Bank of Ghana:  Building Reserves for Rainy Days

Governor of Bank of Ghana, Dr. Ernest Addison

Accra, Ghana, February 11, 2020//-The Bank of Ghana had drawn down on its reserves to manage developments on the foreign exchange market. As explained by the bank’s chief, reserves are held for use when times are not good and then built up as buffers when things improve.

Following the Monetary Policy Committee (MPC) press briefing on Friday, January 31, 2020 by Dr Ernest Addison, Governor of Bank of Ghana (BoG), who is also the Chairman of the MPC, the Press sought clarifications on a number of issues.

Below is an edited transcript of questions by the Press and responses by the Governor.

Questioner: What is your target for Gross International Reserves by mid-year? I am calculating that if you can increase our reserves well enough, it is possible to do maybe a hundred basis points reduction.

I am just looking ahead, possibly if there is enough credibility from the international investment community about our position, looking at how the Moodys report has helped. So sir, what is the target?

I know we are doing the Eurobond issue very soon. What is your target by mid-year and where do you expect to get the inflows to meet it aside the Eurobond?

Governor: If you would recollect a year ago when we met, the Bank of Ghana had drawn down on its reserves to manage developments on the foreign exchange market. As I explained then, reserves are held for use when times are not good and then built up as buffers when things improve.

In 2020, developments on the foreign exchange market reflect the opposite of what happened a year ago with the country building reserves by US$1.4 billion at the end of 2019 compared to the drawdown of over US$600 million same period last year.

So, this really is the one of the policy tools that we have in terms of trying to manage the exchange rate and its impact on inflation.

In addition to that, the nature of Ghana’s export flows also depicts seasonalities, so for instance, you would find out that you would build reserves in the last quarter of the year and then you would end up using those reserves until around August and September the following year when the next cocoa cycle starts.

This is really the history of the seasonalities associated with our reserve inflows. So yes, we expect that between now and September, we would be drawing down on some of the reserves that we have built, but by the time the cocoa season starts, we would also start the cycle of building more reserves.

The Bank tries as much as possible not to go below the minimum threshold that is, three months of import cover. So at least, as of today, we have one-month reserve cover above the minimum threshold, and we must do well to stay within that threshold.

Questioner: What is the level of coordination between the Bank and the Fund?

Recently there have been questions about your current reserve position and what the IMF is putting out. Your position does not align with that of the IMF. What do you have to say about this?

Governor: As you know, we have the Article IV mission from the IMF and there is a lot of coordination between them and us. In terms of performance under the ECF programme, the IMF would set a target on what they call the Net International Reserves (NIR) for the country to meet, so we had some common definitions of these targets.

However, now, we are no longer under the Fund programme and therefore not bound by the IMF’s definitions of NIR. The Bank of Ghana has its definition of NIR in which we include the petroleum funds.

I think this has been the source of the debate over the past year or so. The argument has been that the petroleum funds are not readily available for use but you and I know that if the country has an emergency, we would have to use the petroleum funds.

So technically, it is available to the central bank. Under any serious emergency, we cannot say that because these are petroleum funds we would allow the local currency to depreciate excessively.

This is really the source of diversion between the Fund and the Bank of Ghana, but of course, under the Fund programme we were bound by their definition but now that we are not on the Fund programme, we are not bound by those definitions.

Questioner: I understand that at the last MPC you gave four initiatives to bring down interest rates, especially for SMEs. I would like to know how far you have progressed towards that.

Governor: To the issues of initiatives for SMEs lending, all that we announced was the allocation of two percent of the primary reserve requirements into the Enterprise Credit Fund, which is to be established by the Government.

The modalities for accessing those funds are progressing steadily and hopefully by the next MPC meeting, we should have a clearer view of how the banks can access these resources, which are targeted at SME lending.

Questioner: I have seen a very interesting development in terms of Q1 and the Ghana cedi. Normally you see the pressure coming. Have you already started utilising what you built up, and what are you going to do to stabilise what we have seen so far for Q1, because already there has been forecasts that the cedi is going to depreciate again, but we have seen a very strong performance for Q1.

What are you doing differently? How did the Year of Return contribute to that, or are you waving any magic wand that we do not know about?

Governor: This is the seasonality issue. The seasonalities associated with our foreign exchange inflows are such that you would accumulate by the end of the year, and then you use what you have accumulated to manage the resources until the next cocoa cycle starts.

