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20.08.2005 Press Review

Editorial: IMF Should Allow Us To Borrow Commercially


IN his recent interview on Gabby's Airtime, John Page, the Chief Economist of the World Bank for Africa Region said that the Bank did not believe the Ghana Government should go on the international market to borrow to finance her development. This is the rigid position taken by the International Monetary Fund against Ghana borrowing money, on what is termed nonconcessional terms.

What is clear is that Government officials do not agree with this stance by their so-called development partners. Yet, so far, what is also clear is that Government has not been able to convince its partners about the merit of its argument. Obediently, Ghana is observing this zero ceiling on nonconcessional debt, while maintaining that this conditionality would have been needed under economic circumstances vastly different from those under which the economy now operates.

Whereas there are several variables to determine what a nonconcessional loan is, the loan must not be more than $100 million and the annual interest must not exceed 7 percent. Also, the grace period and redemption period must be similar to that offered by our donor partners.

It is easy to see this check as in our own self-interest to ensure Ghana does not fall back into the debt cycle.

But, it is more importantly true that this check also places a serious check on our ability to develop, create wealth and reduce poverty.

There is hope that after debt cancellation and G8 promises, Ghana's annual foreign aid may double. Yet, this is not expected to hit beyond the $2 billion mark. Already, our poverty reduction strategy paper was slashed from $8 billion to about $2 billion for being “impractical.” President Kufuor has said he needs an extra $2 billion a year for the next three or four years to undertake his Government's infrastructural development plans.

He has B+ sovereign credit rating from Standard and Poors, plus B rating from Fitch. Yet, he has been stopped for the foreseeable future from entering the money market to borrow.

The latest report from the Fund even admits that we are off course in achieving half of the eight Millennium Development Goals. For the next three years, it estimates that our GDP growth would not reach 6% per year. The Bank suggests Africa needs at least a 7% growth rate between now and 2015. The Fund estimates Ghana to achieve an average growth rate of 5.5% between 2009 and 2023.

Are these figures enough to get Ghana to create the wealth needed to reduce poverty in convenient time? Obviously not.

We will urge Government to sharpen its negotiation skills and impress upon its donors the need to be allowed to go to the money market. Nowadays, interest rates hover around two to five percentage points above Libor. With a relatively sustainable debt profile, once the commercial loans contracted are for propping up the productive sectors of the economy, and they are utilised efficiently, it would be difficult to envisage our inability to settle.

The fundamental issue is one of expanding the economic base of Ghana. Crucial to this is heavy investment in infrastructure. Government would have to continue carrying this investment burden until the infrastructure is large and efficient enough to support the expansion of economic activity nationwide to significantly enhance incomes.

We plead with our development partners to give us the room to actualise real growth. If it means making the efficient monitoring of received funds a stringent conditionality so be it. Frankly, the nation needs that and Government must be persuaded to do more on that front. But, please allow us to grow and grow healthy.

Dr Acquah: Banks' stability crucial to ECOWAS

THE Guest Speaker at the maiden Annual Lecture of the Association of Corporate Affairs Managers of Banks (ACAMB) in Nigeria, the Governor of the Bank of Ghana, Paul A Acquah has underlined the significant contribution of banks to the economic growth and integration in the West African sub-region.

Speaking at Abuja on August 12, Dr Acquah said to an audience which included Alhaji Atiku Abubakar, Vice President of the Federal Republic of Nigeria, that “the banking profession, and certainly, central bank Governors have a critical interest in the unfolding process of economic and monetary integration in the sub-region and in the entire monetary cooperation arrangements that envisage a single currency and a single African Central Bank for the continent.”

He supported his point with two recent events, which he said, placed bankers, and “especially those in policy making and management positions squarely in the eye of the storm.” In May this year, the Authority of Heads of States of the West African Monetary Zone (WAMZ) reviewed progress made under the single currency project and decided to set a new date of December 2009, instead of July 2005 that has just passed, for the launch of the single currency for the region.

The second event was the decision by the Association of African Central Bank Governors to harmonize convergence targets and time frames and speeds of adjustments under the five regional cooperation programs in Africa to achieve monetary union at the continental level.

Referring to today's interdependent economic environment, he stated that, “As we prepare to allow capital to move freely across our borders in the sub-region, in a single monetary space, we should be mindful that all our countries will be open to financial crisis whether originating locally or abroad. The challenging task is how do we ensure that the Banking/financial system is stable and seek to avert crisis particularly in a regime of capital account liberalization, which is one key objective of the WAMZ project.”

