Strict expenditure policy is at the heart of fiscal strategy
THE GOVERNMENT IS FOCUSED ON IMPROVING THE LIVES OF ORDINARY PEOPLE AND IS WORKING HARD TO STABILIZE PRICES AND REDUCE INTEREST RATES

Ghana is looking to diversify and deepen its financial sector under a new strategic plan, as it seeks to play a leading role in west Africa.
It is looking to integrate with the global financial system by strengthening its indigenous banking sector, capital market and non-bank finance institutions. The government is also seeking its first sovereign credit rating from Standard & Poor’s to improve access to international lending.

At the heart of the financial sector reform process is sound management of the economy. Since the Kufuor administration took office in January 2001, it has made a concerted effort to rein in fiscal and monetary policy in a bid to curb inflation, drive down interest rates, and control debt.
Inflation fell from over 40% in 2001 to 21% by the end of that year, and then to 12.9% in September 2002, before edging up again to 15% by the end of 2002. Interest rates have also followed a downward curve. The figure is still too high, say analysts, but there are signs that the economy is now under control.

YAW OSAFO-MAAFO Minister of Finance

Finance Minister Yaw Osafo-Maafo says these things are making an important difference in the lives of ordinary people. “Inflation is the enemy of the poor,” he says. “If you are able to stabilize prices, you will maintain the poor’s purchasing power. We are doing this through controlling government expenditure and money supply. The Bank of Ghana is also doing very well with monetary policy.”

Externally, strong commodity prices in gold and cocoa have boosted foreign exchange reserves. Debt levels are also more sustainable, in part through savings under the IMF and World Bank’s Heavily Indebted Poor Countries initiative. Such savings translate into more funding for essential social programs such as health care and education.

PAUL ACQUAH Governor of the Bank of Ghana

Paul Acquah, Governor of the Bank of Ghana, says these positive developments must, however, be viewed in the context of uncertainty surrounding Iraq and the prospect of a major hike in oil prices. As an oil importer, Ghana is watching the markets closely. “This means that the combination of positive and negative pressures has to be managed,” he says.

Nevertheless, initial growth forecasts for 2003 are encouraging at around 4.7%, and the expectations are that interest rates will continue to fall, improving the climate for business and investment.
“We hope to achieve a good balance between interest rates and inflation to underpin the delicate equilibrium of economic growth and stabilization,” Mr. Acquah adds.

The Ghanaian banking sector is also undergoing reform. At present, the country has 17 banks, including a dominant group of some five institutions. In addition, there are around 114 small rural banks which cater for the more remote, rural communities.

AT PRESENT there are 17 national banks and some 114 small rural operations, but liberalization should see a process of consolidation which will help create a stronger banking sector

Mr. Acquah says the authorities recently changed licensing regulations so that an organization can now obtain a universal banking license which entitles it to engage in retail, merchant, and development banking. In the future, he believes, smaller banks will consolidate, which is healthy for the banking system overall and will reduce systematic risks. “The banks have been doing pretty well, but we also recognize that there is a need for financial and capital deepening. Therefore we have been encouraging banks to increase their capital and to encourage strong banks to come to Ghana.”

The Bank of Ghana is eager to see more financial support for the private sector. In the past, the natural preference was to invest in safe assets such as government treasury bills. With the improved macroeconomic climate, banks need to embrace new risks.
Mr. Acquah says that local banks are still a little cautious. With the stabilization of the economy and a policy of fiscal consolidation, however, the public sector will have to borrow less from the banking system, which will release more resources for lending to the private sector.

“The banks would find it in their own self-interest to begin to look for credit-worthy borrowers to lend to,” he says. “There is certainly a need for the banks to be proactive in cultivating a solid client base.” This is what will ultimately drive profitability in the banking sector in the long run, he adds.
Ghana has become a temporary haven for investors, financial capital and skilled labor, due to the situation in troubled Ivory Coast, but it must learn to stand on its own merits. Mr. Acquah says a nation cannot formulate a robust growth strategy based on the misfortune of others. “Attracting capital is very tricky,” he says. “Unless you lay a foundation for solid growth, you cannot achieve anything significant and durable.”