Yes, in the first quarter of the year, normally because of invoice payments associated with the holidays, there is a stronger demand for foreign exchange.

This year, we are seeing that despite the demand, the Bank of Ghana is in a better position to make foreign exchange available, and that seems to be moderating the impact on the exchange rate as I read earlier in the Press Release.

We are seeing some appreciation of the currency this month, which is partly reflecting that on the supply side, we have a little bit more foreign exchange than a year ago.

Questioner: On the new note, we have already seen certain video flying about, suggesting that people are counterfeiting it. There are also reports about some commercial banks saying they do not want to accept it.

Have all this come to your end, and what are you doing about it since it is legal tender and everyone has to accept it be it commercial banks, business or supermarkets?

Governor: I am not sure that there are major problems with counterfeiting. There have been one or two sightings of the hundred cedi notes without the watermark.

Sometimes the printers do have such errors because of the automation of their processes, but from what we have seen, it is not significant; just a few notes that have turned out to be defective and these have been identified as defective notes from the printer.

In terms of the question of acceptance, I think the level of acceptance has improved. Initially, there were some hiccups associated with the equipment at the various supermarkets in terms of conditioning their equipment to be able to read the notes, but those issues have all been resolved over the past few months. 

Questioner: When you read the recent Economic Intelligence report, they were of the view that inflation has moderated and for that matter, it is likely that the Bank of Ghana is going to slash the policy rate, but that is not what we have seen. Are there certain things that we do not know?

Governor: This is a very good observation, that inflation seems to be within our medium-term target band and based on that the central bank should have gone ahead to cut the policy rate.

That in a sense tells you that we are being cautious, and the reason why we are being cautious is the dependence of our budget on external financing, in particular, non-resident participation in our bond market.

Therefore, it is important to ensure full financing of the budget before taking any decisions that may have implications on budget financing.

If we are unable to get the non-residents to finance the budget, the resources would have to be found from the domestic market with implications for crowding out the private sector and implications for the direction of interest rates.

So yes, the MPC is being cautious and we are adopting almost a wait-and-see attitude. I believe that if conditions continue to be favourable, we should see the policy rate going down, hopefully by the end of the year, that is, if things continue to improve.

Questioner: You said the public debt is now GH¢213 billion. How much of this is in commercials?

Governor: This should be available in the statistical bulletin. As you know, since the end of the HIPC, Ghana’s debt is more commercial and more from the international capital markets.

A little of the debt is from bilateral sources too, but the bulk of our debt is now commercial and from the capital market.

Questioner: You said total export is $15.6 billion. How much of this was retained in the country for 2019? Recently a Databank report that they are expecting inflation to end 2020 by 8.8 percent, is that what we should see or we should expect something different?

Governor: This is an important question on the improvement in the export and trade balance because we are seeing all these improvements in gold export and oil export, which are positively influencing the trade balance.

We have a trade surplus, but the foreign exchange flows associated with oil and gold may not be fully inuring to the benefit of the Ghanaian market and the financial sector.

These issues have been under discussion over the years, and we are trying to ensure that gold exporters repatriate their export earnings through the commercial banks to the benefit of the economy.

We are monitoring and would, may be in the future, publish the retention rate of the data that we have received from the commercial banks.

The inflation forecast of 8.8 percent is within our inflation medium-term target band, so we do not have a problem with that.

Questioner: With Brexit, what do you think are the implications for Ghana and what steps are the Bank of Ghana taking, on the monetary side, to take advantage of or at least ameliorate the challenges which we expect to arise?

Governor: It is a little too early to say. I mean essentially, the main channels are our trade partners in Europe and in the UK, in particular, I am not sure that would significantly affect our exports to the EU, for example.

Therefore, this is something that we need a little bit more time to ascertain the potential impact on our economy. At this time, we do not see that as a major source of instability to our balance of payments, and as I said, even at the global front, Brexit is not expected to change the global outlook significantly.

Questioner: We have done one year of the banking sector reforms and the recapitalisation. One of the things we heard in the run up to the recapitalisation was that it was going to encourage big-ticket transactions and more lending to the private sector. One year on, what have you seen regarding this particular expectation?

Governor: We are seeing very robust credit growth and we are seeing a jump in new advances, as I read from the Press Release. The capacity of banks to lend was one of the expectations for the recapitalisation and it seems to be manifesting based on the data that we have seen as at the end of 2019.

