News Guide Africa

Category: Technology

  • Ghana to receive first tranche of $1.1bn by September – World Bank

    Adnan Adams Mohammed

     

    The World Bank office in Ghana has disclosed that Ghana is likely to receive the first tranche of the US$1.1billion budget support by September ending.

     

    This will be possible only if the two are able to reach a final agreement on the conditionality.

     

    In accordance to this, World Bank wants the government to present a strong reform package to enable the World Bank release the $300 million facility which is expected to serve as budget support extended to Ghana over a four-year period  while under the IMF programme.

     

     

    “Our plan, our hope is we can bring this to the board by September. But it will all depend on how fast we reach agreement with government on the pro-actions. The Country Director, Pierre Laporte, noted. “It may be September, it may be October, but we’re hoping we need to do it this year because IMF has factored it into its financing gap,” he said in an interview last week.

     

    He explained that, “But this US$300 million, I want to be very clear is not acquired, is not given, is not taken that World Bank will come and give. We need to have a strong reform package from government that accompanies as prior actions for the release of this US$300 million and these have to be in areas where us and government agree these areas that have caused problems for the budget or for the sector.”

     

    He noted that there are four key pillars in Ghana’s economy that need urgent reform.

     

    “One is the whole aspect of domestic revenue mobilization…because as we all know Ghana’s revenue to GDP ratio is quite low, and we’re hoping to accompany IMF reforms there, government reforms, to raise revenues and there’s a whole aspect on fiscal management, PFM, expenditure management.

     

    “The second aspect is private sector development and financial sector to accompany our financial sector project. We will also push for some reforms in the financial sector because it’s one thing to put money to address the problems now but there are some long term issues that remain outstanding and it will be important for Ghana to resolve and we will support that reform in the project,” he said.

     

    He continued, “As I said before, when you have a kind of very severe consolidation as you’re having now it’s important to consider the growth agenda also. Because one thing is to squeeze the budget for you to realign and pay your debt in the future, protect the poor which we do through the social protection project but also how do you keep the economy going.

     

    “You need to maintain your growth agenda, you need to maintain economic growth because the faster you grow the faster the ratio of revenue improves, your ability to pay your debt improves and the economy will recover faster. And we want to discuss with government certain reforms in the investment climate, because what brings you FDI is a good sound investment climate and today there are areas that Ghana needs to do more.”

     

    He further noted that government will need to introduce huge reforms in the energy sector, and fast.

     

    He is hopeful that the IMF-World Bank programme will accelerate those reforms.

     

    “But the other two is energy, as I’ve said before energy is a huge burden on the fiscal framework. Government is subsidising the energy sector over 1 billion dollars a year and something needs to be done urgently. And I must say that unfortunately reform in that sector has been slow. We’re hoping with the programme it will accelerate.

     

    “And finally the whole show of building resilience, we have a pillar that will bring support to build social economic resilience and improve your social protection framework…and finally climate resilience,” he said.

  • Prudent fiscal management high on gov’t table

    Adnan Adams Mohammed

     

    As part of measures to meet the dictates of the International Monetary Fund vis-a-vis the recently-approved US$3 billion bailout, government is expected to prioritize fiscal adjustments to ensure it meets the performance criteria for the disbursement of the other loan tranches.

     

    In this regard, President Nana Akufo-Addo has admitted that Ghana’s fiscal deficit is “way above” the five per cent ceiling set by the fiscal responsibility law, indicating that there was a need to bring it down, as he pledges his government’s commitment to cutting expenditure.

     

     

    The Fund has already indicated that, Ghana government will be under pressure to cut down its expenditure following the approval of the country’s US$3 billion deal.

     

    “Rationalisation of our expenditure is something that we have given the assurance [about],” President Akufo-Addo said while speaking at the Qatar-Africa Economic Forum in Doha. “Domestic revenue mobilisation is absolutely critical for us, and, already, we are seeing signs.”

     

    Also, he said: “We have a fiscal responsibility law in Ghana that has pegged our fiscal deficit at five per cent but, already, we are way above that,” noting: “And the sooner we can bring that to more acceptable levels, the better for us.”

     

    In an interview last week, the IMF Representative in Ghana, Dr. Leandro Medina posited that; “On the fiscals there is quite a sizeable adjustment in the 2023 budget and what we expect in the duration of the program, On the structural transformation, it has to do with the reforms and measures that improve the business climate and the growth of private sector”,

     

    “So, there are a lot of reforms within the context of the program that look at what you can do within these three years to ensure that there is a strong foundation in growth and that is the effect of that structural transformation”, he added.

     

    The Fund has also justified the adoption of three mobilization measures as well as the increase in utility costs as Ghana attempts to fix its balance of payment problems.

