Sunday, October 31, 2010
Tuesday, March 04, 2008
The 'Cocoa' of the North
The shea tree in the north is regarded as the sword that empowers women against the wrecks of poverty. Sadly however, less than 30 percent of the yields from the shea is collected due to the fact that it grows on the wild. As GRi learned on a tour of the Cocoa Research Institute of Ghana sub-station in Bole in the Northern Region, every effort is being put into domesticating the shea tree. Rev. Fr. Dr. Emmanuel O.K. Oddoye, Senior Research Officer at the Institute talks to CLEMENT TUONURU
Shea butter is assuming amazing importance in the international beauty and cosmetic industry as the most sought after ingredient in aiding the moisture content of pomade. Its organic nature makes it the preferred choice of environmentally-conscious users.
In Britain and other European nations, for instance, manufacturers and retailers of pomade and other cosmetics, advertise the addition of shea butter in their products with pride.
In the savanna zones of the West African Sub-Region, it provides the main raw materials for women industry. As an official suggested, the shea nut tree is the ‘cocoa’ of the north. For some time in the immediate post independent era, shea butter was the main pomade in most Ghanaian homes.
The shea nut tree (known scientifically as Vitellaria paradoxa), grows wild in the Guinea Savannah zone of West Africa where the climate is characterised by unimodal rainfall pattern starting in April and ends in October. Total annual rainfall ranges from 900mm to 1,200mm and the average maximum temperature is about 34.5 degrees centigrade. These climatic conditions are conducive for the growth of the shea tree. The tree is normally not found in areas that are prone to water-logging or with poorly drained heavy soils.
In Ghana, the shea tree is, found mainly in the three northern regions. But it is also in the northern fringes of the Ashanti, Brong-Ahafo, Eastern and Volta Regions. The tree is slow growing. According to CRIG officials, it takes about 12 to 15 years to bear fruit. The fruits (nuts) are processed mostly by women for fat, the commercial product.
By tradition, no individual can own a shea nut tree. It is considered an ill-omen for someone to claim ownership of a plot of shea nut trees. It is forbidden to cut or cause damage to shea butter tree. The tree belongs to all. It is perceived to be the lifeline of the people.
The shea tree is propagated by seed and recent research at the Cocoa Research Institute of Ghana (CRIG) has shown that vegetative propagation is possible.
In 1974, CRIG set up a sub-station in Bole to aid research into all aspects of the shea tree; ranging from growth either by seed or by vegetative propagation, the agronomic practices that are needed to ensure optimum growth and yield to the harvesting and processing of the crop.
The centre later took on board research into cashew when cashew as the crop began to excite attention in the country.
The prime concern of the centre is finding ways of domesticating the shea tree and reducing its gestation period so that it could become a crop of economic importance, attracting a chunk of people to it.
Apart from the centre concerning itself with the physiology, breeding and the agronomy of these economic crops (cashew and shea nut), GRi also learned during visit to the centre that the sub station is developing some by-products from both shea butter nut and cashew.
For instance, cashew yields a lot of products. Apart from the nuts, the fruits when squeezed give juice which is used in producing fruit juice drink and jam. The remains are used as animal feeds. Some oil could also be obtained from the cashew nuts. There butter from shea nuts.
Asked why the centre is cited at Bole and no other place in the north, the Senior Research Officer, chuckled and said that when the authorities decided to extend their tentacles to the north, God revealed no other place but Bole. “Behold,” he said Biblically, “the traditional ruler, Bolewura Amankwah Gbedease II, was much more than friendly to the extent of allocating a vast land of several acres for the institute.”
Bole is a district capital with a population not exceeding 10,000 people.
Dr. Oddoye told GRi that the current size of the plantation is about 700 acres of a mixture of shea and cashew. There is much more to be done, according to the Senior Research fellow: The total land mass under cultivation is not even up to one third of the total land mass allotted to the institute.
Dr. Oddoye said the problem with shea butter tree is that it takes too long to bear fruit. The challenge is how to get it to grow quicker and to yield within the shortest possible time. Being wild and ubiquitous, it has adapted naturally to certain conditions that make the efforts of taming it very difficult.
The main interest in the sub-station in Bole, according to Dr. Oddoye, is to develop the shea tree to stand out as the most perceptible crop whose economic value is felt in almost every household in the north. For this reason, the idea emerged that the crop should be modified so that it could generate maximum yields to beef up the income level of women, especially, who are the main patrons of the crop.
The economic value of the shea nut crop is reflected in the fact that all parts of the shea tree, ranging from the roots to the fruits have some practical use. The bark is an ingredient in traditional medicine against certain childhood ailments and minor scrapes and cuts. The shell of the nuts can repel mosquitoes. Above all, the fruity part of the nut, when crushed and processed, yields the butter.
The benefits of a domesticated shea nut tree, far outweigh that of the wild. Being wild means that the trees grow naturally and haphazardly as compared to a plantation where they are grown orderly with good agronomic practices. It also implies that the collectors would have to travel far into the bush in order to pick the nuts. In such a circumstances, only 10 to 20 per cent of the nuts are collected.
Those picking are also exposed to other dangers like snake bites and attack by other wild animals. The burden of carrying heavy loads of shea nuts for such long distances is onerous. Compared to a domesticated shea nut plantation, which is regularly weeded and researched into, one can be assured of optimum yield and increase use of the land.
. The traditional way of producing shea butter is often interferes with quality. The sub station has plans to set up a plant to mechanise the process such that the women, who are the main processors would be taught how to produce export quality butter. The institute will then buy the butter from women pickers for processing. A laboratory will also be established to test the butter that is being produced to ensure that it is of the desired quality butter before it is exported.
Shea butter is a natural herbal extract. It is known for its effective skin care. It is reputable for its:
High moisturising properties which protect the skin from dryness and sunburn;
Treatment of chapped lips and feet, skin abrasions and blemishes; high nutritive qualities including vitamins A,D,E,F; wonderful pharmaceutical properties;
Versatility in home use in food and direct skin application;
Use in the cosmetics industry to make premium creams, lotions, bath soaps and skin care products;
Use in the manufacture of margarine and especially in the manufacture of chocolates and confectionery as it is an excellent for cocoa butter;
Making traditional shea butter is labour intensive. Women toil for long hours in the wild in harsh weather, braving rainstorms and temperatures to pick shea nuts. The traditional shea butter is extracted from shea nuts and typically involves the following stages:
The shea fruits are collected and heaped for some few days for the fruits to decompose
The fruits are de-pulped to get the nuts;
The nuts are parboiled for at least 60 minutes;
They are then dried on a plain floor for some time to remove moisture;
The nuts are de-husked or de-shelled to get the kernel;
The kernel is further dried and after this stage, the kernel could be stored for use at a future date or sold in this form;
After getting the dried kernel, any desirable quantity is fetched onto a specially; designed mortar and pounded with a pestle until it turns flour;
The flour is fried on a pan until it turns liquid;
It is then sent to the grinding mill for grinding or this could be done locally on a specially designed stone into a paste;
From the paste, some water is added and kneaded vigorously by hands until oil in coagulated form separate from the water;
Released oil in coagulated form is whisked out. Water containing nut sediments is discarded;
Coagulated shea butter containing traces of nut paste is placed to steam kettles or boiling pods;
Coagulated shea butter paste is heated in kettles at high heat to release shea oil;
Shea oil is skimmed and stored to solidify into shea butter.
The institute has set up a plant that processes cashew. Out of a total of 28 employees in this plant, only one is a male, the rest are females. The gender bias in the recruitment is deliberate because the nature of the job is such that it requires more women than men. The cashew nuts are processed to get the fruit which is subsequently packaged in small plastic bags.
The Bole sub-station boasts of the only cultivated shea plantation in Ghana. The seed takes about 7 to 10 years to start fruiting.
The institute also did a germ plasm collection, the idea of collecting different varieties to arrive at a high yielding variety. According to officials at the sub-station, shea nut varieties from all over the north were collected for an experiment. The product of the cross breeding is what informed the cultivation of the shea nut plantation.
The main hurdle of the institute is how to reduce the gestation period of the plant – the period between planting and harvesting. The institute is relying on vegetative propagation. This form of propagation is believed to be faster.
Another method of propagation at the experimental stage is by grafting and budding. This has been successfully tried on cashew and there is every belief that it will work on shea too.
The institute is awaiting verification trials on some agronomic practices including:
Cashew intercrop trial – The essence of this trial is to see if it is possible to intercrop cashew with other food crops such as maize, groundnut and yam which could be of use to the farmer.
Cashew fertilizer application trial – This is also to verify if the application of fertilizer to cashew has any impact on the yield. In this case, separate plots of cashew are sited, one of which is applied fertilizer and the other not. The yields from the different plots are then compared to see the impact of the fertilizer on cashew yields.
Cashew spacing trial – This seeks to establish the appropriate distance that should be allowed between the cashew trees.
Weed control trial – There has been some innovations for weed control. Some plants such as the Agushie have been introduced to suppress the growth of weeds. Some cashew farms have also been allowed to be bushy to test the tolerance level of cashew to weeds. If this is found to be applicable, it will relieve farmers of the onerous task of regular weed control. In addition to crops, the institute has about 150 cattle which graze on the plantation in order to reduce under growth and their droppings can also add nutrients to the soil.
These trials have been applied on the shea plantation as well. There is the other method of intercropping shea nut with cashew.
The sub station, is still at the experimental stage but officials have quite a lot to cheer about. The success story so far includes:
The ability to get the stem of the shea nut tree to geminate after it has been cut from the plant.
It has also been able to perfect a technique for grafting cashew which is being used in top-working. In top-working, when it is realised for instance that the original cashew plant is not of the high yielding variety, it is cut down. When it begins to re-grow, it is grafted or the high yielding variety is budded into the re-grown plant.
The institute is also able to extract juice from the cashew nut and is used for jam, fresh fruit drinks, alcohol and animal feed from the residue after the extraction of the juice.
Challenges
The greatest challenge facing the institute is the limited availability of funds for research. According to officials at the sub station, cashew for instance has done very well because there is a Cashew Development Project being run by the Ministry of Agriculture and funded by the African Development Bank. Consequently, cashew research is has suddenly jumped into the lead because it is getting a lot of support. The shea nut experiment, they say also needs similar support.
The climatic conditions are suitable for both the shea and the cashew because both crops require dry conditions. However, the prevalence of bush fires is the greatest problem. The annual fire outbreaks that sweep through shea trees often retard regular growth. Normally, the bush fire burns the back of the shea tree making it to shed its leaves completely thereby retarding its growth. Against this backdrop, the institute has employed people as fire patrols/guards to watch out for bush fires.
Unlike cashew, which takes three years to start fruiting, shea nut takes between seven and 10 years and as a result, there is a problem of how to whip up the enthusiasm of people to take to shea nut farming.
The price is the same for a bag of cashew and shea nuts. However, the weights differ. An 80 kilogrammes bag of cashew sells at GH¢ 24 whilst the same price applies to a bag of shea nut weighing 85 kilogrammes. These prices are however seasonal. Unlike cashews and shea nuts, cocoa is a commodity whose price is quoted in the world market. Cashew and shea nuts are yet to get to this stage.COCOBOD is trying to fix prices for the shea nut trade just as cocoa so that shea nut prices will no longer be seasonal.
There are 44 permanent staff. The institute also employs about 50 casual workers every month to work on the plantations, most of whom are recruited within the community.
Dr Oddoye ended his chat to GRI by pledging the research institute’s commitment to operate in the best interest of the people that it serves.
