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