National banks can save Ghanaian economy

Ghana’s banks are helping to get the economy back on track despite high inflation rates and a weakening currency

 
National banks can save Ghanaian economy
People shop in downtown Accra, Ghana 
Author: Dr Kwame Baah-Nuakoh, Senior Vice President, The Royal Bank
May 15, 2017

In March 1957, Ghana became the first sub-Saharan state to free itself from colonialism, and has since weathered political upheaval and economic turbulence, ultimately growing into a highly functioning democracy. The nation saw an end to military rule in 1992, and has since enjoyed 25 years of good governance and relative stability. Over the last quarter century, Ghana has emerged as a west African powerhouse, boasting a rich history and one of the highest GDPs per capita of any nation in the region (see Fig 1).

With several peaceful transitions of power now under its belt, Ghana’s firm commitment to democracy has strengthened its economy and created a stable business climate. In 2010, the World Bank reclassified Ghana as a lower-middle income country, in recognition of its falling poverty levels and flourishing economy. In recent years, the nation has successfully exploited its rich natural resources and has expanded into oil production, with its offshore fields now running close to target levels. With an estimated 700 million barrels worth of oil reserves, Ghana’s fledgling oil industry is set to boost economic growth even further.

Despite these aspirational oil ambitions, however, the Ghanaian economy is suffering a significant slowdown. High inflation, a weakening currency and a large public deficit led to an economic crisis, forcing Ghana to seek a $920m bailout from the IMF in mid-2015. Amid such economic turmoil, the nation’s banks are now rallying to exert a positive influence on the Ghanaian economy and stimulate growth. By ensuring a strong monetary policy and prudent operational activities, Ghana’s public and private banks may well succeed in turning the struggling economy around.

The role of banks
Since Ghana achieved independence from the UK in 1957, its financial sector has been largely characterised by extensive government intervention. Believing that the financial system it inherited from the colonial period was irreparably flawed, the newly independent government set about implementing financial policies to quicken the pace of Ghanaian development throughout the 1960s. All the banks established in the nation during the 1960s and 1970s were either wholly or majority owned by the public sector, while the government also acquired minority shares in the nation’s two foreign banks, extending its influence over the banking industry.

After two decades of government dominance in the banking sector, the 1980s saw a range of economic reforms that ushered in a newly liberalised era for the industry. The government granted permission for private banks to open, and these new financial institutions fast established themselves as tough competitors to the remaining public sector banks, offering high standards of service and efficiency for customers. Now, the Ghanaian banking sector offers a wide range of financial services, with a combination of universal banks, community banks and non-bank financial institutions providing reliable banking to both urban and rural communities.

Ghana’s banks also play a crucial role in driving the nation’s economy. As financial intermediaries, Ghanaian banks channel funds from savers to borrowers, providing customers with the liquidity they need for investment in productive, profitable enterprises. By stimulating savings and investment, the nation’s banks effectively reduce the loss of capital and boost economic growth. However, while the banking sector has been working to drive growth, the government’s budget deficit has also widened considerably.

With government spending outstripping its incoming revenue, the budget deficit exceeded 10 percent of GDP from 2012 to 2014, before falling to its current level of around seven percent. This substantial public deficit has largely been financed through both domestic and external borrowing by the government, with Ghanaian banks agreeing to invest in high-yielding, risk-free government securities in an attempt to diversify their portfolios. By borrowing more than it can repay, the Ghanaian Government’s ongoing attempts to pay off its bank loans further drove up state expenditure. Despite their best efforts to influence the economy for the better, Ghana’s banks have, by extension, contributed to an increase in public debt.

National influence
Whether it be positive or negative, it is clear the operational activities of banks in Ghana have a significant impact on the nation’s economy. While government borrowing may have increased the already substantial public deficit, banks can also be a force for good. Through responsible manipulation of monetary policy, banks can successfully reduce inflationary pressures, combat currency depreciation and help to tackle the issue of public debt.

Despite a recent drop, the nation’s inflation rate remains high, reaching 13.3 percent in the first month of 2017. For the average Ghanaian, this high level of inflation has a severe impact on their purchasing power, pushing the price of food and other basic commodities out of their weekly budget. As the effects of inflation continue to be profoundly felt among Ghanaian citizens, the nation’s banks are attempting to ease the impact of these high rates and help the economy run smoothly once more.

Ghanaian banks channel
funds from savers to borrowers, providing customers with the liquidity they need for investment in profitable enterprises

Given excessive money supply has driven up inflation in Ghana, its banks are now engaged in an ongoing effort to reduce the use of cash for transaction purposes. In order to dissuade customers from holding large quantities of cash, Ghanaian banks are helping customers access their funds through a range of new services. From online banking to mobile money transfer programs, Ghana’s banks are keen to create a cash-lite society.

With a weakening currency also contributing to rising inflation, Ghanaian banks are dedicated to tackling currency depreciation. In order to ease the pressure on the nation’s domestic currency, Ghana is striving to increase export production so as to welcome more foreign currency in the country. Banks are able to influence export production through collaboration with trade promotion agencies and Ghanaian embassies. Together, the bodies can analyse production activity and successfully identify viable export destinations, resulting in an increase in trade.

In addition to driving up exports, the nation’s banks are also hoping to reduce the country’s reliance on imports by boosting production at home. Rice, for example, constitutes Ghana’s second largest import, costing the nation upwards of $500m annually. However, Ghana has great potential to expand both its rice production area and output; increasing capacity could see the country move towards self-sufficiency in this area. By providing targeted support to clients engaged in import substitution industries, such as rice farming, the nation’s banks can in turn ease the pressure on the weak Ghanaian cedi.

In terms of managing the substantial public deficit and debt, banks can exert a positive influence by ensuring an easy flow of tax revenue into government accounts. Ghanaian banks work alongside the government to streamline import and export procedures, helping the state to obtain the necessary import duties and thus reduce delayed inflows in government revenue.

Furthermore, the nation’s banks currently assist government agencies with linking customers’ bank accounts to national identification databases, house numbers and street names, so as to facilitate domestic tax collections. In this way, Ghanaian banks are helping to ease the challenges of the nation’s pubic deficit by guaranteeing a strong, steady flow of government revenue.

Internal evolution
In addition to tackling macroeconomic challenges such as high inflation and public debt, Ghana’s banks are also making positive changes to their own internal operations. The nation’s central bank, the Bank of Ghana, works with private and public financial institutions to help them cut down on their operational inefficiencies, advising them on how best to determine an appropriate cost for borrowing funds.

A proper and efficient national ID system is crucial to reducing the risks associated with lending

Banks are also able to effectively reduce the probability of customers defaulting on loans by collaborating with government agencies to enforce proper identification and tracking of borrowers. A proper and efficient national ID system is crucial to reducing the risks associated with lending, and a well-worked tracking framework would in turn allow banks to lower their risk premiums on loans. By working with the government to improve identification methods, Ghanaian banks have cut down on their own costs of doing business, while also creating a better value banking system for customers.

The past few years have proved exceptionally testing for both the Ghanaian economy and the country’s banking system. However, following prudent implementation of a strong monetary policy by the nation’s banks, it looks increasingly likely Ghana will experience an economic recovery in 2017, with experts predicting growth will hit 8.7 percent this year. By successfully stimulating growth and effectively tackling the public deficit and debt, Ghana’s banks may just prove to be the key to the nation’s future economic prosperity.