We need to get a little more granular data to see what the nature of these transactions are, but at the broader macro level, we do know that the capacity of the banks to lend has increased significantly and it is reflecting in the numbers.

Questioner: In the banking sector reforms, I remember you have talked about specialised courts to help with the adjudication of some of these things and I want to know how far with that.

Governor: I do not believe this should be a question to the Governor. Maybe you should find time to interview the Chief Justice who oversees the courts and then you can ask him about that, but it is not for the Governor to decide on specialised courts.

Questioner: I would like to know about the performance of the receivers. We know they have been able to make certain recoveries. How much has come from some of these shareholders whom we were told had contributed to the collapse of some of the banks?

Governor: Regarding the performance of recoveries, yes, the receiver has been able to make some recoveries, but they are not as impressive as we had expected.

The last time I checked about GH¢1.4 billion had been recovered. Now you are looking at the loan portfolio of these banks that were resolved of over GH¢16 billion. So out of this, if you have recovered just GH¢1.4 billion, it tells you that there is a lot of work to be done.

This week we have all seen in the papers that the receivers are beginning to auction vehicles and office equipment and all of that, trying to find more money to resolve or meet some of the requirements for paying depositors’ funds. So yes, the effort is there, progress, however, in terms of the amount of cedis that they are recovering is slow.

Questioner: The deputy finance minister mentioned that Bank of Ghana is buying some gold from small-scale miners. Can you give us more information on that?

Governor: The decision for Bank of Ghana to start buying gold was taken because as a central bank in a country that was producing gold, maybe we needed to strengthen our holdings of gold.

Therefore, that policy decision was taken, and the Bank has put in modalities and working with some of the local buying agents on acquiring that gold. We are currently finalising the arrangement for the refining of that gold.

We have not done any purchase yet. We were about to do that sometime last year and we decided to put that on hold but hopefully, by the middle of this year, that programme will start.

Questioner: The current capital adequacy ratio of banks is 17.5 percent, and as you said, it is still above the 13 percent threshold, but it is also a reduction from the November figure. Should that be a concern?

Governor: Obviously once, it is above the threshold and well-above the threshold, we are not concerned. From month-to-month, you would see variations in the capital adequacy ratio because it is being calculated on a risk-based approach, and on a monthly basis the composition of lending and assets change, so we do not expect that ratio to remain constant. Therefore, it is not a source of concern for us.

Questioner: Part of the directives that you issued at the last MPC meeting touched on how you were going to reduce interest rates by working with the banks. Apart from SME lending, what has been done so far?

Governor: We have implemented some of the measures through moral suasion and the Bank of Ghana met with each of the 23 banks during the last quarter of 2019 in this conference room and got their commitment on lending, the volumes of lending, as well as rates at which they were going to lend.

The feedback that I have had is that it has been very positive and moral suasion is an instrument that the central bank can also use to do these things. We have worked with the banks and the average lending rates we have reported at the current MPC meeting is around 23.6 percent, so yes, there has been some improvement in bringing the lending rates down.

Remember the government bonds are currently priced at 21 percent; those are risk-free instruments and alternative investments for banks. If lending rates are around 23.6 percent and the government’s five-year or seven-year bonds are 21 percent, I think we are doing well in getting the banks to bring their lending rates down.

Questioner: Please I understand you were part of the delegation that went to Nigeria to discuss the ECO. What is government’s current position on the Eco? What are our concerns?

 Governor: This is one of the more complicated developments over the past few months. As you know, the ECOWAS as a region had a programme to adopt a common currency, called the Eco.

The plan for that Eco was to have a unitary common central bank with a flexible exchange rate arrangement. Then, we had Cote d’Ivoire now saying that they are renaming CFA as Eco.

At the meeting called in Abuja to discuss the issue, delegates were not too happy with the fact that the Francophone zone had unilaterally taken the decision to rename the CFA as Eco, because the Eco is not CFA.

The Eco is not supposed to be a fixed exchange currency, and those were the sentiments expressed at that particular meeting.

We still have many unresolved issues regarding reaching the final destination for a common currency. First is the issue of convergence, macroeconomic convergence, which is a prerequisite.

If you look at the data, most of the countries do not meet the prerequisite to enter into the common currency, not to talk about the other complications on agreeing on an exchange rate arrangement or agreeing on where the headquarters would be located or agreeing on whether you are having unitary or federal arrangements for the central bank.

