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 ITS ROLES, FUNCTIONS AND PERFORMANCE
Following the attainment of political independence in 1957, Ghana decided to establish its own independent central bank. The Bank of Ghana, as it is known, took over the functions of the former West African Currency Board (WACB), which had previous responsibility for issuing currency for the then Gold Coast as well as other British West African colonies- the Gambia, Nigeria and Sierra Leone. The Bank of Ghana Ordinance(1957), charged the Bank with, among other functions: the issue of currency, serving as banker and fiscal agent of Government, regulation of the financial system and, more importantly, to set the framework for independent monetary management, formerly orchestrated from London.
 Monetary Management
The most important orthodox function of the Bank is monetary management. The primary objective of monetary policy is to achieve internal; and external stability. To this end, the Bank has at its disposal a number of instruments which may be manipulated to varying in line with the Bank’s monetary policy stance and objectives. Although the Bank has primary responsibility for the conduct of monetary policy, it exercises this responsibility in ‘consultation with the Ministry of Finance, or the Treasury for that matter’. For the best part of the country’s economic history, Bank of Ghana operated largely a direct-control system of monetary management. This entailed essentially employing direct instruments, basically credit control, regulated interest rates and reserve requirements, to control money supply. The use of direct credit control generally proved ineffective and, indeed, counter-productive. One problem was large borrowings from the banking system to finance government budget deficits. Meanwhile, the imposition of credit ceilings and high reserve requirements on banks severely constrained their capacity to lend as well as limiting their investment avenues. The banks thus resorted to all sorts of practices to recoup their losses. These included imposing high charges for other financial services and generally increasing the transactions costs of banking services. These and other weaknesses associated with the direct control-system of monetary management necessitated major reforms in the conduct of monetary policy in the country. Starting from April, 1983, an Economic Recovery Programme (ERP) was introduced by the Government to address the myriad of economic difficulties facing the country. The ERP entailed a phased introduction of liberal economic policy measures. In line with the new liberal stance, monetary management was also deregulated in phases, culminating in the institutionalization of a market-based system of monetary management by early 1992.
The period 1983-86 was used to prepare the ground for the introduction of the market-based system of monetary policy. The period generally saw the tightening of monetary policy, with increases in interest rates and reserve requirements, among others. Under the new system of monetary management, the Central Ban employs indirect instruments to control money supply. The principal instrument for this purpose is Open Market Operations(OMO), which entails selling (and buying) of securities by the Central Bank.
Between 1988 and 1992, sectoral and global ceilings on lending by banks were removed. Banks have since been free to determine the size and direction of their credit to the economy. Also during 1987/88, interest rates were de-regulated, leaving the banks to quote their own rates on deposits and loans. The Central Bank has continued to set its lead rate, the Bank Rate. This is applied to overdrafts to banks and for the rediscounting of financial instruments.
Starting from April 1997, an innovation was introduced into reserve requirements policy, by inclusion of foreign currency deposits. A new primary reserve ration rate of 8% was imposed on both domestic and foreign currency deposits, while the secondary ratio was pegged at 35%. The purpose of including foreign currency deposits in reserve requirements was to level the playing field and thereby remove any incentive for the mobilization of foreign currency deposits at the expense of domestic deposits. At the same time, a new definition of money supply, including foreign currency deposits, was adopted to increase the Central Bank’s ability to control effective purchasing power, and thereby improve the effectiveness of monetary policy.
Regulation of the Financial System
As part of orthodox role as an agency of regulation, Bank of Ghana exercises supervisory responsibility over the banking system in particular and the financial system as a whole. For this purpose, the Bank has both a Banking Supervision Department and a Financial Institutions(Non-Banking) Department. These departments carry out regular on-site and off-site inspection of the activities of banks and other financial institutions to ensure their compliance with laid-down regulations and standards.
A major initiative to improve the performance of the financial system was launched in 1988 in the context of the Financial Sector Adjustment Programme(FINSAP). The Programme, which was supported financially by the World Bank, sought, among others:
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to enhance the soundness of improving the regulatory framework and strengthening bank supervision.
restructure financially distressed banks through infusion of new capital and management expertise, and
improve resource mobilization and increase the efficiency of credit allocation by the banking system.
In support of the objectives of FINSAP, the Banking Law was amended in 1989 to provide a sound prudential and regulatory base for the banking system. Meanwhile, the Bank of Ghana Law was also amended in 1992 to enhance the regulatory and supervisory role of the Central Bank.
Another major financial policy initiative by the Bank has been the promotion of non-bank financial institutions to enhance financial intermediation. To this end, a Financial Institutions(Non-Banking( Law was enacted in 1993, to regulate the activities of these institutions.
Involvement in the Development of the Economy
Operating in an underdeveloped economic environment, the Bank has not limited its role to the traditional one of regulation only. In fact, the Bank has undergone considerable evolution since its inception to be able to respond to the changing needs of a growing economy. While performing its traditional regulatory functions, the Bank has sought to promote the nation’s overall development process. In this regard, the Bank has assumed further responsibilities, including:
Direct provision of capital for the establishment of specialized and other financial institutions, including Development and Rural Banks;
Provision of credit guarantees to banks to cover loans to small-scale borrowers in agricultural and industrial sectors;
Provision of guarantees to agricultural produce marketing bills discounted by commercial bank; and
Participation in the establishment of specific industrial and agricultural projects in the private sector.
The Way Forward
The Bank intends to continue to improve its performance in the years ahead. In particular, the Bank will continue to pursue policies aimed at ensuring financial and macroeconomic stability.
The Bank will, first and foremost, seek to improve the effectiveness of its monetary management through a more active use of its instruments. The cooperation of Government in reducing budget deficits and avoiding excessive deficit financing will be crucial in this pursuit.
The Bank will also seek to ensure a sound, competitive and efficient financial system. This will require greater vigilance by the bank in ensuring compliance with regulations and established standards by banks and non-banking institutions.
Finally, the Bank will continue to give active support, when necessary in promoting the overall development of the economy. In this regard, the Bank will be careful not to compromise its orthodox regulatory role, and in particular its stabilization objectives.
CONTACT:
The Secretary
Bank of Ghana
P.O. Box 2674 - Accra, Ghana
Tel: 233-21- 666 174-6 / 233-21- 666 902-8
233-21- 662 395 / 233-21- 664 719
Fax: 233-21- 666 299 / 233-21- 666 417
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© World INvestment NEws, 1999.
This is the electronic edition of the special country report on Ghana published in Forbes
December 13th 1999 Issue.
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GHANA