The goal, he stressed is to help farmers in the north to establish shea plantations so that they can get more from the shea tree. In that case, the shea tree will truly become the ‘cocoa’ of the north, providing income and livelihood for people; thus minimising the pangs of poverty.
Monday, April 23, 2007
Banking in Ghana: 50 years on
The Golden Jubilee edition of the Ghana Banking Awards is themed on the challenges, and prospects, of the industry. Aided by the highlights given at the launch of Awards by Dr. Mahamadu Bawumia, Deputy Governor of the Bank of Ghana, CLEMENT TUONURU explores the landscape of banking in Ghana over the last 50 years. Additional notes are provided by NANA OTUO ACHEAMPONG…
Introduction
The banking system in Ghana has undergone at least two phases: pre-reform and reform periods. Before independence, two overseas branches of British Commercial banks (referred to as “Expatriate Banks”) dominated the banking scene in Ghana. These included the Barclays Bank and the Bank of West Africa (later to be known as Standard Chartered Bank). Their categorisation as Expatriate Banks presumably evolved from the definition of “foreign bank” as enshrined in section 47 of the Banking Act 1970, to mean “any bank or banking enterprise incorporated in Ghana in which less than 55 percent of the equity share capital is held by Ghanaians”.
These banks were highly inaccessible by the average Ghanaian as most farmers and indigenous businesses were largely neglected by these expatriate institutions. The branches of these banks were located only in the urban commercial centres which could only be reached by a few lucky Ghanaians found in those areas.
In this regard, the national government, after independence, adopted development priorities that emphasised rapid industrialisation, modernisation of agriculture and the national economy.
The discourse below examines the banking system in Ghana in the last 50 years under the pre-reform and reform periods. It also evaluates the impact of the financial sector reforms on banking in Ghana.
Phase One
Post-independence financial sector policies
The post independence period witnessed extensive state intervention in the financial sector policies. Public ownership dominated the banking system. All the banks set up between the early 1950s and the late 1980s were mainly owned by the public sector except the “Expatriate Banks” where government held minority shares.
Interest rates were administratively controlled by the Bank of Ghana (BoG) and a variety of controls were also imposed on the asset allocations of the banks, such as sectoral credit directives. For example, BoG determined how much credit should be allocated to say, the agricultural sector and how much to the service and other sectors of the economy. It also determined the interest rate to be charged on credits allocated to the various sectors of the economy.
The motivation for these policies was based on the belief that, because of market imperfections and the nature of the financial system inherited from the colonial period, the desired pattern of investment could not be realised without extensive government intervention in the financial markets. An imperfect market exists when the forces of demand and supply fail to achieve allocative efficiency of goods and services. The problem is sometimes partly solved through State intervention.
Establishment of public sector banks
To arrest the allocative efficiency problem, the government established its own commercial and development banks, at least for two reasons: the belief that the operational focus of the foreign commercial banks, in particular their lending policies, was too narrow, thus depriving large sections of the economy of access to credit, and also the contention that sectors important for development, such as industry and agriculture, required specialised financial institutions to supply their funding needs.
In line with the above reasons the following state banks were established. The first of these banks was the Ghana Commercial Bank (GCB), established in 1953 to improve the access to credit of indigenous businesses and farmers. It was also to extend a branch network into rural areas, so that people in the rural areas would have access to banking facilities and was heavily involved in lending to agriculture.
Three development finance institutions were also set up: the National Investment Bank in 1963, to provide long term finance for industry; the Agricultural Development Bank in 1965 and the Bank for Housing and Construction in 1974, to provide loans for housing, industrial construction and companies producing building materials. These banks mobilised funds from deposits as well as from government and foreign loans and undertook commercial banking activities as well as development banking.
The Social Security Bank (now Societe-Generale Social Security Bank) came into the banking scene in 1977. It also provided credit, including long term loans, for businesses and consumers and invested in the equity of several large businesses. In 1975, there emerged two minor commercial banks which included the National Savings and Credit Bank, formerly the Post Office Savings Bank and the Cooperative Bank, which were charged with providing consumer loans, credit for small industries and cooperatives.
Interest rate policy
The BoG determined the structure of bank interest rates, including minimum interest rates for deposits and maximum lending rates. The agricultural sector was one of the priority sectors which received preferential lending rates. The structure of interest rates set by the BoG made no allowance for loan maturity or risk. Indeed, incentives for banks to extend credit were often perverse because riskier sectors such as agriculture were accorded a preferential rate. Nominal interest rates were held below prevailing inflation rates in most years and when inflation accelerated in the late 1970s and early 1980s, real interest rates were highly negative.
Credit controls
Sectoral credit guidelines, based on an annual credit plan, drawn up by the BoG, were imposed on the banks to channel credit towards the priority sectors of agriculture, manufacturing, and exports. These usually took the form of maximum permitted percentage increases in the stock of loans to each sector, with priority sectors accorded larger increases. The sectoral credit directives appear not to have been strictly enforced and from 1981, an additional regulation stipulated that lending to agriculture should comprise a minimum of 20% of total loans, with shortfalls to be transferred to the Agricultural Development Bank. Foreign companies were required to obtain BOG permission to access loans from domestic banks.
Demonetisation exercises and anti-fraud measures
Some measures taken by the government during the late 1970s and early 1980s further eroded public confidence in the holding of currency and bank deposits. The most drastic were the two currency appropriations in 1979 and 1982, adopted in an attempt to reduce the money supply and therefore inflation, but the public were discouraged from holding bank deposits by a number of measures aimed at countering fraud. Banks were mandated in 1979 to furnish authorities with information on their customers’ assets. In 1982 accounts in excess of ¢50,000 were frozen pending investigation for fraud or tax liabilities. Bank loans for the financing of trade inventories were recalled and compulsory payment by cheque was introduced for transactions in excess of ¢1,000.
Prudential regulation and supervision
The 1970 Banking Act provided the regulatory framework for the banking industry. This Act imposed an amount of ¢2m and ¢0.5m respectively as minimum paid up capital requirements for foreign and locally owned banks.
Banks were also required to maintain capital and reserves of at least 5% of their total deposits, a step which essentially seem to be an insurance against insolvency. The capital adequacy requirements were in any case largely meaningless because of the absence of clear accounting rules regarding the recognition of loan losses, provisioning for non-performing assets and the accrual of unpaid interest. The true state of banks’ balance sheets, including the erosion of their capital as a result of loan losses, could therefore be cancelled.
Although the Banking Act did provide some rules to constrain imprudent behaviour by banks, penalties for infractions were minimal. There were also important regulatory omissions such as limits on single borrower loan exposures.
In 1964, a Bank Examination Department was fashioned out of BoG with its regulation mainly centred on ensuring that banks complied with the allocative and monetary policy directives such as sectoral credit directives and reserve requirements rather than prudential regulations. This department lacked the requisite resources to monitor and inspect the banks especially, regarding the banks’ asset portfolios, their profitability and solvency.
Impact of the policies on the banking industry
The pre-reform policies of financial repression and public ownership of banks had important consequences for the banking industry. With the exception of those banks which retained foreign equity participation like Barclays, Standard Chartered Bank and Merchant Bank, the others became insolvent as a result of bad debts and investments in commercially unsuccessful ventures.
Below are some of the repercussions emanating from the post-independence financial sector policies.
Financial repression caused severe financial shallowing in Ghana. The broad money supply to GDP ratio, which had been relatively stable at around 29% from 1964-74, rose briefly in the mid 1970s, to a peak of 29% in 1976 and then collapsed to 12.5% in 1983. Moreover, bank deposits became less attractive relative to cash with the currency/M2 ratio rising from 35% in 1970 to 50% in 1983. This was a manifestation of disintermediation from the formal financial system with bank deposits only amounting to 7.4% of GDP in 1984, falling from 19.5% in 1977.
The main causes of this jinx in the banking industry were, among other things, the sharply negative real deposit rates, which deterred savers from holding financial assets. The currency appropriations of 1979 and 1982, the freezing of bank accounts and the decree mandating the government to demand details of customers’ bank accounts from banks, all serve to phase out public confidence in holding domestic currency and using the banking system, instead of encouraging the use of informal financial intermediaries and the holding of savings such as buildings and constructing materials, or foreign assets. Long queues at banks, a consequence of inefficiency and the lack of large denomination bank notes, also deterred the public from depositing cash in banks. Moreover, banks were discouraged from active deposit mobilisation because interest rate controls and the very high statutory reserve and liquid asset requirements prevented banks from channelling depositors’ funds into remunerative outlets.
Although financial sector policies aimed to support priority sectors through the use of sectoral credit guidelines and preferential interest rates, the supply of credit to these sectors declined sharply in real terms. Credit to the whole of the non government sector amounted to only 3.6% of GDP in 1983 having falling from 9.8% in 1977.
The main reasons for the decline in the supply of credit were due to the high insolvency that befell the banks which reduced the volume of funds available to the banks for lending to all sectors of the economy including the priority sectors. Besides, some of the sectoral allocations were diverted into other private uses rather than the intended purpose.
Banks were reluctant in the sectoral allocation of their available funds because of the lending rate controls which did not adjust for the risk of lending, or for transactions costs.
Banks had strong incentives not to lend to potentially risky borrowers but to invest in government securities since the latter were both liquid and virtually risk free as compared to the former.
Almost all the public sector banks were afflicted by financial distress in the 1980s. They had all been rendered insolvent by Non-Performing Assets (NPAs) and had to be restructured between 1989 and 1991, when a total of ¢62 billion of NPAs was identified in the banking system and replaced by BoG of bonds or offset against liabilities of the banks to the BoG or the government.
The NPAs included non performing loans, letters of credit and equity investments which yielded no income. Non performing loans amounted to ¢32 billion, representing 41% of all outstanding loans to the non government sector. Loan losses would have been much greater had lending not been curtailed by the high liquid reserve requirements and credit ceilings imposed in the 1970s and 1980s.
The main reasons for the losses incurred by the public sector banks was that they had been pressured into extending finance to unbankable projects to meet developmental and political objectives. The banks were very vulnerable to political pressures because the government had the authority to appoint and dismiss the banks’ executives and managers. The economic crisis and the radical changes in economic policy implemented during the 1980s also contributed to the deterioration in the banks’ asset portfolios. Many importers, to whom letters of credit had been extended by the commercial banks, were unable to meet their obligations following the large exchange rate devaluations which began in 1983.
The extent of the financial distress in these banks was only revealed when diagnostic studies were conducted in 1987 as part of the preparations for the Financial Sector Adjustment Programme (FINSAP).
Phase Two
Financial sector reforms
Financial sector reforms have been implemented since the late 1980s as part of the ongoing Economic Recovery Programme (ERP). This encompassed the partial interest rate liberalistion in 1987 and the removal of sectoral credit ceilings in the following year. This was accompanied by the liberalisation of access to foreign exchange and the licensing of foreign exchange bureaux. In 1989 the FINSAP was started supported by a financial sector adjustment credit from the World Bank.
The objectives of the FINSAP were among others, to address the institutional deficiencies of the financial system, in particular by restructuring distressed banks, reforming prudential legislation and the supervisory system, permitting new entry into financial markets by public and private sectors financial institutions and developing money and capital markets.
Further financial market liberalisation occurred in 1992 with the adoption of indirect instruments of monetary control which entailed the introduction of market determined Treasury bill rates. Since 1994, a second phase of FINSAP has been underway, major objectives of which are the privation of public sector banks and the development of non bank financial institutions to fill the gaps in the financial markets not served by the banks.