     

    Despite criticisms, the Excise Duty, Growth and Sustainability, and Income Tax Amendment laws aim to generate GHS4 billion for the country each year.

     

    These, along with the expected tariff increases in June, are deemed crucial components of the country’s US$ 3 billion, three-year Extended Credit Facility with the IMF.

     

    Dr. Leandro Medina, argued in favour of adjustments in the face other tough economic conditions.

     

    “The revenue measures that have been passed between December and April are part of the prior actions. It’s very important to mobilize revenue. Revenue to GDP in Ghana is very low as compared to other countries. Ghana is making a huge effort to increase revenue, and this will be done mainly by increasing the tax base. What is important to say is that this is a large and front load fiscal consolidation”, he added.

  • Banks recapitalisation: gov’t support to be conditional on long-term profitability

    Adnan Adams Mohammed

     

    The International Monetary Fund (IMF) says commercial banks are expected to submit their credible time-bound plans to rebuild capital buffers on a phased basis.

     

    The banks are to raise some GH¢400 million to remain in business as most banks reported significant losses on the back of the mark-to-market valuation on their respective holdings in Government of Ghana bonds following the implementation of the DDEP. Other losses were due to higher impairments on loans and rising operating costs.

     

    The governor of the Bank of Ghana, last week, confirmed initial figures predicted by financial analysts as the value of losses suffered by the 23 banks that participated in the DDEP as GH 6.6 billion. The industry posted before-tax losses of GH¢8.0 billion in 2022 compared with a profit of GH¢7.4 billion recorded in 2021. This has prompted the second recapitalisation of banks in a period of less than five (5) years. However, the central bank says any government support from Financial Stabilisation Fund to the banks will be purposefully base on a condition.

     

    “Any government support for recapitalization will be designed to incentivize private capital injection and will be conditional on reforms to improve long-term profitability”, Dr. Ernest Addison said while answering questions during the 112th Monetary Policy Committee (MPC) press conference in Accra.

     

    “…further incentives to banks to expedite the process will include the prohibition of distributing dividends, restrictions in risk exposures, and enhanced monitoring for those that do not meet minimum CAR, and support for early recapitalization from the GFSF [Ghana Financial Stability Fund]”, he explained.

     

    The banking sector has up to September this year to provide a recapitalisation plan. This is in line with timelines set out in the financial sector strategy. According to the IMF Staff Report, the plans will be reviewed by the Bank of Ghana and finalised by the banks for BoG approval by end-September 2023 (structural benchmark). As part of this process, it said, regulatory forbearance, including capital requirements, will be lifted as soon as possible.

     

    “The BoG will monitor the expected capital shortfalls stemming from the ongoing recognition of debt restructuring losses in CAR [Capital Adequacy Ratio] calculations and ensure the plans on rebuilding capital buffers are implemented based on periodic milestones”.

     

    “Most banks are working towards that, and they have been given a period I think up to September 2023 to submit to us [BoG] as to what their recapitalizations are, and we will be following up on that. To ensure that instead of banks distributing profits that they have started making, use those resources to rebuild their capital buffers,” Governor of the Central Bank, Dr. Ernest Addison noted.

     

    Meanwhile, the Ghana Association of Banks has described the Bank of Ghana’s end-of-September timeline for banks to provide their recapitalisation plans as a prudent decision.

     

    The Chief Executive Officer, John Awuah, in an interview last week noted that, the directive is in the best interest of the banks to further aid in improving the banking sector. According to him, this would also position the banks to support economic growth.

     

    “We all heard from the Governor [Dr. Ernest Addison] just around the time we signed the debt exchange documentation that with the banks they had given us some reliefs on capital and when are we supposed to build up capital”.

     

    “What the Governor is saying is within that period they want to know when capitalization will be coming in so that they have good visibility of the plans of the banks in terms of capital accumulation and the capital to build capital buffers. I think it’s in the spirit of building a base to support the economic recovery”, he explained

     

    Mr Awuah expressed optimism about the further recovery of the banking sector in the second and third quarters of 2023.

     

    He added that the various reforms done by the sector and positive economic indicators in recent times will boost more confidence within the sector.

     

    “It will not be a day or night event, but a situation when we will witness gradual improvement within the sector. We are seeing certain positive trajectories within the economic variables.”

     

    “We have seen inflation coming down and the cedi also appreciating against other major foreign currencies so I will say the banking sector is gradually taking shape but we all have a role to play”, he continued.

     

    He however indicated that government and the regulator would have to put in more effort to improve the banking sector.

     

    Consequently, the International Monetary Fund (IMF) Staff Report on Ghana has revealed that Ghana’s financial sector was relatively robust before the debt restructuring, but the sector’s cleanup were yet to be fully implemented.

