects across the country, with less than two years to fulfil the numerous promises made to the electorate.
Adding salt to the Governor’s wounds is the rather apocalyptic commentaries of a certain Professor Hanke – a foreign economics professor who has exhibited an uncanny penchant for doomsday forecasts to muddy the country’s economic prospects.
This writer finds it awkward to read about his incessant negative commentary when he was not heard of during the period when Portugal, Ireland, Greece and Spain faced economic difficulties some decades ago.
The Governor owes a fiduciary duty to the global financial community in the wake of the global village phenomenon whereby a bad bank anywhere is considered a threat to banks everywhere. For this reason, and his association with the Basel Committee on Banking Supervision (BCBS), the local regulator is obliged to enforce recommendations agreed through Basel 1, 11 and now 111.
These focus on capital and credit risk, operational risk and now market/liquidity/capital risks respectively. The summary effect of these accords is a strict interpretation of the rules on Capital Adequacy, a shrinking of the banks’ capacity to lend and the ultimate high cost of capital, given the various liquidity conservation buffers expected to be held by the banks.
These conventions help in the global effort to capture the totality of risks facing banks and the financial community. They enable the regulator to manage risks across the local industry to avert contaminating the global system.
This calls for regulation and intense supervision with the objective of avoiding or minimising the incidence and impact of capital depletion and potential insolvencies in banks.
The Governor and his team therefore have the onerous responsibility to ensure that banks operate soundly; thereby protecting the integrity and stability of the financial system- a function that is even more pertinent in a developing country.
The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its principal objective is to enhance understanding of key supervisory issues and improvement of the quality of banking supervision worldwide.
The Basel Committee sits within the Bank for International Settlements (BIS), which is an international organisation fostering international monetary and financial cooperation and serves as a bank for central banks.
The governor of Ghana’s central bank is a member of this committee, which is charged with enforcing agreements reached in their forum. The key challenge has always been how to enforce these rules that are made with the developed countries’ practices as benchmarks.
While the Governor and his team vigorously pursue monetary policies to arrest what they perceive to be a demand-driven inflationary spiral, it is also buffeted by supply constraints made worse by fertiliser shortages in an agrarian economy heavily reliant on rains and systemic inefficiencies in the application of scarce inputs.
At the same time, GUTA and other wholesale importers like the supermarkets are at their vociferous worst – commanding the central bank to conjure foreign exchange without regard to the real local producers whose efforts generate the scarce foreign exchange for them to dissipate.
The Governor is theoretically clothed with constitutional independence to focus on the short-, medium- and long-term growth of the economy. He is faced simultaneously with a requirement to complement the agenda of a ruling government poised to meet the aspirations of an electorate which is justifiably hungry to see a fulfillment of the numerous promises. This places the Governor between the devil and the deep blue sea.
Against such expectations galore, the Governor is torn between his constitutional responsibility of maintaining a sound financial system and loyalty to a president whose government’s objectives and time-frames seemingly retard economic growth.
This is a difficult time when it is unclear how the government intends to mobilise enough local resources to execute its numerous projects close to another election. With international rating agencies downgrading the country’s economic status, access to private capital, if available, will come at cut-throat interest rates.
Thus, promoting a balanced or deficit fiscal budget policy becomes a mirage; the Governor’s arm will be twisted to support a scheme he probably detests professionally. Each of these choices has their peculiar economic growth implications.
Set against the imperative of the legal bar that technically precludes government from creating a budget deficit exceeding 5 percent of the previous year’s revenues, an intricate balancing act faces the Governor – whose independence faces a grave test.
It certainly takes a courageous and patriotic Governor to confront the political establishment, struggling to stay within the prescribed threshold on budget deficits. His position on maintaining ‘the right balance’ becomes even more arduous given the pressures on government eager to meet its promises to the electorate “as early as yesterday”.
To play the role of a catalyst for stable economic growth and development while complementing the incumbent government’s goals – some of which may not necessarily be congruent to macro-economic stability, especially close to another crucial election – must be a difficult task for any Governor in an emerging market economy.
I have always wondered how it feels to possess such ‘near- absolute’ independence legally and in a queer way still maintain a non-subservient relationship with the president through the Minister of Finance.
We have lived with budget deficits exceeding the prescribed threshold in times past and still survived. The challenge now is how to ensure stricter discipline with its consequences on tight government spending, rising unemployment and other external pressures against government’s desire to make waves so close to another election.
Whether the Governor has reached the tether’s end or still has some ammunition up his sleeve will be seen in the coming months. The fact remains that effectively containing the current monetary and fiscal pressures is not a walk in the park – given present debt servicing obligations, mounting public sector expenditures and weak revenue generation capacity.
The majority of the electorate may not appreciate the dire straits in which government finds itself. All they care, perhaps justifiably, is that government must deliver on its electioneering promises “as early as yesterday”.
It is said that “uneasy lies the head that wears the crown”, but current realities point to a crown with disproportionate thorns for the incumbent Governor. He needs our prayer-support and absolute sympathy.
The writer is a Fellow of the Chartered Institute of Bankers and an adjunct lecturer at the National Banking College, a farmer and also author of the ‘Risk Management in Banking’ textbook.
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