The period of FINSAP encompassed the following reforms:
Restructuring of financially distressed banks
The restructuring of the financially distressed banks took the form of addressing the financial, institutional, and managerial deficiencies in the banks. These measures included the following:
Reconstitution and strengthening of Board of Directors of affected banks
Closure of unprofitable branches
Reduction of operating costs through retrenchment of staff
Cleaning of the balance sheets of distressed banks by hiving off non-performing State-Owned Enterprise loans, non-performing loans granted to the private sector and loans granted by the Ghana Government.
The loans in these categories were redeemed, primarily in exchange for bonds. There were also a mixture of bonds and pre-determined injections of cash to the particular distressed bank in order to improve its liquidity, up-grade managerial capacity and deficiency of distressed banks as well as to intensify staff training of the affected banks.
Reforms to the prudential regulation and supervision
This entailed the revisions to the banking legislation with the promulgation of a new Banking Act in 1989 and a Non Bank Financial Institutions Act in 1993, the introduction of standardised reporting and accounting procedures and the strengthening of supervisory capacities in the BoG.
The 1989 Banking Law imposed minimum paid up capital requirements for Ghanaian and foreign owned commercial banks of ¢200 million and ¢0.5 billion respectively and ¢1 billion for development banks providing medium and long term finance for trade and industry. These remained so until the mid 1990s when high inflationary pressures compelled the BoG to make an upward revision of the capital requirements.
The Banking Law gives BoG the authority: to prescribe minimum liquid asset ratios of banks; to take action against a bank which it believes may be unable to meet its obligations to depositors or is not acting in the best interests of depositors or creditors.
The banking sector also witnessed the introduction of a standardised accounting system for the banks which includes explicit criteria for the classification of loans, provisioning for non-performing assets and the non-accrual of unpaid income. Banks were also required to submit to BoG, a variety of statistical data at regular intervals to ease supervision.
Financial liberalisation
Since 1987 financial markets have been progressively liberalised in Ghana. This entailed the removal of controls on interest rates and the sectoral composition of bank lending, and the introduction of market based instruments of monetary control. New financial institutions including several merchant banks with private sector participation have been licensed and some state owned banks being partially privatised.
The liberalisation of interest rates saw the removal of maximum lending rates and minimum time deposit rates. Controls on bank charges and fees were also removed in 1990. The bank specific credit ceilings, which had been the main instrument of monetary control during the ERP, were removed in 1992 and replaced with an indirect market based system of monetary control involving the weekly auctioning of T-Bills and other government and BoG securities.
This liberalisation has led to the emergence of new entries into the banking sector in Ghana, most of which are privately owned. Some of these newcomers include:
Continental Acceptances (now known as CAL Bank)
Ecobank Ghana Limited
First Atlantic Bank
Metropolitan and Allied Bank
Prudential
Meridien/The Trust Bank
International Commercial Bank
In addition to the new entry into the banking markets, other Non Financial Banking Institutions (NBFIs), including leasing companies, finance houses, building societies and savings and loans companies, have been established during the 1990s. Many of these NBFIs accept deposits and extend credit and therefore provide some competition for the services offered by the banks.
However, even though the banking industry had realised some improvements brought about by the financial sector reforms, the banking system was still shallow and performed very little intermediation between borrowers and savers in the private sector. . Bank deposits amounted to only 12.8% of GDP and the bank credit to the private sector amounted to only 5.3% of GDP in 1994. A major cause of this was the macroeconomic instability characterised by high rates of inflation which prevented the attainment of positive real interests.
There had been very little innovation among banks in terms of the range of instruments and services provided. Only very basic savings and lending instruments were available from the banks. Interest bearing chequeing accounts were generally only available to customers with very large deposits
The Banking industry also lacked adequate facilities to attract remittances or transfers from abroad as the process was slow. The banks were reluctant to furnish the recipients in Ghana with foreign currency, and moreover the exchange rates offered was uncompetitive compared to the foreign exchange bureaux rates. Hence, such transactions took place outside the banking sector.
In effect, the financial reforms had a limited impact on enhancing the efficiency of intermediation in banking markets.
In this regard, the newly enacted Bank of Ghana Ac 2002 (Act 612), which conferred operational independence on the Bank of Ghana, has been of assistance.
The Act redefined the objective of the Central Bank to be essentially price stability. The Act established the Monetary Policy Committee to formulate and implement policy in the areas of money, banking and credit with the aim of maintaining stable prices conducive to a balanced and stable economic growth.
Bank of Ghana has in the recent past introduced a number of policy reforms.
The objectives for such steps include among others:
Promoting efficiency and competition in the banking system;
Promoting financial deepening
Enhancing the transparency and competitiveness of the interbank money market.
Enhancing the development of the capital market.
Reducing asymmetric information
Asymmetric information is a major obstacle to lending, credit information, address of the borrowers and trust. As a result, Bank of Ghana instituted reforms addressing asymmetric information in the banking sector. These reforms include among others:
Credit Reporting Bill, which is now enacted
Publication of APRs
Publication of bank charges
Borrowers/Lenders Bill
Know Your Customer (KYC)
Anti-Money Laundering legislation
Other reforms embarked upon by Bank of Ghana include:
Abolition of secondary reserve requirements
Non-resident participation in domestic government securities
Foreign Exchange Bill
Payments systems reform
Collateral enforcement
Licensing of new banks
Re-denomination exercise
Universal banking
Central Securities Depository
Listing of government securities on the Ghana Stock Exchange
Risk based supervision
New Capital Accord (Basel II)
Conclusion
These reforms have brought about high competitiveness to the banking landscape in recent times as manifested in increased intermediation coupled with improved loan quality.
The reformation has also witnessed an improvement in bank credit to GDP ratio as the ratio stood at 18.5 percent in 2005 as against 4.7 percent in 1990.
Loan deposits ratio was 50.1 percent in 2002 as against 66 percent in 2006 and Non-Performing Loan was 19.6 percent in 2001 as against 11 percent as of October 2006.
Net foreign currency assets to shareholders funds were negative 9.4 percent in 2000 as against 43.4 percent in 2006.
The policy reforms further led to the proliferation and opening access of new more banks to a wider segment of the population in Ghana. Branch banking as well as the emergence of new more banks especially from Nigeria has become the order of the day in the banking industry. This led to an increase in banks branch network from 295 in 2003 to 377 in 2005.
Ghana Commercial Bank has the largest number of branches and the most widely networked bank among all the banks in Ghana. Creativity and innovation has also become part and parcel of banking in Ghana as many of them are introducing new, instruments, strategies and facilities to modernise and facilitate the banking process. Banks are creating new asset classes and products such as consumer loans, mortgages, Automated Teller Machine services, online telephone and internet banking, Mondex and many others.
The Banking awards instituted by Corporate Initiative Ghana in 2001is a measuring rod to see what banks are doing and also to stimulate debate over how banks can create social and environmental values without sacrificing profitability.
It also seeks to engender competition and efficiency among banks. Bank of Ghana has undertaken various reforms to support a competitive banking system. In the context of all these reforms banks will need to reinvent themselves in this new conducive but challenging environment.
References:
Martin Brownbridge and Augustine Fritz Gockel (1995) The impact of Financial Sector policies on Banking in Ghana
T.E. Anin (2000)
Dr Mahamudu Bawumia Deputy Governor, Bank of Ghana (2007). Banking in Ghana in the last 50 years- challenges and prospects. A Keynote Address at the Launch of Ghana Banking Awards.
World Bank (1994), Ghana Financial Sector Review: Bringing Savers and Investors Together. Report No 13423-Gh World Bank, Washington DC.
Introduction
The banking system in Ghana has undergone at least two phases: pre-reform and reform periods. Before independence, two overseas branches of British Commercial banks (referred to as “Expatriate Banks”) dominated the banking scene in Ghana. These included the Barclays Bank and the Bank of West Africa (later to be known as Standard Chartered Bank). Their categorisation as Expatriate Banks presumably evolved from the definition of “foreign bank” as enshrined in section 47 of the Banking Act 1970, to mean “any bank or banking enterprise incorporated in Ghana in which less than 55 percent of the equity share capital is held by Ghanaians”.
These banks were highly inaccessible by the average Ghanaian as most farmers and indigenous businesses were largely neglected by these expatriate institutions. The branches of these banks were located only in the urban commercial centres which could only be reached by a few lucky Ghanaians found in those areas.
In this regard, the national government, after independence, adopted development priorities that emphasised rapid industrialisation, modernisation of agriculture and the national economy.
The discourse below examines the banking system in Ghana in the last 50 years under the pre-reform and reform periods. It also evaluates the impact of the financial sector reforms on banking in Ghana.
Phase One
Post-independence financial sector policies
The post independence period witnessed extensive state intervention in the financial sector policies. Public ownership dominated the banking system. All the banks set up between the early 1950s and the late 1980s were mainly owned by the public sector except the “Expatriate Banks” where government held minority shares.
Interest rates were administratively controlled by the Bank of Ghana (BoG) and a variety of controls were also imposed on the asset allocations of the banks, such as sectoral credit directives. For example, BoG determined how much credit should be allocated to say, the agricultural sector and how much to the service and other sectors of the economy. It also determined the interest rate to be charged on credits allocated to the various sectors of the economy.
The motivation for these policies was based on the belief that, because of market imperfections and the nature of the financial system inherited from the colonial period, the desired pattern of investment could not be realised without extensive government intervention in the financial markets. An imperfect market exists when the forces of demand and supply fail to achieve allocative efficiency of goods and services. The problem is sometimes partly solved through State intervention.
Establishment of public sector banks
To arrest the allocative efficiency problem, the government established its own commercial and development banks, at least for two reasons: the belief that the operational focus of the foreign commercial banks, in particular their lending policies, was too narrow, thus depriving large sections of the economy of access to credit, and also the contention that sectors important for development, such as industry and agriculture, required specialised financial institutions to supply their funding needs.
In line with the above reasons the following state banks were established. The first of these banks was the Ghana Commercial Bank (GCB), established in 1953 to improve the access to credit of indigenous businesses and farmers. It was also to extend a branch network into rural areas, so that people in the rural areas would have access to banking facilities and was heavily involved in lending to agriculture.
Three development finance institutions were also set up: the National Investment Bank in 1963, to provide long term finance for industry; the Agricultural Development Bank in 1965 and the Bank for Housing and Construction in 1974, to provide loans for housing, industrial construction and companies producing building materials. These banks mobilised funds from deposits as well as from government and foreign loans and undertook commercial banking activities as well as development banking.
The Social Security Bank (now Societe-Generale Social Security Bank) came into the banking scene in 1977. It also provided credit, including long term loans, for businesses and consumers and invested in the equity of several large businesses. In 1975, there emerged two minor commercial banks which included the National Savings and Credit Bank, formerly the Post Office Savings Bank and the Cooperative Bank, which were charged with providing consumer loans, credit for small industries and cooperatives.
Interest rate policy
The BoG determined the structure of bank interest rates, including minimum interest rates for deposits and maximum lending rates. The agricultural sector was one of the priority sectors which received preferential lending rates. The structure of interest rates set by the BoG made no allowance for loan maturity or risk. Indeed, incentives for banks to extend credit were often perverse because riskier sectors such as agriculture were accorded a preferential rate. Nominal interest rates were held below prevailing inflation rates in most years and when inflation accelerated in the late 1970s and early 1980s, real interest rates were highly negative.
Credit controls
Sectoral credit guidelines, based on an annual credit plan, drawn up by the BoG, were imposed on the banks to channel credit towards the priority sectors of agriculture, manufacturing, and exports. These usually took the form of maximum permitted percentage increases in the stock of loans to each sector, with priority sectors accorded larger increases. The sectoral credit directives appear not to have been strictly enforced and from 1981, an additional regulation stipulated that lending to agriculture should comprise a minimum of 20% of total loans, with shortfalls to be transferred to the Agricultural Development Bank. Foreign companies were required to obtain BOG permission to access loans from domestic banks.