There are many unanswered questions and we think that we need to take our time and try to find solutions to these issues, and this is really the discussions that we had.

Questioner: Following the establishment of the Ghana Deposit Protection Scheme (GDPS) to basically protect depositors, highly placed people have had concerns whether the Managing Director of the GDPS passed the ‘fit and proper’ test because of her previous affiliation with some of the collapsed banks.

What is your response to this?

 Governor: We did our homework before the appointment of the Managing Director for the Ghana Deposit Protection Corporation (GDPC), and we believe that the appointed person was fit and proper. Yes, she did work with UT Bank but remember she left UT Bank two years before the bank was resolved.

The Receiver cleared her; she did not have any major issue outstanding, and as far as the Bank is concerned, she is fit and proper to hold the position of the MD of GDPC.

Questioner: In your speech, you touched on Coronavirus and its effect on the global economy. How serious will this be on the Ghanaian economy?

Governor: As I said, it is too early to be able to say, even at the global front.

Questioner: You have been very prudent with the Management of monetary policy; however, these policies have not necessarily been in sync with fiscal discipline from the Finance Ministry. Do you sometimes get worried or frustrated about this development, seeing that we constantly borrowed money from recurrent expenditure and not necessarily fixed assets and acquisitions?

Governor: I am not sure that is a fair assessment of what has happened. If you look at the past three years, there has been a lot of fiscal consolidation as well.

Both monetary and fiscal policy have worked in tandem to bring inflation down from over 25 percent to where we are today. That could not have been done by monetary policy alone, let us be clear on that.

We have seen a lot of support from the budget and the way the fiscal policy has been run, but we all know that there are also challenges and it is important that we support the fiscal authorities to resolve those challenges.

Questioner: The Bank of Ghana has successfully completed a two-year cleanup and of course capitalisation reform. Is the reform process going to continue?

Governor: We announced that the cleanup was over and we are satisfied with the outcome. It was important to allow the market to settle. We expect that given what we had done there would be many improvements.

Already, there are indications that it has been very successful, so we do not intend to continue but we would be keeping a very keen eye on the banks with very strong oversight from our regulation and supervisory activities.

Questioner: The policy rate of the US Fed and the European Central Bank (ECB), which you mentioned were cut twice last year. Is that going to affect our policy rate, because apparently we cut ours once or twice last year?

Governor: On the issue of policy rate synchronisation with the advanced markets, I think it is an interesting question because, yes, as they ease policy, we are also expected to ease, and if they tighten, we may have to tighten because of the linkages through capital flows because we are all competing for the same capital.

This is an important point that you allude to, and the fact that the Fed and the ECB are not tightening policy rate gives us room to be able to eventually lower the policy rate.

Questioner: There was a split about whether or not this decision was going to go up, stable or downwards. The Committee you said decided on ‘Stable’. We do not know how it worked in there, but is it like a unanimous decision, is it a vote?Did everybody have a solid reason for the arguments? I’m just curious.

Governor: The majority was to stay put, let us put it that way. The majority and a strong majority was to stay put on the decision that we took.

Questioner: The president has directed you to work with the Finance Minister to fully repay the depositors’ funds. Ken tells me that is around the region of GH¢4 billion in addition, bringing the clean up to an estimated GH¢20 billion. Clearly, this was not been budgeted for. How do you pay this GH¢4 billion addition to depositors?

Governor: As you rightly put it, the government has decided that we should pay, so you leave it to us and we would pay, but we are not going to pay by printing money as has been suggested, because printing money to do that would not help anybody.

If you print money, you are going to cause inflation; you are going to devalue your currency. At the end, none of us would gain anything out of that so it is important that we are able to resolve this payment without resorting to printing money.

Questioner: I know you have responded to this in the last MPC, whether in the short to medium-term you have plans to revise the current inflation target of 8.0 ± 2 percent, maybe by the close of the year. This keeps coming up, so can you please tell us more?

Governor: I had said at the last MPC press briefing that in view of our trading partner inflation rates, which are significantly lower than the 8 percent, we lose competitiveness if we are to focus on 8 percent as our target for inflation.

For that reason, there would be a need to reset a lower inflation target just on the basis of competitiveness, but I do not think that an election year is a good time to reset this policy target, so in the medium term, maybe 2021 to 2024, we may have to look at that issue.

Transcribed by the Communications Department of the Bank of Ghana

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