     

    According to the Fund, the aggregate Non-Performing Loans (NPLs) had declined from 17% in 2019 to about 15% at end-2022, and the sector had been well-capitalised except for a few institutions.

     

    However, several steps under the financial sector cleanup were yet to be implemented.

     

    The main profitability indicators, namely, return-on assets and return-on-equity all turned negative in 2022 because of the industry’s loss position.

     

    The 2022 audited financial statements of banks also pointed to some impairments in capital levels, although most banks posted Capital Adequacy Ratios (CAR) above the 10 percent regulatory minimum at end-December 2022.

     

    This was attributed to the effect of the roll-out of the temporary regulatory reliefs extended to the banks to cushion them against the impact of the DDEP as was done at the onset of the pandemic.

     

    However, in the first four months of this year, prudential data show some turnaround in the banking sector’s performance following the conclusion of the DDEP, and following consensus reached among stakeholders on the treatment of losses arising from same.

     

    Banks continue to rebalance their portfolios in response to the impact of the DDEP on their balance sheet shifting away from medium-to-long term investments to short term investments and increases in new loans.

     

    In general, the banks have returned to making profits in the first four months of 2023, broadly reflecting higher operating income.

     

    Loan loss provisions also increased relative to a year ago, due to the pickup in credit growth and elevated credit risks.

     

    These developments culminated in a 47.0 percent increase in profit-before-tax in April 2023 compared with 26.3 percent growth recorded during the same period a year ago.

     

    Similarly, the industry’s net income or profit-after-tax increased to GH¢2.8 billion from GH¢1.9 billion, representing 45.8 percent increase in April 2023.

     

    The industry’s return-on-assets increased to 5.5 percent from 4.7 percent, while return-on-equity rose to 36.3 percent from 22.3 percent.

     

    Key financial soundness indicators remained strong on the back of the impact of the regulatory reliefs.

     

    Also, the industry’s Capital Adequacy Ratio, adjusted for the regulatory reliefs, was 14.8 percent in April 2023, higher than the revised prudential minimum of 10 percent, but lower than the 21.3 percent recorded in April 2022.

     

    The decline in the ratio highlights the increase in risk-weighted assets of banks from the impact of exchange rate changes and some losses on mark-to-market investments.

     

    Non-Performing Loans (NPL) ratio deteriorated to 18.0 percent in April 2023 from 14.3 percent in April 2022, reflecting higher loan impairments and elevated credit risks.

     

    While, liquidity indicators have also improved following the implementation of the revised Cash Reserve Requirement.

     

    Performance of the banking sector broadly reflected the general macroeconomic operating environment as well as the impact of the DDEP as indicated in the 2022 audited financial statements.

     

    However, prudential returns for the first four months of 2023 have shown signs of recovery in the profitability of banks and a gradual improvement in the solvency positions, supported by the regulatory reliefs issued to safeguard stability of the financial sector.

     

     

     

  • Ghana intends to agree debt rework MoU with official creditors before November

    Ghanaian authorities aim to agree a memorandum of understanding with official creditors before the first IMF programme review, which they expect to bring to the Fund’s board in November and would trigger a payout of $600 million, the IMF said last week.

     

    The International Monetary Fund’s executive board approved a $3 billion, three-year rescue loan on Wednesday, paving a potential path for Ghana out of the worst economic crisis in a generation.

     

    Ghana’s Finance Minister Ken Ofori-Atta said during a joint press conference with IMF Mission Chief Stephane Roudet that there was no rush to go back to the international financial markets.

     

    “Our expectation is that in managing our expenditure and increasing our revenue … we then get our ratings up and make the country more attractive for foreign investors,” Ofori-Atta said.

     

    Ghana is targeting $10.5 billion of external debt service relief from 2023-2026, the IMF said, giving first indications of how big a hit investors might face in the coming debt overhaul.

    Credit: Reuters

     

  • IMF-Ghana bailout program: the light and darkness

    Adnan Adams Mohammed

     

    The International Monetary Fund (IMF) has finally approved Ghana’s request for a US$3 billion Balance of Payment support to stabilize the economy.

     

    Managing Director of the Fund, Kristalina Georgieva says this programme is only the first step towards restoring Ghana’s economic stability.

     

    In spite of the above assertion, some economists believe Ghana’s programme with the IMF is not just about receiving funds from the Bretton Woods institution to temporarily restore some stability in the economy, but also taking advantage of the programme’s details to raise revenue among others and limit reliance on external sources of funding and this will bring unexpected hard times. The Director of the Institute of Statistical, Social and Economic Research (ISSER) of the University of Ghana has indicated that, the first benefit of the programme is that it will bring about exchange rate stability and also help bring down inflation rate.