Demonetisation exercises and anti-fraud measures
Some measures taken by the government during the late 1970s and early 1980s further eroded public confidence in the holding of currency and bank deposits. The most drastic were the two currency appropriations in 1979 and 1982, adopted in an attempt to reduce the money supply and therefore inflation, but the public were discouraged from holding bank deposits by a number of measures aimed at countering fraud. Banks were mandated in 1979 to furnish authorities with information on their customers’ assets. In 1982 accounts in excess of ¢50,000 were frozen pending investigation for fraud or tax liabilities. Bank loans for the financing of trade inventories were recalled and compulsory payment by cheque was introduced for transactions in excess of ¢1,000.
Prudential regulation and supervision
The 1970 Banking Act provided the regulatory framework for the banking industry. This Act imposed an amount of ¢2m and ¢0.5m respectively as minimum paid up capital requirements for foreign and locally owned banks.
Banks were also required to maintain capital and reserves of at least 5% of their total deposits, a step which essentially seem to be an insurance against insolvency. The capital adequacy requirements were in any case largely meaningless because of the absence of clear accounting rules regarding the recognition of loan losses, provisioning for non-performing assets and the accrual of unpaid interest. The true state of banks’ balance sheets, including the erosion of their capital as a result of loan losses, could therefore be cancelled.
Although the Banking Act did provide some rules to constrain imprudent behaviour by banks, penalties for infractions were minimal. There were also important regulatory omissions such as limits on single borrower loan exposures.
In 1964, a Bank Examination Department was fashioned out of BoG with its regulation mainly centred on ensuring that banks complied with the allocative and monetary policy directives such as sectoral credit directives and reserve requirements rather than prudential regulations. This department lacked the requisite resources to monitor and inspect the banks especially, regarding the banks’ asset portfolios, their profitability and solvency.
Impact of the policies on the banking industry
The pre-reform policies of financial repression and public ownership of banks had important consequences for the banking industry. With the exception of those banks which retained foreign equity participation like Barclays, Standard Chartered Bank and Merchant Bank, the others became insolvent as a result of bad debts and investments in commercially unsuccessful ventures.
Below are some of the repercussions emanating from the post-independence financial sector policies.
Financial repression caused severe financial shallowing in Ghana. The broad money supply to GDP ratio, which had been relatively stable at around 29% from 1964-74, rose briefly in the mid 1970s, to a peak of 29% in 1976 and then collapsed to 12.5% in 1983. Moreover, bank deposits became less attractive relative to cash with the currency/M2 ratio rising from 35% in 1970 to 50% in 1983. This was a manifestation of disintermediation from the formal financial system with bank deposits only amounting to 7.4% of GDP in 1984, falling from 19.5% in 1977.
The main causes of this jinx in the banking industry were, among other things, the sharply negative real deposit rates, which deterred savers from holding financial assets. The currency appropriations of 1979 and 1982, the freezing of bank accounts and the decree mandating the government to demand details of customers’ bank accounts from banks, all serve to phase out public confidence in holding domestic currency and using the banking system, instead of encouraging the use of informal financial intermediaries and the holding of savings such as buildings and constructing materials, or foreign assets. Long queues at banks, a consequence of inefficiency and the lack of large denomination bank notes, also deterred the public from depositing cash in banks. Moreover, banks were discouraged from active deposit mobilisation because interest rate controls and the very high statutory reserve and liquid asset requirements prevented banks from channelling depositors’ funds into remunerative outlets.
Although financial sector policies aimed to support priority sectors through the use of sectoral credit guidelines and preferential interest rates, the supply of credit to these sectors declined sharply in real terms. Credit to the whole of the non government sector amounted to only 3.6% of GDP in 1983 having falling from 9.8% in 1977.
The main reasons for the decline in the supply of credit were due to the high insolvency that befell the banks which reduced the volume of funds available to the banks for lending to all sectors of the economy including the priority sectors. Besides, some of the sectoral allocations were diverted into other private uses rather than the intended purpose.
Banks were reluctant in the sectoral allocation of their available funds because of the lending rate controls which did not adjust for the risk of lending, or for transactions costs.
Banks had strong incentives not to lend to potentially risky borrowers but to invest in government securities since the latter were both liquid and virtually risk free as compared to the former.
Almost all the public sector banks were afflicted by financial distress in the 1980s. They had all been rendered insolvent by Non-Performing Assets (NPAs) and had to be restructured between 1989 and 1991, when a total of ¢62 billion of NPAs was identified in the banking system and replaced by BoG of bonds or offset against liabilities of the banks to the BoG or the government.
The NPAs included non performing loans, letters of credit and equity investments which yielded no income. Non performing loans amounted to ¢32 billion, representing 41% of all outstanding loans to the non government sector. Loan losses would have been much greater had lending not been curtailed by the high liquid reserve requirements and credit ceilings imposed in the 1970s and 1980s.
The main reasons for the losses incurred by the public sector banks was that they had been pressured into extending finance to unbankable projects to meet developmental and political objectives. The banks were very vulnerable to political pressures because the government had the authority to appoint and dismiss the banks’ executives and managers. The economic crisis and the radical changes in economic policy implemented during the 1980s also contributed to the deterioration in the banks’ asset portfolios. Many importers, to whom letters of credit had been extended by the commercial banks, were unable to meet their obligations following the large exchange rate devaluations which began in 1983.
The extent of the financial distress in these banks was only revealed when diagnostic studies were conducted in 1987 as part of the preparations for the Financial Sector Adjustment Programme (FINSAP).
Phase Two
Financial sector reforms
Financial sector reforms have been implemented since the late 1980s as part of the ongoing Economic Recovery Programme (ERP). This encompassed the partial interest rate liberalistion in 1987 and the removal of sectoral credit ceilings in the following year. This was accompanied by the liberalisation of access to foreign exchange and the licensing of foreign exchange bureaux. In 1989 the FINSAP was started supported by a financial sector adjustment credit from the World Bank.
The objectives of the FINSAP were among others, to address the institutional deficiencies of the financial system, in particular by restructuring distressed banks, reforming prudential legislation and the supervisory system, permitting new entry into financial markets by public and private sectors financial institutions and developing money and capital markets.
Further financial market liberalisation occurred in 1992 with the adoption of indirect instruments of monetary control which entailed the introduction of market determined Treasury bill rates. Since 1994, a second phase of FINSAP has been underway, major objectives of which are the privation of public sector banks and the development of non bank financial institutions to fill the gaps in the financial markets not served by the banks.
The period of FINSAP encompassed the following reforms:
Restructuring of financially distressed banks
The restructuring of the financially distressed banks took the form of addressing the financial, institutional, and managerial deficiencies in the banks. These measures included the following:
Reconstitution and strengthening of Board of Directors of affected banks
Closure of unprofitable branches
Reduction of operating costs through retrenchment of staff
Cleaning of the balance sheets of distressed banks by hiving off non-performing State-Owned Enterprise loans, non-performing loans granted to the private sector and loans granted by the Ghana Government.
The loans in these categories were redeemed, primarily in exchange for bonds. There were also a mixture of bonds and pre-determined injections of cash to the particular distressed bank in order to improve its liquidity, up-grade managerial capacity and deficiency of distressed banks as well as to intensify staff training of the affected banks.
Reforms to the prudential regulation and supervision
This entailed the revisions to the banking legislation with the promulgation of a new Banking Act in 1989 and a Non Bank Financial Institutions Act in 1993, the introduction of standardised reporting and accounting procedures and the strengthening of supervisory capacities in the BoG.
The 1989 Banking Law imposed minimum paid up capital requirements for Ghanaian and foreign owned commercial banks of ¢200 million and ¢0.5 billion respectively and ¢1 billion for development banks providing medium and long term finance for trade and industry. These remained so until the mid 1990s when high inflationary pressures compelled the BoG to make an upward revision of the capital requirements.
The Banking Law gives BoG the authority: to prescribe minimum liquid asset ratios of banks; to take action against a bank which it believes may be unable to meet its obligations to depositors or is not acting in the best interests of depositors or creditors.
The banking sector also witnessed the introduction of a standardised accounting system for the banks which includes explicit criteria for the classification of loans, provisioning for non-performing assets and the non-accrual of unpaid income. Banks were also required to submit to BoG, a variety of statistical data at regular intervals to ease supervision.
Financial liberalisation
Since 1987 financial markets have been progressively liberalised in Ghana. This entailed the removal of controls on interest rates and the sectoral composition of bank lending, and the introduction of market based instruments of monetary control. New financial institutions including several merchant banks with private sector participation have been licensed and some state owned banks being partially privatised.
The liberalisation of interest rates saw the removal of maximum lending rates and minimum time deposit rates. Controls on bank charges and fees were also removed in 1990. The bank specific credit ceilings, which had been the main instrument of monetary control during the ERP, were removed in 1992 and replaced with an indirect market based system of monetary control involving the weekly auctioning of T-Bills and other government and BoG securities.
This liberalisation has led to the emergence of new entries into the banking sector in Ghana, most of which are privately owned. Some of these newcomers include:
Continental Acceptances (now known as CAL Bank)
Ecobank Ghana Limited
First Atlantic Bank
Metropolitan and Allied Bank
Prudential
Meridien/The Trust Bank
International Commercial Bank
In addition to the new entry into the banking markets, other Non Financial Banking Institutions (NBFIs), including leasing companies, finance houses, building societies and savings and loans companies, have been established during the 1990s. Many of these NBFIs accept deposits and extend credit and therefore provide some competition for the services offered by the banks.
However, even though the banking industry had realised some improvements brought about by the financial sector reforms, the banking system was still shallow and performed very little intermediation between borrowers and savers in the private sector. . Bank deposits amounted to only 12.8% of GDP and the bank credit to the private sector amounted to only 5.3% of GDP in 1994. A major cause of this was the macroeconomic instability characterised by high rates of inflation which prevented the attainment of positive real interests.
There had been very little innovation among banks in terms of the range of instruments and services provided. Only very basic savings and lending instruments were available from the banks. Interest bearing chequeing accounts were generally only available to customers with very large deposits
The Banking industry also lacked adequate facilities to attract remittances or transfers from abroad as the process was slow. The banks were reluctant to furnish the recipients in Ghana with foreign currency, and moreover the exchange rates offered was uncompetitive compared to the foreign exchange bureaux rates. Hence, such transactions took place outside the banking sector.
In effect, the financial reforms had a limited impact on enhancing the efficiency of intermediation in banking markets.
In this regard, the newly enacted Bank of Ghana Ac 2002 (Act 612), which conferred operational independence on the Bank of Ghana, has been of assistance.
The Act redefined the objective of the Central Bank to be essentially price stability. The Act established the Monetary Policy Committee to formulate and implement policy in the areas of money, banking and credit with the aim of maintaining stable prices conducive to a balanced and stable economic growth.
Bank of Ghana has in the recent past introduced a number of policy reforms.
The objectives for such steps include among others:
Promoting efficiency and competition in the banking system;
Promoting financial deepening
Enhancing the transparency and competitiveness of the interbank money market.
Enhancing the development of the capital market.
