Interview: H A Kofi Wampah
How can the BoG reduce pressure on the cedi?
H A KOFI WAMPAH: To tighten policy we must increase the policy rate in the short term. This means that banks will raise their lending rates, which will reduce credit. We have seen a trend whereby the demand for foreign exchange (forex) increases along with the credit available in the market, and this has put even more pressure on the cedi. Credit recipients can demand forex based on the credit banks extend them, or if it comes from the government, such as through central bank financing, then it also goes to the market, thereby increasing demand for forex. So if you want to have an effect on that demand, you would want to tighten policy more and increase the policy rate.
How do you balance inclusion and macro policy?
WAMPAH: Needless to say, the high cost of credit in Ghana makes access to finance one of the major hurdles in reducing poverty and strengthening local enterprise. Given the current pressures on the currency, we have prioritised building confidence in the cedi and the financial sector over easy, short-term access.
The first step to create sustainable growth is macroeconomic stability. If there is not enough incentive to invest in the bond market, many of the private sector’s gains could be lost due to market uncertainty. Although it was a difficult choice to make, the BoG had to make a decision that would alleviate downward pressure on the cedi. However, these difficult choices should lead to a greater chance for future growth.
How have microfinance regulations changed? WAMPAH: Ghana currently has over 500 microfinance institutions (MFIs), with capital requirements of GHS500,000 ($138,750). MFIs often use their capital to invest in assets, resulting in low liquidity and high rates of insolvency. We have therefore increased their capital requirement to GHS2m ($555,000), and will also increase supervision in this arena. Through clearer policy and more oversight, the unbanked rural and urban populations can have more confidence in banks. We also plan to increase the BoG’s presence in each region. This localised approach will help us detect causes for concern and act on them more quickly.
What shifts in fiscal policy are needed in Ghana?
WAMPAH: The basis of the IMF’s extended credit facility is ensuring fiscal stability, and the policy prescriptions require that we solve our fiscal imbalances while maintaining the free movement of goods and currency on the international market. The key to better fiscal management is greater coordination in public sector financing. If we better coordinate domestic bond auctions and the government’s additional funding needs, we will see a deepening of the domestic debt market, which will create a sustainable means of financing government debt in the medium term.
Further monetary financing on the secondary market will also be needed to increase liquidity, creating appetite for longer-term debt securities. We plan to introduce a platform to facilitate secondary market trading. By reassuring investors that our debt-management strategy is sustainable, while also making sure there is less of a chance of losses when securities are sold for cash, Ghana can rein in its debt.
What can be done to mitigate market shocks?
WAMPAH: The first step is solving our macroeconomic imbalances. While the current account balance will see improvement via the IMF stabilisation fund, many of the factors are structural. The drop in commodity prices of chief exports like cocoa, gold and oil has widened the trade deficit, and it will take a collaborative effort to end our over-reliance on commodities.
Ghana’s economy is heavily affected by the economic policies of major markets like the US and the EU. As such, the BoG is taking steps to increase its foreign currency reserves to cushion against shocks.
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