In the past two years there has been a sharp increase in inflationary rates. We interviewed Minister Osafo-Marfo, who set the target for the end of year inflation to be 25%. How do you expect to reach this ambitious target?
I don't think the target is ambitious if you consider the effect of money supply on inflation last year.The Bank of Ghana uses two definitions for money supply: - money supply that affects only the stock of the local currency (M2); and - money supply when foreign currency deposits are included (M2+).The growth in M2 and M2+ as at the end of last year was 23% and 40% respectively. The higher growth in M2+ could be attributed to the growth in the cedi equivalent of its foreign currency component. That is through the depreciation of the cedi.The same pattern was reflected in the Consumer Price Index (CPI) last year. The increase in the non-food index was higher than in the food index, reflecting the weakness of the cedi as the main driving force behind inflation last year.We have started seeing some stability in the cedi exchange rate since the beginning of the year.This could mean a lower growth in M2+ this year and hence its impact on inflation. Thus measures to ensure stability of the cedi and fiscal discipline will be pursued to enable us achieve the target.
Do you believe you will perform even better?
All I can say is that the target is achievable.In 1997 money supply growth was 40% but dropped to 17.6% in 1998. Depending on how the economy is managed this year, the 25% target for the rate of inflation should be achievable.
What are your expectations on the future evolution of interest rates, which are currently regarded as quite high?
Interest rates are quite high at the moment. The current level of inflation does not encourage domestic savings. The investing public may be interested in the real interest rate on their savings. Currently, using the inflation rate of 40% and the interest equivalent on the 91-day treasury bill which is about 46%, one obtains a real return of 6%, which is common for any other country.The reality is that a drop in interest rates always follows a decline in the inflation rate with a lag.For example in 1998, inflation dropped causing a decline in interest rates by May 1999. We expect the same pattern between now and the first quarter of 2002.
So far what have been the main objectives of the Central Bank?
The Central Bank has three main objectives:- curbing inflation; - ensuring stability in the financial system; and - ensuring an efficient payment system.Achieving these three objectives will ensure macro economic stability, a requirement for private sector development.In such an environment, inflation and for that matter interest rates will go down affording private sector easy access to credit to enhance their operations.
Currently Ghana is facing more or less a cash-based economy under which it is more difficult for the Central Bank to exercise its monetary policy.How do you intend reducing the excess cash in the economy?
At the moment, the Ghanaian economy is unfortunately used to handling cash. We are trying to ensure that cheques and other non-cash payment instruments become more acceptable. For example, the cheque clearing cycle has been considerably reduced and some banks have been authorised to issue pre-paid cards to their customers. These cards can be used at designated points of sale to effect payments depending on the amount loaded on them. Hopefully these measures put in place will help reduce the reliance on cash in the system.
Currently the Central Bank requires a very high minimum cash resource from the Commercial Banks, which restricts their power to lend money. Are you planning to make any changes in this policy?
Commercial banks are legally required to keep 9% of their deposits (including foreign currency deposits) as cash with the Central Bank. This may appear to be on the high side but given the current inflationary situation the Bank of Ghana considers the present level of primary reserves appropriate. As conditions improve we expect steps will be taken to review the policy.In addition the commercial banks are required to invest an additional 35% of their deposit holdings in Government paper as secondary reserves. An examination of the banks' portfolio indicates that they have exceeded the 35% requirement. The fact that the banks are able to exceed the minimum secondary reserve requirement and also operate their normal transactions mean they find investing in Government paper lucrative. It is not mandatory for them to exceed the 35% requirement, but it is their decision. The Central Bank cannot be blamed for this.
In your last interview with Forbes Global you said that you were trying to bring banking to the doorstep of the broadest section of the society. This is being done by promoting entry into the industry and encouraging extension of bank branches to rural areas. For the past two years, what progress has been made in regard to these policies?
We have made tremendous progress. Banks have become more competitive than ever before. They are now open for longer hours on normal working days. They are even asking to open on Saturdays. We shall look at this request later on but for now, they close at 2.30 p.m. every day. Presently, our aim is to ensure that international standards are achieved in our banking sector. | The West African Monetary Institute is the body created to handle the technical preparations towards the setting up of the West African Central Bank.Who are the members of this institute?
Nigeria, Ghana, Sierra Leone, Gambia, Liberia and Guinea. It includes basically, all the countries outside the CFA Franc Zone.
What is the timeline for the West African Central Bank's implementation?
Prospective members are expected to meet the convergence criteria for membership. These include:- a limit on central bank financing of the budget deficit;- a single digit inflation; and- a limit on currency depreciation.The group is expected to use a single currency by the year 2003.
Do you think that by the year 2003 you will be able to meet the criteria?
That is quite ambitious. We are working towards it, but it is ambitious.
What do you expect the contribution of the West African Monetary Zone to be for the development of West Africa?
Well we can take the example of the European Union. It is a vision that we have conceived and are working towards. This is a vision that has reached the execution stage. As to the time frame for the realisation of the vision, I cannot tell, but we are working towards it.We know the importance of a single currency and its use in various economies.Among others, it will help in achieving macroeconomic stability and promote growth in the member countries. The problem is how to achieve it, hence the need for adopting stringent measures.
The Government is committed to strengthening the ability of the Central Bank to control and strengthen monetary stability by using financial tools while ensuring that the private sector that owns and manages its institutions and/or the Bank of Ghana does not intervene. Will these changes affect the relation between the central bank and the private sector?
Independence will enable the central bank pursue monetary policy efficiently without any interference. It means that our objective of achieving currency stability could be attained without any interference. A single currency and lower inflation rate will benefit the private sector in the long run in that interest rates will eventually fall.Thus the idea of independence for the Central Bank is to enable it pursue policies that will ensure a stable currency.
Besides the “Private Enterprise and Export Development (PEED)” project, what programs has the Bank of Ghana implemented to promote foreign investment?
The trend in modern Central Banking is to move away from commercial banking activities, but we still have a few balances under the PEED. Funds for the PEED project were sourced from the World Bank for on lending through the Exim Guarantee, which belongs to the Bank of Ghana and other financial institutions in Ghana. Apart from that, we do not have any other programs like the PEED.
In your opinion, which sectors of the economy are the strongest in Ghana?
In terms of employment agriculture is the strongest, but in terms of economic growth, the financial and services sector has shown tremendous growth. The target of this government is to ensure that the agricultural and industrial sectors grow rapidly.
What are your expectations for Ghana's economy?
Due to currency stabilisation and measures put in place to strengthen the economy after last year crisis, we expect the economy to grow.
What final message would you address to the international community?
The Ghanaian economy is achieving stability – inflation is falling, the currency is stable as well as the political environment. This is what investors all over the world are looking for. Now is the right time to invest in Ghana. |
V.I.P. INTERVIEWS 