     

    “As we are witnessing now, the exchange rate is appreciating, if it’s stable then you will not see an automatic adjustment. So it is something that will bring some hardships in some areas but benefits as well,” Professor Peter Quartey retorted in an interview last week. “Let’s take the case of employment, I have seen in the budget statement of 2023 that there is a freeze on employment. What it means is that we will not be able to employ the number of youth we are churning out of our institutions annually and that is a huge challenge. Already youth unemployment is huge and if for three years you cannot employ, you can imagine the effect.”

     

    On revenue mobilisation, Prof Quartey stated that taxes need to be increased in some areas to help with local revenue mobilisation as the IMF has suggested. This he said would affect many Ghanaians and businesses going forward.

     

    “We are basically doing well when it comes to income tax except that it is only a few people who are overburdened. Where the challenge is, is VAT. If you look at our VAT receipts compared to what is within the sub-region, we are way off the target. That is one area that may be increased and with the effect of increasing VAT, it might bring challenges.”

     

    Already, the Minority in parliament is asking Ghanaians to be prepared for the shocks that will accompany the bailout secured from the International Monetary Fund (IMF).

     

    According to the caucus, many of the conditionalities could have been avoided if the government heeded to their call to go to the Fund earlier in 2022.

     

    “Suffice it to say that the Akufo-Addo/Bawumia government, as part of their proposal to the IMF to secure this deal, has agreed to increase utility tariffs every three months from last year. So far, since September 2022, electricity tariffs have gone up by a cumulative figure of 75.32% (27% in September 2022, 29.96% in the last quarter of 2022, and 18.36% a few days ago)”, the statement said.

     

    “Let us brace ourselves for the full consequences of this IMF deal, which will, without doubt, bite hard on Ghanaians, especially the youth. This is not a counsel of despair, but a reality that will soon dawn on all of us”, the statement.

     

    First tranche of the US$3 billion

     

    At a joint press conference of the government of Ghana and officials of the IMF on Thursday, 18 May 2023, to announce the details on the disbursement of the US$3.0 billion, Finance Minister Ken Ofori-Atta indicated that the first tranche of the $3 billion extended credit facility would hit Ghana’s account on Friday, 19 May 2023. This was confirmed by the Governor of the Bank of Ghana (BoG), Dr Ernest Addison, who was also at the press conference, saying: “Just for your information, we have had swift advice, today to receive the money. Value date tomorrow $604 million”.

     

    Mr Ofori-Atta further noted that, the executive board approval given to the bailout, has already started impacting Ghana’s economy positively.

     

    “We are already seeing relative stability in the currency and inflation and revitalising our economy. Government with support from the IMF and collective effort with Ghanaians will work through our current challenges and emerge stronger.”

     

    “This is the crucial first step on the necessary journey of strong reforms, inclusive growth, and relentless pursuit of a growth agenda geared towards restoring Ghana’s economy to a place of strength, prosperity, and resilience”, Mr. Ofori-Atta said

     

    However, Mr Ofori-Atta, has emphasised that programme is to ensure social protection.

     

    According to him, the programme will mitigate the impact of economic adjustment on the most vulnerable, whilst strengthening existing social intervention programmes such as Lively Empowerment Against Poverty (LEAP), National Health Insurance Scheme, Capitation Grant School Feeding Programme, amongst others.

     

     

    Also present at the presser was the Fund’s mission chief for Ghana, Stephane Roudet. She noted that Ghana’s reform programme is full of substance.

     

    “It is important to emphasise that this is a programme that is very rich in its structural components”, explaining, “it includes many reforms that cover a large range of sectors and these reforms will make the economy more resilient to shocks in the future and this is what the government and the IMF are looking for in this programme”.

     

    “It is a programme that will make the economy more resilient and more likely to withstand shocks in the future”, Mr Roudet added.

     

     

    Meanwhile, an Economist at the University of Ghana Business School, Prof. Godfred Bokpin has advised that, Ghana needs strict governance and productivity enhancing reforms to complement gains from the International Monetary Fund.

     

    He contends, government has a lot of work to do, in ensuring a robust macro-economic stability in the short to medium term as the country awaits the first tranche of the $3 billion facility from the IMF.

     

    Prof. Bokpin in an interview last week after the IMF board approval posited that now is the time for government to get to work.

     

    “It’s time to roll-up our sleeves and get to work. Micro-economic stability is not an end in itself, it’s only a means to an end. What then is important is how do we complement gains from the IMF, short-term usually, but the necessary governance productivity enhancing reforms that Ghana needs to do.”

     

    He wondered whether the country has taken any lesson after several visits to the Fund for a bailout.

     

    “This is our 17th IMF supported programme. I am a little surprise today, that even from government circle they are expecting the IMF programme, when towards the end of 2021, we were making the call that government needed to go to the IMF to save this economy from this embarrassment”.

