v Bank of Ghana’s primary objectives (or mission) is “to pursue sound monetary and financial policies aimed at price stability so as to create an enabling macroeconomic environment for the promotion of sustainable economic growth”.
v Various instruments have been used to achieve this Price Stability goal even through inflation continues to be a hindrance to economic growth in the country. In the early 1980’s for instance inflation rose to more than 100% with persistent GDP declines which led to large fiscal deficits, and overvalued exchange rate.
v International Monetary Fund (IMF) directed stabilisation programme (ERP) was introduced in 1983, followed by Structural Adjustment Programme (SAP) to restore fiscal and monetary discipline and realign prices by removing all controls.
v As part of the structural adjustment programme the Financial Sector adjustment programme (FINSAP) was launched in 1987 to address the deterioration problems in the financial sector. Years of mismanagement and government interference in the administration of credit rendered most banks uncompetitive and technically insolvent.
v Reforms in exchange rate policy which led to large devaluations of the domestic currency rendered most of the foreign currency loans of commercial banks non-performing. Under a World Bank Loan, the sector was restructured and non-performing assets of banks were taken over by government of negotiated interest rates. An institution was set up (NPART) to recover the loans. Management of relevant banks were revamped while many of the banks were modernised through computerization. The government also embarked on privatization programme under which it sold its shares in some banks. Existing barriers of entry were removed to permit new banks to be established.
v Monetay policy reforms was instituted. Before 1987, the main instrument of monetary management were direct controls in the form of ceiling on commercial bank credit to the private sector and regulation of the interest rates. The ceiling on commercial bank credit were both bank and sector specific by stipulating floors and ceilings for deposit and lending rates. High reserve requirements were also imposed during this period.
v Government Securities were almost non-existent and it relied mainly on bank borrowing to and it relied mainly on central bank borrowing to finance it deficit.
v A market for securities were almost non-existent and government relied mainly on central bank borrowing to finance its deficit.
v A market for securities was created to be used for monetary policy purposes. In 1986 a weekly auction in treasury bills was introduced. In 1988 Bank of Ghana bills was introduced to take care of excess liquidity in the system especially in the rural areas. Around this time, there had been schemes (e.g. SAF) to allow government to put its house in order and to move away from borrowing from the banking sector. The BOG bills were also to provide an avenue of investment for banks.
v Further improvements in the money market for banks was introduced. This include:
- a 30-day bill to deal with the short-end of the market.
- a longer dated bill (182-day, 2 years).
Other innovation in financial system was the introduction of 3-5 year bonds.
All these were to pave the way for a full-fledged system of indirect monetary management.
v Another concept introduced in the reform was discount houses. The purpose was to facilitate the transmission of monetary policy measures from the central bank to the banks. The discount houses acted as medium through which surplus banks could lend to deficit banks with the central bank dealing mainly with the discount houses in case of surplus or deficit position in the market.
v By 1991, the restruction and stabilization efforts began to produce results. Money Supply growth fell below 20% annually. Growth rate averaged 5% per annum, while inflation fell to about 10%.
v In 1992 all direct controls were abolish. Banks were free to set their own interest rates and formulate their own credit policies. The indirect system of monetary management was now under way
v Intervention tools used is BOG include
- Reserve requirements
- Discount window
- Foreign exchange operation (i.e. sale or purchase)
- Foreign exchange swap
- Open market operation
v Reserve requirement is a ratio of cash to total deposits that a bank must keep. This is used for both prudential and monetary management purposes. During the period of direct controls, they were used as a supplement to credit controls.
v The reserve requirement ratio has evolved from its highest of 27 per cent in 1990 to 10 percent in 1996 and its current level of 8 per cent since 1997.
v In implementing monetary policy, Bank of Ghana intervenes mainly through the primary auction of treasury and BOG bills.
v Bank of Ghana introduced the wholesale auction system in March 1996. Tenders became restricted to only primary dealers – commercial banks, discount houses and brokerage firms. The essence was to help develop the secondary market.
In Ghana this system has not worked well. The auctions are often under-subscribed and the primary dealers make no effort at promoting secondary market activity.
v In 1996 treasury bills became the main instrument of intervention because it serves in the government’s debt management.
v Although a lot has been achieved in laying down the infrastructure for market intervention. There has not been much success in achieving money supply and inflation targets.
v Experience has revealed that market participants respond only to the Central Bank’s actions which come either through movements in the Bank Rate or the results of preceding auctions.
v Discount window operations and refinance schemes are used by central banks to offer collateralised short-term lending to Banks. Finance schemes are effective as monetary policy tools only in a well functioning money market where interest rates adjust quickly to reflect market conditions. Bank of Ghana does not encourage banks & discount houses to use the discount window and prefers that they deal through the securities markets conditions. Bank of Ghana does not encourage banks and discount houses to use the discount window and prefers that they deal through the securities market.
v Foreign exchange operations are used for monetary policy purposes in terms of outright sales or purchases or swaps. Ordinarily, BOG’s exchange rate policy is based on reserve targeting. On occasions where reserves were higher than targeted, BOG has used outright forex sales as a tool of monetary policy. In this regard forex sales as a tool of monetary policy. In this regard forex sales were used as a supplement to treasury bill auctions to mop up excess liquidity in the system.
v Foreign exchange swap are used to influence domestic liquidity, manage foreign exchange reserves, and stimulate domestic financial markets. When central banks buys forex in a swap with domestic currency, it injects liquidity into the market, similar to repo. Central banks can use swap in its monetary policy by injecting or withdrawing liquidity for specific periods of time.
v Forex swaps were introduced in Ghana in 1997 in response to problems faced by some commercial banks when reserve requirements were introduced on foreign currency deposits. Swaps served as a cover for banks during periods of severe depreciation when they are obliged to keep reserve requirements in both cash and liquid assets.
Current monetary policy pursued in Ghana
Monetary policy in 1999 is geared towards reinforcing the declining trend in inflation with a view to achieving rates below 10% by the end of the year. The current inflation rate is 12 per cent. It is projected that money supplies do not exceed 15 per cent, while Open Market Operations are intensified to mop-up excess liquidity in the economy. BOG is implementing policies to deepen Secondary market activity in the money market by reinforcing the role of primary dealers in money market instruments.
The Bank of Ghana is intensifying the use of interest rate policy to achieve monetary policy objectives. The treasury bills rates reflect market developments. This entails maintenance of real positive rates for money market instruments to provide appropriate signals to financial institutions on interest rates. Banks are responding to this by developing new instruments to attract savings and deposits and new lending scheme for investments purposes.
v Flexible exchange rate policy will continue with the aim of providing incentives for increased production of exportable goods as well as enchancing Ghana’s competitiveness on the international market. It is expected that a tight monetary and fiscal policy will contribute to the achievement of stable exchange rate regime in 1999.