Reducing asymmetric information
Asymmetric information is a major obstacle to lending, credit information, address of the borrowers and trust. As a result, Bank of Ghana instituted reforms addressing asymmetric information in the banking sector. These reforms include among others:
Credit Reporting Bill, which is now enacted
Publication of APRs
Publication of bank charges
Borrowers/Lenders Bill
Know Your Customer (KYC)
Anti-Money Laundering legislation
Other reforms embarked upon by Bank of Ghana include:
Abolition of secondary reserve requirements
Non-resident participation in domestic government securities
Foreign Exchange Bill
Payments systems reform
Collateral enforcement
Licensing of new banks
Re-denomination exercise
Universal banking
Central Securities Depository
Listing of government securities on the Ghana Stock Exchange
Risk based supervision
New Capital Accord (Basel II)
Conclusion
These reforms have brought about high competitiveness to the banking landscape in recent times as manifested in increased intermediation coupled with improved loan quality.
The reformation has also witnessed an improvement in bank credit to GDP ratio as the ratio stood at 18.5 percent in 2005 as against 4.7 percent in 1990.
Loan deposits ratio was 50.1 percent in 2002 as against 66 percent in 2006 and Non-Performing Loan was 19.6 percent in 2001 as against 11 percent as of October 2006.
Net foreign currency assets to shareholders funds were negative 9.4 percent in 2000 as against 43.4 percent in 2006.
The policy reforms further led to the proliferation and opening access of new more banks to a wider segment of the population in Ghana. Branch banking as well as the emergence of new more banks especially from Nigeria has become the order of the day in the banking industry. This led to an increase in banks branch network from 295 in 2003 to 377 in 2005.
Ghana Commercial Bank has the largest number of branches and the most widely networked bank among all the banks in Ghana. Creativity and innovation has also become part and parcel of banking in Ghana as many of them are introducing new, instruments, strategies and facilities to modernise and facilitate the banking process. Banks are creating new asset classes and products such as consumer loans, mortgages, Automated Teller Machine services, online telephone and internet banking, Mondex and many others.
The Banking awards instituted by Corporate Initiative Ghana in 2001is a measuring rod to see what banks are doing and also to stimulate debate over how banks can create social and environmental values without sacrificing profitability.
It also seeks to engender competition and efficiency among banks. Bank of Ghana has undertaken various reforms to support a competitive banking system. In the context of all these reforms banks will need to reinvent themselves in this new conducive but challenging environment.
References:
Martin Brownbridge and Augustine Fritz Gockel (1995) The impact of Financial Sector policies on Banking in Ghana
T.E. Anin (2000)
Dr Mahamudu Bawumia Deputy Governor, Bank of Ghana (2007). Banking in Ghana in the last 50 years- challenges and prospects. A Keynote Address at the Launch of Ghana Banking Awards.
World Bank (1994), Ghana Financial Sector Review: Bringing Savers and Investors Together. Report No 13423-Gh World Bank, Washington DC.
Inflation patterns in Ghana since independence
Ghana@50
Inflation is of interest in any economy. In fact, it has determined the outcome of elections and is widely discussed even by those with little knowledge of economics. CLEMENT TUONURU reviews inflationary trends in Ghana since independence
Introduction
Inflation is widely discussed because it changes the purchasing power of money and real values of variables such as interest rates, wages and many others. An unexpected change in inflation also redistributes income between lenders and borrowers. This explains why it is a very important issue of concern to policy makers especially when it assumes a relatively high level.
Inflation is defined as the persistent and appreciable increase in the general price level. However, one should be circumspect in defining inflation, because for inflation to occur there must be a continuous and rapidly increasing price level. More often than not, inflation has been mistaken to be just high prices. If prices are high but remain so without any appreciable change then there is no inflation. There must be changes in the general price level for inflation to exist.
This is why sometimes non-economists argue erroneously that the rate of inflation has not reduced because average price levels have increased. The fact that inflation in Ghana reduced from say 122.8% in 1983 to 40.2% in 1984 did not imply that average price level for the period fell. Rather it implied that the rate of increase in the average price level in 1984 was slower compared to the rate of increase in 1983. In other words, prices increased faster and more rapidly in 1983 than in 1984.
The most common measure of inflation is the Consumer Price Index (CPI). The CPI measures changes in the average price of consumer goods and services. Once the CPI is known, the rate of inflation is the rate of change in the CPI over a period (e.g. year-on-year inflation rate).
Inflation can be viewed from two directions: as a demand side problem and as a supply side problem. The demand side problem of inflation occurs when too much money chases few goods. If more money is injected into the economy with goods and services remaining the same, then demand-pull inflation arises. Underlying this analysis is the assumption that there is full employment of production of output, such that output cannot be increased in response to demand leading to continual increase in prices.
The supply side problem also known as cost-push inflation occurs when there is a tendency for increases in the cost of production (due to increase in wages, increase in interest rates or depreciation of the cedi) to lead to a continuous increase in the general price level.
Inflation has been one of the intractable problems that has confronted and inhibited the growth and development of the Ghanaian economy ever since the attainment of independence in 1957. Consequently, monetary policy in Ghana has had as its main objective, the attainment of price stability. It is therefore necessary to review inflation in Ghana under the various regimes of government.
Convention Peoples Party Era – 1957 to 1966
The Convention People’s Party (CPP) era marked the rule of Osagyefo Dr. Kwame Nkrumah, the first president of the Republic of Ghana. He masterminded the attainment of independence for Ghana in 1957 and later became the President in 1960, the year when Ghana assumed a Republican status. He was however overthrown in 1966.
Until 1964, inflation was not really a problem in the country. Ghana experienced her first serious bout of inflation in the mid-1960s. The period from independence to 1963 was a normal one in the sense that the previous practice of conservative monetary and fiscal management was more or less maintained. Consequently, the rate of inflation in 1961 was 3.6%. This further fell to 1.7% in 1962 but thereafter rose to 6.8% in 1963.
After independence, the CPP administration embarked on an industrialisation drive with the setting up of many import substitution industries to step up the level of economic development in Ghana. These import substitution industries relied heavily on imported raw materials and other inputs. However, due to poor management and lack of foreign currencies for the acquisition of such inputs, these industries performed abysmally.
Output was therefore minimal and with increased demand, this exerted an upward pressure on prices.
Inflationary pressures however started mounting up between 1964 and 1966. The rate of inflation rose from 9.6% in 1964 to 26.4% in 1965, the highest during the CPP era. It however fell in 1966 to 13.3% but this is still unacceptably high compared to rates in the preceding years.
One major factor behind the development of the inflationary pressures during the period under review was the government’s policy of budgetary deficits, and the financing of deficits mainly by borrowing from the central bank and the commercial banks with the result that more money was pumped into the economy than was warranted by real growth in GDP.
In addition, between 1964 and 1965, there was a sharp increase in total payments made to cocoa farmers following the boom in cocoa yield in the 1964/65 cocoa season. This further increased the money supply in the economy by 37.2% and with a decline in the supply of goods due to shortages and import restrictions, there exerted an upward pressure in general price levels resulting in a 16.8% rise in inflation between 1964 and 1965.
The table below shows annual rates of inflation in Ghana from 1961 to 2006.
Table 1
Year Inflation rate (%)
1961 3.6
1962 1.7
1963 6.8
1964 9.6
1965 26.4
1966 13.3
1967 9.0
1968 8.8
1969 7.1
1970 3.9
1971 9.3
1972 10.1
1973 17.5
1974 18.4
1975 29.7
1976 56.4
1977 116.3
1978 73.3
1979 54.2
1980 49.7
1981 117.1
1982 22.3
1983 122.8
1984 40.2
1985 10.0
1986 24.6
1987 39.8
1988 31.4
1989 25.2
1990 37.0
1991 18.0
1992 10.02
1993 27.7
1994 24.9
1995 74.4
1996 46.6
1997 27.6
1998 19.2
1999 12.6
2000 40.5
2001 21.3
2002 15.2
2003 23.6
2004 11.8
2005 14.8
2006 10.5
Source: M.M. Hug (1989), The Economy of Ghana, Pg 216
ISSER (2001- 2005), The State of the Ghanaian Economy
Ghana Review International Magazine
National Liberation Council Era - 1966 to 1969
After the overthrow of Nkrumah in 1966, the Military Government of the National Liberation Council (NLC) came into power between 1966 and 1969. During this period attempts were made to reverse Nkrumah’s Import-Substitution Industrialisation policies. The NLC rather adopted an International Monetary Fund (IMF) sponsored Stabilisation Programme including devaluation and trade liberalisation to bring inflation down to an acceptable level.
This involved cutting back public spending and the use of bank financing to resolve budget deficits.
The regime also pursued tight monetary policies through interest rate increases and credit restrictions which helped to pin down the amount of money stock in circulation in the economy.
In addition, there was a 30% devaluation of the domestic currency in 1967 which in effect served as a tax on imports and a subsidy on exports. In other words, devaluation tends to make imports more expensive and exports cheaper thereby stimulating domestic production. Devaluation is the deliberate attempt by government to reduce the value of the domestic currency against the other currencies such as the US dollar, the Great British Pound and the Euro. Unlike devaluation, depreciation refers to the fall in the exchange rate of the domestic currency as a result of the forces of demand and supply operating in the foreign exchange market.
Consequently, inflation had declined from 13.3% in 1966 to 9.0% in 1967 and further declined to 7.1% in 1969, as can be seen in table 1 above.
However, these measures curtailed inflation at the expense of economic decline.
Progress Party Era - 1969 to 1972
The NLC government in 1969 handed over power to a pro-market oriented government, the Progress Party of K.A. Busia which continued with some of the NLC’s policies.
After the period of stabilisation, the Busia government revived economic activity as public (government) investment and spending increased as well as private participation.
This brought down inflation further to as low as 3.9% in 1970. This was due to marked domestic output growth and improved import supplies due to the cocoa boom in 1970.
The Busia administration also pursued trade liberalisation which was initiated by the NLC government in 1967. However, the import liberalisation policy and the precipitous fall in the world market price of cocoa in 1971 combined to cause a rapid decline in the country’s foreign exchange reserves, leading to balance of payments difficulties.
Following these pressures, the low rate of inflation in 1970 could not be sustained and thus rose to 9.3% in 1971.
However, the Busia government responded by introducing stiffer restrictions on imports and foreign exchange transfers and the cedi was again devalued in December 1971. This reduced the value of the cedi in terms of the US dollar by 78%. The attempts by the Busia government to further correct the distortions in the economy were still on course when it was overthrown in a military coup led by Col. Acheampong in 1972.
The “Printing Press” era – 1972 to 1981
The era encompassed the regimes of the National Redemption Council, the Supreme Military Council, the Armed Forces Revolutionary Council and People’s National Party.
The decade 1972-1981 was characterised by one military take over to another. The military government of the National Redemption Council (NRC) headed by Col. Acheampong which usurped power from the Busia government in 1972 proceeded to recreate a command economy dubbed “Self Help” with expanded state participation. The popular economic slogans at the time were “Operation Feed Yourself” and “Operation Feed Your Nation”. While the Busia government had devalued the cedi, the NRC revalued it and imposed rigorous price controls. Despite all these, it failed to control inflation.
The Supreme Military Council (SMC) headed by General Akuffo ousted the NRC in 1978. However, the formation of the SMC was met with the military uprising that culminated in its overthrow in June 1979 by the Armed Forces Revolutionary Council (AFRC) under Flt. Lt. J.J. Rawlings. The AFRC stayed in Power for only three months and handed over power to a pro-Nkrumah civilian government of the Peoples National Party (PNP) under the presidency of Hilla Liman.
However, the PNP government was overthrown in 1981 in a military coup headed by Flt. Lt. Rawlings and replaced by the Provisional National Defence Council (PNDC).
From 1972 onward, inflation gathered momentum and it has been described in political parlance as a period of “acceleration towards the abyss”.