     

     

    Meanwhile, the IMF has proposed the scrapping of tax exemptions, adjustment of levies on fuel, and an increase in income tax as some measures the Ghanaian government could implement following the approval of the programme.

     

    This, the IMF said, would help to boost revenue mobilization under its $3 billion support programme.

    This is contained in IMF’s May 2023 country report on Ghana’s request for the $3 billion support programme.

     

    Also, the Bank of Ghana will continue tightening monetary policy until inflation is on a firmly declining path, the International Monetary Fund (IMF) has revealed.

     

    According to the Fund, monetary and exchange rate policies under the programme will focus on reining in inflation and rebuilding foreign reserve buffers. The central bank is also expected to enhance exchange rate flexibility and limit foreign exchange interventions to rebuild external buffers.

     

    “Monetary and exchange rate policies under the program will focus on reining in inflation and rebuilding foreign reserve buffers. The Bank of Ghana will continue tightening monetary policy until inflation is on a firmly declining path and will eliminate monetary financing of the budget”, a press statement issued by the Fund after the Executive Board approved Ghana’s $3 billion bailout package indicated.

     

    The statement further indicated that an ambitious structural reform agenda is being put in place to reinvigorate private sector-led growth by improving the business environment, governance, and productivity.

     

    “Preserving financial sector stability is critical for the success of the program. Given the adverse impact of the domestic debt restructuring on balance sheets of financial institutions, the authorities will devise and implement a comprehensive strategy to rapidly rebuild financial institutions’ buffers and exit from temporary regulatory forbearance measures”, the Fund added.

     

    Outlook and risks

     

    The Fund said while growth is expected to decline this year because of the crisis and the planned fiscal consolidation, a resolution of the debt crisis and reforms should foster a recovery and reduce inflation over the medium term.

     

    Major downside risks include slippages in programme execution, delays in restructuring debt, and a deterioration in the external environment.

  • Cedi gains big…now world’s best-performer

    Adnan Adams Mohammed

     

    Soon after the approval of a $3 billion Extended Credit Facility Arrangement for Ghana by the International Monetary Fund (IMF), the Ghanaian currency the cedi has become the world’s best performer against the dollar over the past six months.

     

    It has advanced 33% since November 2022, the biggest gain among about 150 currencies, reversing some significant losses, according to Bloomberg data.

     

    The cedi strengthened for a fourth day, on bloomberg platform to 10.73 per dollar as at press time on Friday, May 19, 2023. Bank of Ghana as at close of May 18, 2023, a $1 was trading at GHC10.82 and it was trading at Stanbic as $1 to GHC11.0. Also, Ghana’s dollar bonds have delivered a strong performance, providing investors with a return of almost 12%, more than the 3.6% average for emerging and frontier peers in a Bloomberg index.

     

    “..The cedi is likely to see gains in the coming days, to trade at levels below 10 against the dollar,” said Daniel Kavishe, an Africa economist at Rand Merchant Bank, in a note to clients on the back of positive sentiment as Ghana government receives the first tranche of bailout money.

     

    “A similar reaction has been seen in other markets that have received an IMF programme that has coincided with an immediate disbursement of funds.”

     

    The IMF funds will help restore Ghana’s foreign-exchange reserves which have dropped by nearly 50% from a peak in August 2021 as the central bank used them to help ease the pressure on the cedi, which came under significant selling pressure after the country defaulted on its debt, Kavishe said.

     

    The local currency lost about 8.7 percent in value to the US dollar since the beginning of the year.

     

    Prior to the announcement of the fund’s approval as hinted by Dr Amin Adams, a minister of state in charge of finance on Friday, May 12, 2023, the cedi recorded relative stability, trading around  ¢11.9 to a dollar since late March 2023.

     

    The cedi gained further grounds on May 16, 2023 to sell at ¢11.78 to one dollar. It has since March 2023 recorded stability against the world’s most important currency.

     

    The same story can also be said about the pound and then euro. The cedi is going for ¢14.90 and ¢12.97 to the pound and euro respectively.

     

    Investors were cautiously optimistic that Ghana would get the IMF deal approval during the second quarter, without ruling out a May approval per government’s indications.

     

    “Immediately on Friday [May 12, 2023], we saw that reflected in the Ghana cedi performance as the local currency gained 1.0% on Friday alone. The gains have continued into this week as the market expect the approval this week, roundly today, as communicated by government officials”, Economist Courage Martey, , told Joy Business.

     

    “So, in sum, yes, the recent run appreciation of the Ghanaian cedi is due to the latest positive news effect from IMF programme approval”, he added.

     

    Meanwhile, many analysts are worried about the spread between the buy-side and the sell-side.

