Interview: Ernest Addison
What criteria does the Bank of Ghana use as the basis for its monetary policy decisions?
ERNEST ADDISON: The primary aim of the Bank of Ghana is to control inflation and ensure price stability. The inflation-targeting monetary policy framework adopted in 2007 outlines a medium-term inflation target of 8% with a band of 2% either side. At each bimonthly meeting, the Monetary Policy Committee considers a broad range of factors, including global developments, the balance of payments, exchange rate movements, fiscal operations (timing of budget execution), monetary developments, the banking sector and credit conditions survey, the real sector and confidence survey, as well as other price developments and inflation forecasts.
On the basis of these considerations, the Monetary Policy Committee decides where to place the policy rate. Given recent developments – a higher degree of fiscal consolidation and an increase in foreign reserves – there is greater ability to meet the inflation target and more room to reduce the policy rate. Ghana is a small, open economy, and both domestic and external shocks are continuously monitored by the Bank of Ghana.
How prepared is Ghana’s banking sector for the increase in capital requirements?
ADDISON: Apart from the two banks that were absorbed, the rest of the financial system is making significant progress towards recapitalising from a minimum of GHS120m ($28.7m) to GHS400m ($95.8m) before the deadline in December 2018. Before the decision to raise capital requirements was made, extensive discussions with banks were held and some started taking steps towards increasing their capital level prior to the announcement. The Bank of Ghana has also put in place some favourable options for banks that include discussions with parent banks, shareholders and other investors to inject fresh capital, and capitalisation of surplus income to increase current capital levels. Additionally, a significant number of investors are looking to increase their positions in the banking sector, which will ultimately benefit the ongoing reform process.
The initial asses ssment that not many banks would be able to recapitalise has been challenged, and it is very likely that consolidation will occur at a balanced pace. This is a positive development that will contribute to both the overall equilibrium of the sector and its ability to have an impact on the real economy.
What is being done to improve the ability of the financial sector to assess borrower risk?
ADDISON: Revisions to the 2016 Bank and Specialised Deposit-Taking Institutions Act make provisions to regulate lending and investment activities, imposing limits on financial exposure; affiliate transactions; inter-institutional placements and loans; exposure to insiders, related parties and staff; and other actions. These, if properly adhered to and supervised, could curtail loan default. Furthermore, the Bank of Ghana will enforce the directive for banks and specialised deposit-taking institutions to use the credit bureaux. The 2007 Credit Reporting Act is being reviewed to extend the information requirement to include both positive and adverse findings, and strengthen supervisory oversight of the submission of data to the credit reference bureaux.
How can cashless transactions be encouraged?
ADDISON: Ghana has made significant progress when it comes to regulating payment technology. Electronic money issuer guidelines were provided to encourage mobile money within the Ghanaian financial landscape. Mobile money can both improve financial inclusion and reduce the cost of cash transactions. The last remaining challenge lies in full adoption at a retail payment level; Ghana will be a leader in this regard. To further drive the agenda of a cashless society, the government has embarked on both a national identification system and a digital address system to enable proper identification of individuals and help formalise economic activities.
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