The rate of inflation increased persistently between 1972 and 1977 as can be seen in table 1.00 above. In fact, the situation worsened in 1976 and in subsequent years, Ghana’s inflation could truly be termed as galloping since it was assuming triple digits.
In discussing the causes of inflation during the late 1970s and early 1980s, the Central Bureau of Statistics put the blame squarely on the ‘huge borrowings by the government from the Central Bank, which continued to increase year after year’. Budget deficits were financed by bank loans to government and parastatals.
This period witnessed persistent budget deficits. In 1972 and 1976, the Deficit-GDP ratio was 6% and 11% respectively
In fact this was the period in which the Bank of Ghana was regarded as a government “printing press” by the various regimes especially the SMC regime. This is because government often resorted to the Bank of Ghana to print money to finance expenditures and budget deficits.
Total money supply by the end of 1981 was about 29 times the level at the end of 1971.
The Bureau cites the worsening supply position of domestic agricultural produce over the decade as another major contributory factor generating the runaway inflation.
Between 1972 and 1981, inflation averaged about 50% while the average for 1977 and 1981 stood at 116.7%.
To curtail inflation these regimes made use of extensive price controls, fixed exchange rate regimes and interest rate controls. This led to economic stagnation and severe shortage of goods and services and this further worsened the inflationary situation in the country.
PNDC and NDC Era - 1982 to 2000
The PNDC came to power in 1982 during which time the Ghanaian economy was in a very bad shape. This was manifested in a declining per capita income, negative growth rate in GDP, huge external deficits, run down in social and economic infrastructure and strong inflationary pressures.
Inflation hit its all time high figure of 122.8% in 1983, the highest since independence. This resulted from the intensive drought and bush fires which destroyed large quantities of food crops in 1983 thereby creating acute food shortage in the country. The situation was further worsened by the influx of Ghanaians from Nigeria in the same period. All these exerted upward pressures on demand for goods and services and on general price levels.
The year 1983 also witnessed an exchange rate overvaluation as well as the development of a buoyant parallel market coupled with other inappropriate policies all of which are contributory factors to the inflationary pressures at the time.
Following the poor economic performance at the time, the PNDC government initiated the Economic Recovery Programme (ERP) in 1983 with the control of inflation being one of the prime objectives. The main components of the ERP included IMF stabilisation policies and policies of World Bank Structural Adjustment Lending and/or Sectoral Adjustment Lending.
Within a year of the ERP, inflation dropped drastically from the all time high of 122.8% in 1983 to 40.2% in 1984 and further fell to 10% in 1985.
The low rate attained in 1985 was due to the good harvest in 1984. Food prices constitute about 50%- 60% of the CPI. An increase in food production exerted downward pressure on food prices and as a result the rate of inflation dropped for the period.
Between 1986 and the end of 2000, inflation remained above the targets set by the government in the ERP. For instance, in 1989, inflation when had fallen from 31.4% to 25.2% was above the target of 15%. In 1990, inflation rose again to 37% and fell in the subsequent year to 18%. It further fell in 1992 to 10.02% which again was above the target of 8%. The further decline in the rate of inflation in 1992 was due to the conscious effort at monetary control by the government and the good harvest in 1991.
The years 1993 and 1994 have different stories to tell. The rate of inflation rose from 10.02% to 27.7% in 1993 and declined to 24.9% in 1994 but rose to 74.4% in 1995, the highest since the inception of the ERP.
The high rate of inflation in 1995 could be explained by the introduction of the Value Added Tax (VAT) by the NDC government which received severe criticisms by a wide spectrum of Ghanaians. The new tax scheme, VAT resulted in prices skyrocketing because the VAT rate was even higher than the existing tax rate, that is, the Sales Tax, which it came to replace.
Inflation however declined continuously between 1996 and 1999 falling from 46.6% in 1996 to 12.6% at end of 1999.
Unfortunately, this decline could not be sustained as the year 2000 ended with a disappointing result on inflation. The year-on-year inflation had increased to 40.5%. This was due to the expansionary monetary policies pursued, the depreciation of the domestic currency which stood at 49.5%, the terms of trade shocks, the general loss in confidence in the Ghanaian economy and the extensive borrowing from the Central Bank in 2000 probably to finance the election.
Overall, the PNDC-NDC regime witnessed fluctuating results in the rate of inflation with the first quarter of their administration recording the highest rate of inflation since independence.
New Patriotic Party Era - 2001 to date
For the first time in Ghana’s history, a democratically elected government, the NDC handed over the helm of affairs of the country to another democratically elected government, the NPP in January 2001.
As at the end of the first quarter of the year 2001 (i.e. three months into the first year of the NPP government), inflation had increased to 41.9% from 40.5% as at the end of December 2000. This was due to the excessive money supply growth in the last quarter of 2000, rundown of local food stocks and the upward adjustment in petroleum prices in February 2001.
However, through prudent fiscal management and tight monetary policies coupled with a relatively stable cedi, the NPP government has been able to reduce the year-on-year inflation from 40.5% as at the end of December 2000 to 21.3% as at the end of December 2001, representing a 19.2% decline. This was below the target of 25% set for the end of 2001, the first time an actual inflation rate fell below the target. Remarkably, the rate of inflation has further been reduced to 10.5% as at end of December 2006, which is a narrow miss of the single digit target that is set for the period.
The NPP government like other industrialised countries such as Canada, New Zealand, Spain, Sweden, Australia, and the United Kingdom and among others adopted Inflation Targeting in 2001 as a stabilisation policy pursued with the aim of controlling inflation. This has yielded the favourable results during the NPP administration in the fight against inflation in Ghana.
Inflation targeting is an economic policy in which a Central Bank estimates and makes public a projected or “target” inflation rate and then attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools. The targets are often set as range or point. However, when these are set, unexpected changes such as fuel price changes which tend to affect a whole range of activities can bring deviations from the target.
Inflation targeting thrives on the independence of the Central Bank in conducting monetary policy which includes the freedom to use its available instruments in achieving its inflation target with little or no government borrowing from the Central Bank.
It also relies on the technical and institutional capacity of the Central Bank to model and forecast domestic inflation rate, predict the time lag between monetary tools and their effect on inflation rate and have a well informed view of the relative effectiveness of the various instruments of the monetary policy.
With the commitment of the NPP administration to reducing inflation to a low and stable level, the government enacted the Bank of Ghana Act 2002 (Act 612). The Act redefined the objective of the Central Bank to be essentially price stability and granted the Central Bank some degree of independence. The Act also established the Monetary Policy Committee (MPC) of the Bank of Ghana and mandates the MPC to formulate and implement policy in the areas of money, banking and credit with the main aim of maintaining stable prices conducive to a balanced and stable economic growth.
Based on the Act, the Bank of Ghana is to implement monetary policy that would switch the economy from a regime of high inflation, high interest rate and exchange rate depreciation to a regime of low inflation and low interest rate with exchange rate stability.
The Bank of Ghana, unlike other independent Central Banks has not adopted an explicit inflation targeting framework, where the Central Bank in collaboration with the government announces to the public, its inflation target and is bound by law to explain to the public any reasons for missing the target in any particular period. Transparency through full disclosure in its dealings to the general public is also a critical aspect of explicit inflation targeting. This is in exchange for the independence that is granted the Central Bank under the framework. The Central Bank targets its forecast of inflation over a horizon and interest rate policy is fashioned out to react to deviations between forecasted and actual inflation over the policy horizon.
The current inflation target used by the Bank of Ghana is set jointly by the Central Bank and the Ministry of Finance and Economic Planning. The Central Bank in its quest to achieve the targeted inflation uses the prime rate as its key policy instrument for monetary policy.
With the adoption of inflation targeting, the NPP government has been able to bring down inflation to lower levels as inflation in Ghana now hardly rises above 20%.
In line with the broad objective of Ghana’s medium term Economic Programme, the NPP government set an inflation target of 13% by end of 2002. To meet the set target, the NPP government together with the monetary authorities continued with the prudent fiscal management and the tight monetary policy stance initiated in 2001. These measures coupled with the slow pace of depreciation of the cedi led to a deceleration on the year-on-year inflation rate from 21.3% in 2001 to 15.2% as at the end of December 2002. This time, the actual rate of inflation rose above the target set for the period.
In 2003, the Finance Minister in his budget statement to Parliament indicated that the NPP government had targeted a 9% year-on-year inflation at the end of 2003. This was also influenced by commitments towards achieving the targets set within the West Africa Momentary Zone (WAMZ) convergence criteria that would eventually lead to five West African countries (Gambia, Nigeria, Ghana, Guinea and Sierra Leone) adopting a common currency, the Eco.
However, at the end of the year, inflation stood at 23.6%, far above the target for the period. This was due to the adjustments and corrective measures instituted in the petroleum sector of the economy. There was 100% adjustment in petroleum prices in January 2003 resulting in distortions in general prices. This escalated the rate of inflation to its peak of 30% in April, but sustained implementation of the fiscal framework along with prudent monetary management implemented by the Bank of Ghana reduced inflation to 23.3% at end-December 2003.
The year 2004 was an election year and a very challenging one for the monetary authorities in view of the history of excessive fiscal deficits accumulated through expansionary monetary policy that give rise to price increases and exchange rate volatility in the run-up to elections. The NPP government was voted back into power for yet another four year team.
However, due to prudent monetary management by the Bank of Ghana and the NPP government, coupled with improved prices in the non-food component of the CPI, led to a decline in inflation to 11.8%, a further miss of the single digit target. There was also exchange rate stability coupled with a decline in the prime rate which was introduced during the NPP government in 2002 to replace the bank rate. This reflected in a fall in interest rates which is a boost to investments and overall output in the economy.
The early months of post-election years are often charactised by rising inflation and exchange rate instability mainly due to fiscal deficits accumulated through expansionary monetary policy in the latter part of the preceding year. However, macroeconomic stability remained central to government as seen in the inflation and monetary growth targets for the period.
In order to achieve the stability necessary for accelerated growth and poverty reduction, government proposed to reduce the end of period inflation to 13.5% by December 2005 and gradually moves towards a single digit rate by end 2006.
However, due to petroleum price adjustments within the year under review, the growth in money supply and the appreciation of the cedi by 9.98%, the rate of inflation as at end of December 2005 was 14.8%, overshooting the target of 13.5%.
In 2006, inflation hit the single digit mark in the months of March and April, but the year ended with a 10.50% rate of inflation. The yearly average for 2006 is 10.96% which is a narrow miss of the single digit target that the NPP government want to attain to be able to meet the WAMZ convergence criteria.
Conclusion
On the whole, the NPP administration so far has been able to tame inflation within limits though they have not been able to hit the targets except in 2001. The adoption of inflation targeting has yielded favourable results in the fight against inflation during the NPP administration because this has helped brought inflation down to below 20%. The average inflation rate for the NPP regime is lower compared to the PNDC-NDC era. This is because of high inflationary pressures in 1983 and in 1995. The “Printing Press” regime has rather high average rate of inflation compared to the NPP regime. However, comparing these three regimes to the Busia regime, there is a marked difference because the Busia era recorded single digit inflation rates throughout except in his last year in 1972, when inflation went up to 10.1%. The average inflation rate for the entire regime is 5.2%.
The CPP era has recorded the lowest rate of inflation since independence. This was in 1962 when inflation was as low as 1.7%. Inflation generally was low during the CPP era except in 1965 when the economy nearly went off track due to inappropriate policies.