     

    “It appears the buy-side is falling faster than the sell-side and this is widening the spread. Essentially, traders want to buy the US dollar very cheap but are not willing to sell too cheap”, Mr. Martey pointed out.

     

    “This means that the appreciation of the cedi is not yet supported by any strong improvement in economic fundamentals, but rather on sentiments and news effects”, he added.

     

    Subsequently, the Forex Bureau Association of Ghana is predicting further gains by the cedi in the coming days. According to the association, the local currency is witnessing some stability owing to the announcement of Ghana securing a US$3 billion Extended Credit Facility from the IMF.

     

    Prior to the approval announcement, the Vice President of the Association, Dr. Alex Akpabli said members of the association were hopeful a successful deal will shore up the value of the cedi.

     

    “As we speak, most businesses are struggling and therefore if the funds come it will boost more confidence in our economy. I think it will be good news for all of us. We as bureau operators are only praying that the good thing happens”.

     

    He added that Ghana’s economy will soon bounce back once the funds is credited to the Bank of Ghana’s account.

     

    “Ghana’s economy will be sound and robust. Therefore if it happens, as we are all praying that we secure this $3 billion loan from the IMF, I think it will help businesses”.

  • Currency Board: IEA calls for a strong legal system

    Adnan Adams Mohammed

     

    The Institute of Economic Affairs (IEA) is calling for a strong legal system to support the proposed Currency Board (CB) Lite System to achieve its goals.

     

    It believes a strong legal system is key to support the board particularly the enforcement of the applicable rules.

     

    The IEA had earlier proposed the establishment of a CB to limit the Central Bank lending to the government, a move it believes will stabilise the cedi and prevent instability in the economy in times of shocks. It is, however, now calling for a Currency Board Lite System to reduce the limitations including possible loss of monetary policy independence and loss of exchange rate flexibility to respond to shocks.

     

    “A strong legal system is key to support the board, particularly the enforcement of the applicable rules. It is essential because a currency board arrangement derives much of its credibility from the changes required in the Central Bank law”, the Institute juxtaposed in a statement issued last week.

     

    “We would want to rather see a Currency Board Lite System for Ghana. This is essential to mitigate some of the disadvantages of a Currency Board. This would rather help in tightening the monetary and fiscal rules as well as enforcement and oversight regimes.”

     

    The institute also said a well-managed financial system is required for the system to be able to stand on its own without the lender of last resort opportunity that is available under a central bank but absent under a currency board.

     

    The ‘Currency Board’, the Institute of Economic Affairs (IEA) believes will help stabilise the cedi and prevent instability in the economy in times of shocks. The Institute also to limit the Central Bank lending to the government

     

    These monetary control and management factors deficiencies have been the bane of Ghana’s economic management. According economists, the CB system has limited inflation, checks currency volatility and better position balance of payments.

     

    “You see, a Currency Board (CB) is a rigid monetary management system that is hedged in strict rules, with little room for discretion. The CB does not lend to government and it covers its currency fully by foreign exchange”, Lead Researcher at the Intitute, Dr. John Kwakye, in a paper published and titled “Institutionalising Fiscal Discipline and Macroeconomic Stability for Sustained Growth in Ghana: The Constitutional Pathway” noted.

     

    “The CB system has limited inflation, the currency does not depreciate and balance of payments crises are rare. This is close to the system in our Francophone neighbours, who restrict their Central Bank lending to governments and provide adequate cover for their currency, the CFA.”

     

    IEA buttressed its points that, the Francophone countries system guarantees them low inflation and a stable currency, but “you have Ghana that has chosen an independent Central Bank to conduct discretionary monetary policy’.

     

    It also blamed the Central Bank of Ghana for some of the economic woes, saying, “The Central Bank provides significant lending to government and covers the cedi with limited foreign exchange (40% in the Act). No doubt we face perennial price and currency instability!”

     

    “It is for this reason that some of us have argued that if we continue to abuse policy discretion and pay a high price for it in terms of macroeconomic instability, then we better hedge our policies by rules; tie our economic managers hands, so that we can enjoy rules-driven macroeconomic stability!”, it added.

     

    Finally, the IEA said despite Ghana having rules such as the Public Financial Management Act, the Bank of Ghana Act and the Fiscal Responsibility Act, the rules have not work because of lack of political way.

     

    “Let me say that it is not that we have had no rules at all in fiscal and monetary management. In fact, I can mention a couple of them, such as the Public Financial Management Act, the Bank of Ghana Act, the Fiscal Responsibility Act and the relevant provisions in the 1992 Constitution, which represent attempts to introduce rules in our fiscal and monetary management system”.

     

    “However, there are serious questions regarding not only their enforcement but their effectiveness as well. And that is the reason we feel strongly about the need to give constitutional backing to some of these rules”, it concluded.

