Interview: Kofi Wampah
What measures must be taken to support the cedi?
KOFI WAMPAH: The BoG operates within a framework of inflation targeting and a free-floating exchange rate regime. The BoG Act highlights price stability as the primary objective of the BoG, while also instructing the bank to promote stability of the cedi outside Ghana. However, the BoG does not pursue exchange rate stability as an independent objective. Rather, the bank monitors the exchange rate to ensure that it is in line with economic fundamentals. BoG support for the cedi should therefore be seen as curbing excessive exchange rate volatility without undue reserve losses.
High fiscal and external current account deficits, which are partly driven by external shocks, are the primary factors fuelling the weak performance of the cedi. Structural imbalance in the demand for and supply of foreign exchange also exerts pressure on the exchange market. In particular, Ghana’s narrow export base coupled with the country’s import dependency fosters an inadequate supply of foreign currency to match increasing domestic demand.
To support the cedi we are consolidating fiscal and external positions in pursuit of lower fiscal deficit-to-GDP ratios. Externally we are implementing strategies to improve the balance of payments by expanding the export base and promoting import substitutes. Other factors could also help to strengthen the cedi, including proceeds from the cocoa syndicated loan and the eurobond issuance, the reduction of oil imports due to the onset of gas production in the fourth quarter of 2014, the impending IMF programme, and current monetary policy aimed at lowering inflation.
Why is the rate of loan syndication activity so low?
WAMPAH: Structural factors, such as a fledgling financial sector and a lack of a culture of sharing amongst banks, are at the heart of this. At the BoG, our key strategy for stimulating loan syndication is creating a financial system of liquid and well-capitalised banks that operate in a stable macroeconomic environment – a crucial backdrop for capitalising on opportunities present in the country’s oil and gas sector.
How will the deposit insurance scheme be funded, WAMPAH: The government, the BoG and a loan from Germany will provide the initial capital. Thereafter funding will come from banks and specialised deposit-taking institutions (SDI). A one-time premium (based on minimum capital levels) and quarterly premiums (based on eligible deposits) will be the key sources of revenue. To ensure sustainability of funding, only solvent, viable banks and SDIs will be admitted, with investments in the fund focused on liquidity over profitability. Ghana looked to best practices when designing the scheme (e.g., the International Association of Deposit Insurers’ core principles and Nigeria and Kenya’s experience).
Does regionalisation necessitate more regulation?
WAMPAH: The growth of cross-border banking in the sub-region engenders associated risks and thus necessitates stronger regulatory oversight. The regional committee of governors and supervisors has undertaken many initiatives including the creation of the college of supervisors of the West African Monetary Zone (WAMZ) with a view to sharing information on banking systems, harmonising regulatory and supervisory practices, and conducting consolidated supervision of banking groups and joint examinations of bank subsidiaries by home and host regulators. The college allows for peer review, helping to build strong regulations. The WAMZ is creating a recovery and resolution plan to deal with bank distress as it arises and the ECOWAS Commission is developing stability measures.
Specific to Ghana, the BoG is revising the Banking Act to strengthen the banking sector via clauses for parent banks to undertake consolidated supervision of subsidiaries. Stringent licensing procedures, including strict checks on capital sources and due diligence on shareholders and key management, are also in place.
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