He, therefore, stressed the fundamental interest of every economy to have a well regulated financial system, underlining the imperative for the sub-region to adopt international standards of best practice in the regulation of “our financial system along with the necessary best practice and standards of transparency in other areas of financial management.”

“What can bankers do?” he asked rhetorically. The answer, he said, was to have and maintain strong financial institutions operating in a stable macroeconomic environment are the bedrock of financial stability. “Strong financial institutions typically have a strong capital base well aligned to their risk profile; with quality portfolios of assets, high accounting standards, and robust balance sheets; and they have a culture of timely disclosure of information and submit to the discipline of the market. They are assets for their managers and shareholders. Such institutions are less vulnerable to external shocks and are therefore a source of resilience for an economy.” Urging banking regulators to be firm in order to help achieve financial stability in the sub-region, Dr Acquah added that regulators also have to be forward looking in setting the regulatory framework. “The dynamics of the market today is such that banks and other financial institutions develop a wide variety of financial products with increasing frequency; and so the regulatory framework has to be adaptable to meet the changing demands on the banks and the financial system. For example, a minimum capital requirement that may appear to be sufficient today might be woefully inadequate tomorrow and regulators have to consistently prepare to deal with such developments in the financial system.”

He said, many of the countries in the sub-region have had their share of banking difficulties, with distressed banks weighed down by the burden of non-performing loans. The root cause of the problem, he said, for the most part is macroeconomic instability. “Most of our economies are emerging from a historical past where the norm was a situation of high and variable inflation and volatile exchange rates, with all the distortions and attendant risks which have affected banks.”

He said, bankers in the sub-region “have started addressing most of the structural problems and other distorting legacies in our economic systems and forging ahead, consolidating macroeconomic gains.”

This, he said, “should serve as a healthy environment for the financial sector to operate, and as a durable foundation for growth. And as experience has shown this would only be sustainable in a low inflation environment.”

He described as understandable that as a fundamental pillar of the West African Monetary Zone (WAMZ) single currency project, “our countries Nigeria, Ghana, Sierra Leone, The Gambia and Guinea have committed to placing our economies on the path of low and stable inflation as key to securing macroeconomic convergence.

“This is for good reason beyond the need to keep inflation under control. The union that we envision will be an economic entity that would provide for three freedoms; the free circulation of goods, the free movement of capital, and the free movement of labour, with a unique central bank and with complete fiscal autonomy for each of its member countries.”

He warned that in a monetary union, fiscal deficits can no longer be absorbed under a “no bail out” policy by the central bank. “Without adequate convergence to sustainable fiscal positions, the required adjustment (e.g. through expenditure cuts or tax increases, if there is room) needed by a member to cope with shocks particularly of the asymmetric type might well be implausibly large and politically difficult and a source of tension, if not conflict, in the union.”

While conceding that Member Countries will yield sovereignty over monetary policy to a common central bank and lock into a fixed exchange rate for all zonal transactions, he added that for a commitment to the price stability goal the common central bank will have to be operationally independent of the fiscal authorities of members to be credible and successful.

The convergence criteria for monetary union within the WAMZ, he said, have been designed to encourage countries to pursue disciplined monetary and fiscal policies. “They are essential to set the stage, not only for a single currency but more importantly to build the foundation for successful monetary integration.”

Mentioning some of the impediments on the integration process, Dr Acquah noted that “to date, the barriers to the movement of goods across the sub-region remain formidable and need to be lowered if not removed, and tariffs harmonized within a multilateral framework to give real meaning to the ECOWAS Trade Liberalization Scheme and other protocols.”

The ECOWAS Trade Liberalization protocol, he said, offers a vehicle for and a test of commitment to integration in the sub-region, reminding Banks of the major facilitation role they have to play in enhancing trade within the sub-region.

Some of the potential benefits of monetary integration will be the reduction in transaction costs, the increased size of the market for firms', increased trade within the sub-region, and greater currency stability.

“However,” Dr Acquah warned, “the benefits will only come if we do our home work properly, including implementing the necessary macroeconomic policies and the structural and other policy reforms, and strengthening trade and sectoral linkages that are essential for economic growth in the sub-region.”

He mentioned that with the next phase of the WAMZ project, emphasis is being placed on the harmonization of payments systems, banking laws, statistics, and the liberalization of trade and capital account transactions between member countries. Also distinct time lines have been established for the attainment of clearly specified objectives.

The Association of Corporate Affairs Managers of Banks (ACAMB) is the umbrella body for reputation managers in Nigeria. ACAMB came into being in 1996 because of the problem of negative perception of the banking industry.