  • Economists warn of looming crisis in the banking sector

     

    Adnan Adams Mohammed

     

    Ghana’s banking sector is to face another crisis if the Bank of Ghana fails with its control measures to avert the downturn consequence of the Domestic Debt Exchange Program (DDEP).

     

    The DDEP has caused many Ghanaian local banks to record huge losses already with further losses expected in coming months. To mitigate this challenge facing the banking sector, the government created a Ghana Stability Fund expecting about US$1.5 billion to ensure appropriate solvency and liquidity.

     

    This, according to Economist at Louisiana Economic Development in the USA, if government is not able to get the funds by July this year, some banks will start collapsing since they will not be able to pay their workers and keep their operations running. Already, some banks have recorded huge losses, therefore the lack of liquidity support from the Stability Fund will leave them with no option than to fold up or reduce their number of branches, which will result in job losses.

     

    “We are heading into a banking crisis, believe it or not, we are currently suffering. If government is not able to get the $1.5 billion Stability Fund by July 2023, some banks will start collapsing”,  Dr. Sa-ad Iddrisu alarmed in an interview last week. “Even what is happening in Ghana is affecting the Nigerian economy because a lot of the Nigerian banks in Ghana, are also recording loses.”

     

    The government must speed-up processes in mobilising funds to cushion the banks from this timing canker, he urged.

     

    The Ghana Stability Fund, set up to provide liquidity support to banks participating in a domestic debt exchange and being managed by the Bank of Ghana under unique operational guidelines being developed by the Financial Stability Council, has already secured $250 million from the World Bank in addition to Ghana government’s commitment of $750 million as announced by minister of state for finance Mohammed Amin Adam weeks ago.

     

    Also, a Professor of Economics at the London Business School has warned that banking crises could happen, especially if Central Banks, including that of Ghana, continue to tighten monetary policy.

     

    According to Prof Lucrezia Reichlin, banking crises cannot be prevented in all contingencies, at least not in a fractional reserve system where loans do not need to be fully backed by deposits, like the system of today, adding, the recent crisis is a painful reminder of the fundamental instability of banks’ business model.

     

    Speaking on the topic ‘Early lessons from the recent banking turmoil’ championed by the International Monetary Fund, she expressed hope that banks are well equipped to face generalized liquidity crises through Central Banks’ interventions.

     

    “In principle, we also have tools to deal with the insolvency of a single institution. However, those crises are rarely managed in an orderly way. Today, if the world economy were to plunge into a deep recession, we are likely to see many cases of institutions facing solvency problems that will test this assertion”, she explained.

     

    She added that the Credit Suisse episode rings an alarm on whether Central Banks can be confident that problems can be solved following the rulebook.

     

    “If a bank is failing, the regulator can seek resolution with a bail-in or a bailout. A bail-in in theory is a good option to protect taxpayers, but in some cases a bailout may be wiser. The way to think about the choice is that a bail-in may cause financial instability while a bailout causes moral hazard and is an implicit subsidy to the banking sector”, she continued.

     

    In many cases, she pointed out that the crisis of one bank is addressed by a national regulator facilitating a merger with a national bank, either by moral suasion, subsidy, or both.

     

    This was the case in Switzerland, where UBS was encouraged by the regulator to absorb Credit Suisse at a very unfavorable exchange for Credit Suisse shareholders. Such a solution is not always feasible.

     

    Apparently, the Second Deputy Governor of Bank of Ghana (BoG), Elsie Addo Awadzi, has reiterated that the Ghana’s banking sector remains solvent and strong to support economic growth, despite the recent challenges faced by the country.

     

    She boldly posited that, the banking system is liquid and well positioned to lend to businesses and individuals after government’s debt exchange programme, despite the government’s acknowledgement that the DDEP have had effect on the banking and financial industry.

     

    “Our banking sector remains solvent and liquid even after the pandemic, in the face of recent macroeconomic challenges, and in particular the government debt restructuring efforts”, Mrs Awadzi noted while speaking at the launch of the “Absa SME loan at 10%” in Accra last week.

     

    She explained that the banking sector clean-up and recapitalisation exercise before the onset of the Covcid-19 pandemic, provided the industry with the necessary capital and liquidity buffers to withstand the pandemic and the recent macroeconomic challenges.

     

    “We expect banks over the next few years to take steps to rebuild strong buffers so that they remain resilient for the long-term”, she advised  and further pointed out that, while regulating and supervising banks to promote their safety and soundness, the Bank of Ghana expects banks to be more inclusive in their product and service offerings to ensure that all economic actors in Ghana are able to access much-needed finance to grow their businesses and contribute to the growth of our economy.

