MONETARY
AND EXCHANGE RATE MANAGEMENT IN GHANA
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.