In assessing the inflationary situation in Ghana, and comparing it to other parts of the world, it can objectively be said that Ghana still has a long way to go. Even within Africa, Ghana is far behind. For instance, inflation in Libya is low, averaging 0.9% between 2003 and 2005. In the same period, the annual average rate of inflation for Cameroon is 1.5%. The average for Ghana in the same period is 16.63% which is quite higher. South Africa in the same period has an annual average inflation rate of 3.4%. In Africa, we can only be said to be far better than Zimbabwe in the fight against inflation.
The rate of inflation in Zimbabwe is more than 1000%, the highest in the world, according to the International Monetary Fund. Between 2003 and 2005, China has an average annual inflation rate of 2.3%. A country like Japan has been in deflation between 1999 and 2004 with an average deflation rate of -0.6%.
In this regard, Ghana really has to tighten her belt in the fight against inflation. It is not impossible to attain the single digit mark. All we need is prudent monetary management and fiscal discipline. It is the attempt to finance our persistent budget deficits that often prompt the need for monetary expansion, a policy which is inflationary.
We also need to devise measures to increase agricultural production especially food. It is evident that during periods of good harvest, inflation declines drastically and vice versa during periods of poor harvest as manifested in 1983. This is because food items constitute a significant part of the CPI and therefore food shortages can be critical in the fight against inflation in Ghana.
References:
M.M Hug (1989). The Economy of Ghana
ISSER (2001-2005). The State of the Ghanaian Economy
Emmanuel A. Codjoe (2004). Inflation in Ghana
Inflation is of interest in any economy. In fact, it has determined the outcome of elections and is widely discussed even by those with little knowledge of economics. CLEMENT TUONURU reviews inflationary trends in Ghana since independence
Introduction
Inflation is widely discussed because it changes the purchasing power of money and real values of variables such as interest rates, wages and many others. An unexpected change in inflation also redistributes income between lenders and borrowers. This explains why it is a very important issue of concern to policy makers especially when it assumes a relatively high level.
Inflation is defined as the persistent and appreciable increase in the general price level. However, one should be circumspect in defining inflation, because for inflation to occur there must be a continuous and rapidly increasing price level. More often than not, inflation has been mistaken to be just high prices. If prices are high but remain so without any appreciable change then there is no inflation. There must be changes in the general price level for inflation to exist.
This is why sometimes non-economists argue erroneously that the rate of inflation has not reduced because average price levels have increased. The fact that inflation in Ghana reduced from say 122.8% in 1983 to 40.2% in 1984 did not imply that average price level for the period fell. Rather it implied that the rate of increase in the average price level in 1984 was slower compared to the rate of increase in 1983. In other words, prices increased faster and more rapidly in 1983 than in 1984.
The most common measure of inflation is the Consumer Price Index (CPI). The CPI measures changes in the average price of consumer goods and services. Once the CPI is known, the rate of inflation is the rate of change in the CPI over a period (e.g. year-on-year inflation rate).
Inflation can be viewed from two directions: as a demand side problem and as a supply side problem. The demand side problem of inflation occurs when too much money chases few goods. If more money is injected into the economy with goods and services remaining the same, then demand-pull inflation arises. Underlying this analysis is the assumption that there is full employment of production of output, such that output cannot be increased in response to demand leading to continual increase in prices.
The supply side problem also known as cost-push inflation occurs when there is a tendency for increases in the cost of production (due to increase in wages, increase in interest rates or depreciation of the cedi) to lead to a continuous increase in the general price level.
Inflation has been one of the intractable problems that has confronted and inhibited the growth and development of the Ghanaian economy ever since the attainment of independence in 1957. Consequently, monetary policy in Ghana has had as its main objective, the attainment of price stability. It is therefore necessary to review inflation in Ghana under the various regimes of government.
Convention Peoples Party Era – 1957 to 1966
The Convention People’s Party (CPP) era marked the rule of Osagyefo Dr. Kwame Nkrumah, the first president of the Republic of Ghana. He masterminded the attainment of independence for Ghana in 1957 and later became the President in 1960, the year when Ghana assumed a Republican status. He was however overthrown in 1966.
Until 1964, inflation was not really a problem in the country. Ghana experienced her first serious bout of inflation in the mid-1960s. The period from independence to 1963 was a normal one in the sense that the previous practice of conservative monetary and fiscal management was more or less maintained. Consequently, the rate of inflation in 1961 was 3.6%. This further fell to 1.7% in 1962 but thereafter rose to 6.8% in 1963.
After independence, the CPP administration embarked on an industrialisation drive with the setting up of many import substitution industries to step up the level of economic development in Ghana. These import substitution industries relied heavily on imported raw materials and other inputs. However, due to poor management and lack of foreign currencies for the acquisition of such inputs, these industries performed abysmally.
Output was therefore minimal and with increased demand, this exerted an upward pressure on prices.
Inflationary pressures however started mounting up between 1964 and 1966. The rate of inflation rose from 9.6% in 1964 to 26.4% in 1965, the highest during the CPP era. It however fell in 1966 to 13.3% but this is still unacceptably high compared to rates in the preceding years.
One major factor behind the development of the inflationary pressures during the period under review was the government’s policy of budgetary deficits, and the financing of deficits mainly by borrowing from the central bank and the commercial banks with the result that more money was pumped into the economy than was warranted by real growth in GDP.
In addition, between 1964 and 1965, there was a sharp increase in total payments made to cocoa farmers following the boom in cocoa yield in the 1964/65 cocoa season. This further increased the money supply in the economy by 37.2% and with a decline in the supply of goods due to shortages and import restrictions, there exerted an upward pressure in general price levels resulting in a 16.8% rise in inflation between 1964 and 1965.
The table below shows annual rates of inflation in Ghana from 1961 to 2006.
Table 1
Year Inflation rate (%)
1961 3.6
1962 1.7
1963 6.8
1964 9.6
1965 26.4
1966 13.3
1967 9.0
1968 8.8
1969 7.1
1970 3.9
1971 9.3
1972 10.1
1973 17.5
1974 18.4
1975 29.7
1976 56.4
1977 116.3
1978 73.3
1979 54.2
1980 49.7
1981 117.1
1982 22.3
1983 122.8
1984 40.2
1985 10.0
1986 24.6
1987 39.8
1988 31.4
1989 25.2
1990 37.0
1991 18.0
1992 10.02
1993 27.7
1994 24.9
1995 74.4
1996 46.6
1997 27.6
1998 19.2
1999 12.6
2000 40.5
2001 21.3
2002 15.2
2003 23.6
2004 11.8
2005 14.8
2006 10.5
Source: M.M. Hug (1989), The Economy of Ghana, Pg 216
ISSER (2001- 2005), The State of the Ghanaian Economy
Ghana Review International Magazine
National Liberation Council Era - 1966 to 1969
After the overthrow of Nkrumah in 1966, the Military Government of the National Liberation Council (NLC) came into power between 1966 and 1969. During this period attempts were made to reverse Nkrumah’s Import-Substitution Industrialisation policies. The NLC rather adopted an International Monetary Fund (IMF) sponsored Stabilisation Programme including devaluation and trade liberalisation to bring inflation down to an acceptable level.
This involved cutting back public spending and the use of bank financing to resolve budget deficits.
The regime also pursued tight monetary policies through interest rate increases and credit restrictions which helped to pin down the amount of money stock in circulation in the economy.
In addition, there was a 30% devaluation of the domestic currency in 1967 which in effect served as a tax on imports and a subsidy on exports. In other words, devaluation tends to make imports more expensive and exports cheaper thereby stimulating domestic production. Devaluation is the deliberate attempt by government to reduce the value of the domestic currency against the other currencies such as the US dollar, the Great British Pound and the Euro. Unlike devaluation, depreciation refers to the fall in the exchange rate of the domestic currency as a result of the forces of demand and supply operating in the foreign exchange market.
Consequently, inflation had declined from 13.3% in 1966 to 9.0% in 1967 and further declined to 7.1% in 1969, as can be seen in table 1 above.
However, these measures curtailed inflation at the expense of economic decline.
Progress Party Era - 1969 to 1972
The NLC government in 1969 handed over power to a pro-market oriented government, the Progress Party of K.A. Busia which continued with some of the NLC’s policies.
After the period of stabilisation, the Busia government revived economic activity as public (government) investment and spending increased as well as private participation.
This brought down inflation further to as low as 3.9% in 1970. This was due to marked domestic output growth and improved import supplies due to the cocoa boom in 1970.
The Busia administration also pursued trade liberalisation which was initiated by the NLC government in 1967. However, the import liberalisation policy and the precipitous fall in the world market price of cocoa in 1971 combined to cause a rapid decline in the country’s foreign exchange reserves, leading to balance of payments difficulties.
Following these pressures, the low rate of inflation in 1970 could not be sustained and thus rose to 9.3% in 1971.
However, the Busia government responded by introducing stiffer restrictions on imports and foreign exchange transfers and the cedi was again devalued in December 1971. This reduced the value of the cedi in terms of the US dollar by 78%. The attempts by the Busia government to further correct the distortions in the economy were still on course when it was overthrown in a military coup led by Col. Acheampong in 1972.
The “Printing Press” era – 1972 to 1981
The era encompassed the regimes of the National Redemption Council, the Supreme Military Council, the Armed Forces Revolutionary Council and People’s National Party.
The decade 1972-1981 was characterised by one military take over to another. The military government of the National Redemption Council (NRC) headed by Col. Acheampong which usurped power from the Busia government in 1972 proceeded to recreate a command economy dubbed “Self Help” with expanded state participation. The popular economic slogans at the time were “Operation Feed Yourself” and “Operation Feed Your Nation”. While the Busia government had devalued the cedi, the NRC revalued it and imposed rigorous price controls. Despite all these, it failed to control inflation.
The Supreme Military Council (SMC) headed by General Akuffo ousted the NRC in 1978. However, the formation of the SMC was met with the military uprising that culminated in its overthrow in June 1979 by the Armed Forces Revolutionary Council (AFRC) under Flt. Lt. J.J. Rawlings. The AFRC stayed in Power for only three months and handed over power to a pro-Nkrumah civilian government of the Peoples National Party (PNP) under the presidency of Hilla Liman.
However, the PNP government was overthrown in 1981 in a military coup headed by Flt. Lt. Rawlings and replaced by the Provisional National Defence Council (PNDC).
From 1972 onward, inflation gathered momentum and it has been described in political parlance as a period of “acceleration towards the abyss”.
The rate of inflation increased persistently between 1972 and 1977 as can be seen in table 1.00 above. In fact, the situation worsened in 1976 and in subsequent years, Ghana’s inflation could truly be termed as galloping since it was assuming triple digits.
In discussing the causes of inflation during the late 1970s and early 1980s, the Central Bureau of Statistics put the blame squarely on the ‘huge borrowings by the government from the Central Bank, which continued to increase year after year’. Budget deficits were financed by bank loans to government and parastatals.
This period witnessed persistent budget deficits. In 1972 and 1976, the Deficit-GDP ratio was 6% and 11% respectively
In fact this was the period in which the Bank of Ghana was regarded as a government “printing press” by the various regimes especially the SMC regime. This is because government often resorted to the Bank of Ghana to print money to finance expenditures and budget deficits.
Total money supply by the end of 1981 was about 29 times the level at the end of 1971.
The Bureau cites the worsening supply position of domestic agricultural produce over the decade as another major contributory factor generating the runaway inflation.
Between 1972 and 1981, inflation averaged about 50% while the average for 1977 and 1981 stood at 116.7%.
To curtail inflation these regimes made use of extensive price controls, fixed exchange rate regimes and interest rate controls. This led to economic stagnation and severe shortage of goods and services and this further worsened the inflationary situation in the country.