     

    Meanwhile, a Banking Consultant, Dr. Richmond Atuahene has urged government to engage mining and telecom firms to help mobilise revenue to salvage the imminent danger.

     

    “We need to structure it in such a way that we engage the mining and telcos because they are a cash cow especially some of the telcos. We need to get the inflows to support the sector”.

  • Analysts pegs cedi to end year at ¢12.43 to a dollar

    Adnan Adams Mohammed

     

    Some economists, both international and local have peg the local currency, the cedi to end the year below ¢13 to a dollar.

     

    This is in anticipation of the country securing the International Monetary Fund Board (IMF) Board approval soonest.

     

    Fitch Solutions and Economist Intelligence Unit (EIU) have forecasted the cedi to end the year 2023 at an exchange rate of between ¢12.40 and ¢12.46 to a dollar respectively. The UK based EIU, in its latest report published in April, 2023, expects the cedi to depreciate significantly this year, although lower than 2022 performance of the cedi.

     

    “We now expect the currency to weaken to ¢12.46:US$1 at end­ 2023 (from ¢10.95:US$1 as at mid­-April)”, EIU forecasted.

     

    It further said that the cedi depreciation will be driven by increased demand for hard currency due to high import prices, inflation, capital flight, rising profit repatriation by Ghanaian-based multinationals and weak investor sentiment in the face of the ongoing debt crisis.

     

    However, according to Fitch (a research and market information firm) and an Economist and Research Lead at GCB Capital, Courage Boti, the performance of the cedi will be premised on the possibility of Ghana securing an International Monetary Fund-support programme by May 2023. They believe that will go a long way to cushioning the cedi against foreign exchange pressures.

     

    It added that, “while short-term exchange rate volatility will persist, the cedi will stabilise once a formal creditors’ committee is formed and the IMF executive board approves Ghana’s programme”, Fitch Solutions noted.

     

    On the contrary, Courage Boti, has cautioned that the cedi will lose the most, if the government is unable to get  an IMF approval by the end of this month.

     

    He argues that the current suspension of interest payments on Ghana’s external loans is the main reason for the relative gains or slow depreciation by the cedi.

     

    Mr. Boti pointed out that time is of essence to clinch a deal and give certainty to investors that the economy is on a recovery path, a signal that could increase the gains of the cedi in the coming months.

     

    “Given the very weak external balances that we have, I think the cedi is showing what the fundamentals are suggesting. That probably is because the pressures we see when we pay interests on external loans have been suspended.

     

    “The cedi will continue to show some level of stability if a deal is secured with the IMF and the external debt restructuring programme is completed”, the currency analyst said.

     

    This, he suggested will boost investor confidence and gradually pave the way for Ghana to return to the international bonds market in the long term.

     

    The cedi has so far depreciated by about 14% to the US dollar in the retail market, selling at about ¢12.

     

    However, it has lost about 21% in value to the American greenback on the interbank forex market, going for about ¢10.95.

     

    For the past two weeks, the local currency has posted mixed performance on the markets, although the Central Bank increased its intervention in the spot market.

     

    This is due to heightening demand for foreign exchange as a result of market uncertainties

     

  • Ghana’s economy looks fragile

    By Elorm Desewu

    Ghana’s economy may be heading into recession, if the government is unable to secure the US$3billion Extended Credit Facility from the international Monetary Fund, (IMF).

    The government is hoping on the U$3billion to enable it improve on its balance of payment, shore up it’s reserves as well as stem the speed depreciation of the cedi.

    The delay in securing the approval from the Executive Board of the Fund has put most of the economic indicators off gear.

    Economy Times has learnt that the indicators will improve and things will stabilize as soon as the IMF approves the program. The cedi will appreciate sharply and inflation may also begin to ease sharply, although it increased to 54 percent last year.

    However retail prices of most consumption items will remain high, this is because of the new taxes and also due to inertia. There could be some dampening in economic activity but the signaling effect of the fund program could stem the decline.

    Fitch, one of the international rating agencies in its latest report on Ghana has disclosed that International Monetary Fund (IMF) support for Ghana will likely depend on the government’s ability to show a path towards bringing the present value of debt to 55% of Gross Domestic Product (GDP) over the forecast horizon on the basis of the IMF/World Bank debt sustainability analysis.

     

    According to Fitch, the government must also show the ability of official bilateral creditors to provide financing assurances in the context of the Common Framework external debt restructuring that authorities have requested.

     

    But according to the Economic Intelligence Unit, “we expect the Fund’s Executive Board to approve the US$3bn deal by mid-2023”.

     

    Ghana is undergoing domestic and external debt restructuring, which will continue in the near term, and is in urgent need of IMF support.

     

    Although discussion has started among some official creditors, the official creditor committee, responsible for providing the financing assurances, has not been created yet.