As
the suddenly foreshortened tenure in office of outgoing Bank of Ghana
(BoG) Governor, Dr Kofi Henry Wampah comes to an end, speculation over
who will replace him has become rife.
The most obvious options
are Millicent Narh, the current First Deputy Governor or Dr Nashiru
Issahaku, the current Second Deputy Governor, although there is an
outside chance of someone being brought in from outside the bank to head
it. While the identity of Dr. Wampah’s successor remains uncertain, the
tasks he will have to take on are however clear cut and very
formidable.
The next central bank Governor will be assuming
office at a time that the bank is grappling with high inflation, a weak
domestic currency, an inordinate amount of securitized public domestic
debt and consequent high cost of debt servicing and refinancing and
intense criticism over the tight monetary regime put in place to dampen
demand pull inflation, especially for increasingly scarce foreign
exchange.
Add to these, regulatory challenges, not just with
regards to the microfinance industry which has dominated public
attention recently, but also concerning the commercial banking sector as
well which is quietly suffering the effects of deteriorating asset
quality for which it is reluctant to make adequate loan loss provisions.
The new Governor’s task will be made all the more complicated by two
factors.
One is that this is an election year, which means as the
year progresses there will be pressure from government to accommodate
politically driven expansionary spending even as the BoG is beholden to
the International Monetary Fund which wants it to tighten the screws
further despite the upcoming elections.
The other is that the BoG
is currently deeply immersed in profound reforms of both the monetary
policy framework and the financial intermediation industry itself, under
the guidance of the IMF.
Unlike Dr Wampah who spent his initial
couple of years in office pandering to the whims of government amid
acute fiscal profligacy, the new Governor will have to face down the
same politicians who have appointed him, right from the start. This year
is the first during which a new IMF condition applies which sets a zero
limit on gross credit from the BoG to government.
In previous
years the limit had been set at 10% of the fiscal deficit and under Dr
Wampah, even this was often stretched to its elastic limit. Large BoG
financing of the fiscal deficit can be likened to printing money to
finance it and this is not only very inflationary but tends to put undue
pressure on the exchange rate as well.
To curb this government
and the BoG have agreed to the IMF’s insistence that the central bank
will no longer finance the deficit but since this will seriously curtail
government’s ability to spend more than it earns, do not expect it to
go away quietly, especially as election motivated exigencies mount in
the run up to the November polls.
How well the new constraint
will work depends in part on government’s commitment to fiscal
consolidation , but also on how the new Governor will be able to resist
the pressure that will inevitably come eventually.
In this
regard, the new Governor will want to accelerate the ongoing review of
the BoG law to strengthen the autonomy of the central bank, another
initiative emanating from the IMF. More work is needed in the areas of
the quality of data the bank produces, oversight on BoG credit to
government and implementation of a process for systematically recording
guarantees.
How quickly and effectively the new Governor sees
this legislative reform process through will have major implications
going forward, especially if a situation arises where there is a change
of government from the one that has appointed the chief central banker.
This
potential difficulty arises from the change in timing of the
commencement of the BoG Governor’s tenure in office from the erstwhile
situation which allowed a new government to make the appointment, to the
current one whereby the contract begins just months before a
presidential election. This change in circumstances has arisen from the
unscheduled replacement by Dr Wampah of the then newly selected Vice
President, Paa Kwesi Arthur as BoG Governor back in August 2012.
Another
task for the incoming Governor will be the implementation of
outstanding reforms to improve the central bank’s inflation targeting
framework with a view to taming persistent high inflation rates. This is
part of a wider effort to curb inflation with a tight monetary stance.
Here
the new Governor will be pitted against most of the organized private
sector who insist that tight monetary policy is strangulating them and
the country’s economic growth prospects, as well as much of the
financial media which tends to agree.
The new Governor will be
caught between sticking to the BoG’s guns in order to sustain the cedi’s
current exchange rate stability or trying to please the critics and
risking a downward spiral back into inflationary, and indeed only
nominal, growth.
The ongoing reform process for the inflation
targeting framework, which the new Governor will be taking over,
includes efforts to improve liquidity forecasting, refinements to the
framework for repo transactions and improvements to the inflation
forecasting framework.
Then there is the reform of Ghana’s
foreign exchange market which has only just begun. The reforms, which
are being carried out by the BoG with technical assistance from the IMF
are being done in three phases. The first phase was scheduled for
completion by the end of March, the second phase by the end of June and
the final phase by the end of September.
The reforms aim at
eliminating the compulsory surrender requirement of foreign exchange,
thus enabling forex earners to sell directly to the market. This is
expected to deepen the forex market and reduce exchange rate volatility.
Even
as the incoming Governor grapples with complex monetary issues he will
also have to ensure that the stability of the financial industry does
not deteriorate any further. The most obvious area for his immediate
attention will be the microfinance industry which greatly helped
accelerate Dr Wampah’s exit in the first place.
The immediate
mess left by DKM will have to be sorted out and the regulatory framework
overhauled to prevent future reoccurrences. In particular, the BoG’s
monitoring and response capabilities will need to be vastly improved.
But
just as importantly, the BoG will have its work cut out with regards to
the universal banking industry as well. The recent special external
forensic audit of Ghana’s deposit money banks have exposed the urgent
need to address weaknesses in their loan loss provisioning and asset
valuation and classification, in the context of a deteriorating outlook
for financial stability.
Although the banks appear to be well
capitalized, the non performing loans ratio has picked up sharply since
mid 2015 and now stands at about 15% of gross loans outstanding.
The
new BoG Governor will have to quickly take action to remedy the problem
of under provisioning by the banks including the enforcement of
recapitalization where needed. This is the core of the task facing the
new BoG Governor.
There is more such as the completion of the
phased recapitalization of the various types of deposit taking financial
institutions and the impending transfer of government’s various bank
accounts onto the Treasury Single Account. Put together the incoming
Governor is not to be envied despite all the pay, perks and prestige
that come with the job. – |
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