PNDC and NDC Era - 1982 to 2000
The PNDC came to power in 1982 during which time the Ghanaian economy was in a very bad shape. This was manifested in a declining per capita income, negative growth rate in GDP, huge external deficits, run down in social and economic infrastructure and strong inflationary pressures.
Inflation hit its all time high figure of 122.8% in 1983, the highest since independence. This resulted from the intensive drought and bush fires which destroyed large quantities of food crops in 1983 thereby creating acute food shortage in the country. The situation was further worsened by the influx of Ghanaians from Nigeria in the same period. All these exerted upward pressures on demand for goods and services and on general price levels.
The year 1983 also witnessed an exchange rate overvaluation as well as the development of a buoyant parallel market coupled with other inappropriate policies all of which are contributory factors to the inflationary pressures at the time.
Following the poor economic performance at the time, the PNDC government initiated the Economic Recovery Programme (ERP) in 1983 with the control of inflation being one of the prime objectives. The main components of the ERP included IMF stabilisation policies and policies of World Bank Structural Adjustment Lending and/or Sectoral Adjustment Lending.
Within a year of the ERP, inflation dropped drastically from the all time high of 122.8% in 1983 to 40.2% in 1984 and further fell to 10% in 1985.
The low rate attained in 1985 was due to the good harvest in 1984. Food prices constitute about 50%- 60% of the CPI. An increase in food production exerted downward pressure on food prices and as a result the rate of inflation dropped for the period.
Between 1986 and the end of 2000, inflation remained above the targets set by the government in the ERP. For instance, in 1989, inflation when had fallen from 31.4% to 25.2% was above the target of 15%. In 1990, inflation rose again to 37% and fell in the subsequent year to 18%. It further fell in 1992 to 10.02% which again was above the target of 8%. The further decline in the rate of inflation in 1992 was due to the conscious effort at monetary control by the government and the good harvest in 1991.
The years 1993 and 1994 have different stories to tell. The rate of inflation rose from 10.02% to 27.7% in 1993 and declined to 24.9% in 1994 but rose to 74.4% in 1995, the highest since the inception of the ERP.
The high rate of inflation in 1995 could be explained by the introduction of the Value Added Tax (VAT) by the NDC government which received severe criticisms by a wide spectrum of Ghanaians. The new tax scheme, VAT resulted in prices skyrocketing because the VAT rate was even higher than the existing tax rate, that is, the Sales Tax, which it came to replace.
Inflation however declined continuously between 1996 and 1999 falling from 46.6% in 1996 to 12.6% at end of 1999.
Unfortunately, this decline could not be sustained as the year 2000 ended with a disappointing result on inflation. The year-on-year inflation had increased to 40.5%. This was due to the expansionary monetary policies pursued, the depreciation of the domestic currency which stood at 49.5%, the terms of trade shocks, the general loss in confidence in the Ghanaian economy and the extensive borrowing from the Central Bank in 2000 probably to finance the election.
Overall, the PNDC-NDC regime witnessed fluctuating results in the rate of inflation with the first quarter of their administration recording the highest rate of inflation since independence.
New Patriotic Party Era - 2001 to date
For the first time in Ghana’s history, a democratically elected government, the NDC handed over the helm of affairs of the country to another democratically elected government, the NPP in January 2001.
As at the end of the first quarter of the year 2001 (i.e. three months into the first year of the NPP government), inflation had increased to 41.9% from 40.5% as at the end of December 2000. This was due to the excessive money supply growth in the last quarter of 2000, rundown of local food stocks and the upward adjustment in petroleum prices in February 2001.
However, through prudent fiscal management and tight monetary policies coupled with a relatively stable cedi, the NPP government has been able to reduce the year-on-year inflation from 40.5% as at the end of December 2000 to 21.3% as at the end of December 2001, representing a 19.2% decline. This was below the target of 25% set for the end of 2001, the first time an actual inflation rate fell below the target. Remarkably, the rate of inflation has further been reduced to 10.5% as at end of December 2006, which is a narrow miss of the single digit target that is set for the period.
The NPP government like other industrialised countries such as Canada, New Zealand, Spain, Sweden, Australia, and the United Kingdom and among others adopted Inflation Targeting in 2001 as a stabilisation policy pursued with the aim of controlling inflation. This has yielded the favourable results during the NPP administration in the fight against inflation in Ghana.
Inflation targeting is an economic policy in which a Central Bank estimates and makes public a projected or “target” inflation rate and then attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools. The targets are often set as range or point. However, when these are set, unexpected changes such as fuel price changes which tend to affect a whole range of activities can bring deviations from the target.
Inflation targeting thrives on the independence of the Central Bank in conducting monetary policy which includes the freedom to use its available instruments in achieving its inflation target with little or no government borrowing from the Central Bank.
It also relies on the technical and institutional capacity of the Central Bank to model and forecast domestic inflation rate, predict the time lag between monetary tools and their effect on inflation rate and have a well informed view of the relative effectiveness of the various instruments of the monetary policy.
With the commitment of the NPP administration to reducing inflation to a low and stable level, the government enacted the Bank of Ghana Act 2002 (Act 612). The Act redefined the objective of the Central Bank to be essentially price stability and granted the Central Bank some degree of independence. The Act also established the Monetary Policy Committee (MPC) of the Bank of Ghana and mandates the MPC to formulate and implement policy in the areas of money, banking and credit with the main aim of maintaining stable prices conducive to a balanced and stable economic growth.
Based on the Act, the Bank of Ghana is to implement monetary policy that would switch the economy from a regime of high inflation, high interest rate and exchange rate depreciation to a regime of low inflation and low interest rate with exchange rate stability.
The Bank of Ghana, unlike other independent Central Banks has not adopted an explicit inflation targeting framework, where the Central Bank in collaboration with the government announces to the public, its inflation target and is bound by law to explain to the public any reasons for missing the target in any particular period. Transparency through full disclosure in its dealings to the general public is also a critical aspect of explicit inflation targeting. This is in exchange for the independence that is granted the Central Bank under the framework. The Central Bank targets its forecast of inflation over a horizon and interest rate policy is fashioned out to react to deviations between forecasted and actual inflation over the policy horizon.
The current inflation target used by the Bank of Ghana is set jointly by the Central Bank and the Ministry of Finance and Economic Planning. The Central Bank in its quest to achieve the targeted inflation uses the prime rate as its key policy instrument for monetary policy.
With the adoption of inflation targeting, the NPP government has been able to bring down inflation to lower levels as inflation in Ghana now hardly rises above 20%.
In line with the broad objective of Ghana’s medium term Economic Programme, the NPP government set an inflation target of 13% by end of 2002. To meet the set target, the NPP government together with the monetary authorities continued with the prudent fiscal management and the tight monetary policy stance initiated in 2001. These measures coupled with the slow pace of depreciation of the cedi led to a deceleration on the year-on-year inflation rate from 21.3% in 2001 to 15.2% as at the end of December 2002. This time, the actual rate of inflation rose above the target set for the period.
In 2003, the Finance Minister in his budget statement to Parliament indicated that the NPP government had targeted a 9% year-on-year inflation at the end of 2003. This was also influenced by commitments towards achieving the targets set within the West Africa Momentary Zone (WAMZ) convergence criteria that would eventually lead to five West African countries (Gambia, Nigeria, Ghana, Guinea and Sierra Leone) adopting a common currency, the Eco.
However, at the end of the year, inflation stood at 23.6%, far above the target for the period. This was due to the adjustments and corrective measures instituted in the petroleum sector of the economy. There was 100% adjustment in petroleum prices in January 2003 resulting in distortions in general prices. This escalated the rate of inflation to its peak of 30% in April, but sustained implementation of the fiscal framework along with prudent monetary management implemented by the Bank of Ghana reduced inflation to 23.3% at end-December 2003.
The year 2004 was an election year and a very challenging one for the monetary authorities in view of the history of excessive fiscal deficits accumulated through expansionary monetary policy that give rise to price increases and exchange rate volatility in the run-up to elections. The NPP government was voted back into power for yet another four year team.
However, due to prudent monetary management by the Bank of Ghana and the NPP government, coupled with improved prices in the non-food component of the CPI, led to a decline in inflation to 11.8%, a further miss of the single digit target. There was also exchange rate stability coupled with a decline in the prime rate which was introduced during the NPP government in 2002 to replace the bank rate. This reflected in a fall in interest rates which is a boost to investments and overall output in the economy.
The early months of post-election years are often charactised by rising inflation and exchange rate instability mainly due to fiscal deficits accumulated through expansionary monetary policy in the latter part of the preceding year. However, macroeconomic stability remained central to government as seen in the inflation and monetary growth targets for the period.
In order to achieve the stability necessary for accelerated growth and poverty reduction, government proposed to reduce the end of period inflation to 13.5% by December 2005 and gradually moves towards a single digit rate by end 2006.
However, due to petroleum price adjustments within the year under review, the growth in money supply and the appreciation of the cedi by 9.98%, the rate of inflation as at end of December 2005 was 14.8%, overshooting the target of 13.5%.
In 2006, inflation hit the single digit mark in the months of March and April, but the year ended with a 10.50% rate of inflation. The yearly average for 2006 is 10.96% which is a narrow miss of the single digit target that the NPP government want to attain to be able to meet the WAMZ convergence criteria.
Conclusion
On the whole, the NPP administration so far has been able to tame inflation within limits though they have not been able to hit the targets except in 2001. The adoption of inflation targeting has yielded favourable results in the fight against inflation during the NPP administration because this has helped brought inflation down to below 20%. The average inflation rate for the NPP regime is lower compared to the PNDC-NDC era. This is because of high inflationary pressures in 1983 and in 1995. The “Printing Press” regime has rather high average rate of inflation compared to the NPP regime. However, comparing these three regimes to the Busia regime, there is a marked difference because the Busia era recorded single digit inflation rates throughout except in his last year in 1972, when inflation went up to 10.1%. The average inflation rate for the entire regime is 5.2%.
The CPP era has recorded the lowest rate of inflation since independence. This was in 1962 when inflation was as low as 1.7%. Inflation generally was low during the CPP era except in 1965 when the economy nearly went off track due to inappropriate policies.
In assessing the inflationary situation in Ghana, and comparing it to other parts of the world, it can objectively be said that Ghana still has a long way to go. Even within Africa, Ghana is far behind. For instance, inflation in Libya is low, averaging 0.9% between 2003 and 2005. In the same period, the annual average rate of inflation for Cameroon is 1.5%. The average for Ghana in the same period is 16.63% which is quite higher. South Africa in the same period has an annual average inflation rate of 3.4%. In Africa, we can only be said to be far better than Zimbabwe in the fight against inflation.
The rate of inflation in Zimbabwe is more than 1000%, the highest in the world, according to the International Monetary Fund. Between 2003 and 2005, China has an average annual inflation rate of 2.3%. A country like Japan has been in deflation between 1999 and 2004 with an average deflation rate of -0.6%.
In this regard, Ghana really has to tighten her belt in the fight against inflation. It is not impossible to attain the single digit mark. All we need is prudent monetary management and fiscal discipline. It is the attempt to finance our persistent budget deficits that often prompt the need for monetary expansion, a policy which is inflationary.
We also need to devise measures to increase agricultural production especially food. It is evident that during periods of good harvest, inflation declines drastically and vice versa during periods of poor harvest as manifested in 1983. This is because food items constitute a significant part of the CPI and therefore food shortages can be critical in the fight against inflation in Ghana.
References:
M.M Hug (1989). The Economy of Ghana
ISSER (2001-2005). The State of the Ghanaian Economy
Emmanuel A. Codjoe (2004). Inflation in Ghana
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