Monetary Policy And Financial Sector Reform In Africa
By Mahamudu Bawumia.
Reviewed by Christian Kitenge Moembo Kingombe.
A very lucid account and assessment of the monetary policy and financial sector reform in Ghana since its independence in 1957. The description and analysis clearly bears the mark of Bank of Ghana insider who played a key role in the design and implementation of many of the reforms while rising through the ranks from Senior Economist in 2000, to Head of Monetary Policy and Financial Stability Department, Chairman of Ghana’s Capital Market Committee, Monetary Policy Committee Member, and finally Deputy Governor in 2006-2008. Dr. Mahamudu Bawumia’s book is essential reading for Bankers, Economists, Policymakers, and Students of economics and finance on the African Continent and beyond interested in gaining an understanding of the practical policy issues involved in monetary policy and financial sector reform in Africa, including the lessons learnt.
Book Outline This book both present and examine the monetary policy and financial sector reform in Ghana since independence in 1957 in the context of developments in the international monetary system. During this 50 or more-year period Ghana has adopted three monetary regimes; direct controls, monetary targeting (indirect monetary instruments) and inflation targeting. Financial sector development and reform has also taken place alongside the monetary policy regimes. These include regulatory and legal reforms, capital market and money market reforms, banking reforms, currency redenomination, reforms, payment system reform, rural banking reforms, and accessing the international capital markets.
Although the book focuses almost exclusively on the Ghanaian experience it also provides a number of interesting comparisons. The author reiterates the classic point that in 1957 Ghana’s income per capita was almost exactly equal to South Korea’s at $490 (in 1980 dollars). Fifty three years later, the World Bank’s purchasing power parity calculations show that South Korea’s gross national income per capita was $28,120 while Ghana’s was at $1,430 at the end of 2008. This basically tells the story that while South Korea has been growing very fast, Ghana has for long periods stagnated. By describing and evaluating the Ghanaian history of monetary regimes and financial reforms, he effectively managed to cover most topics in open-economy macroeconomics (also known as international finance).
The level of exposition is relatively easy to comprehend, since the historical, institutional material and the discussion of policy issues contain no technical notation. From a theoretical perspective, what I found missing was the lack of an upfront chapter 1 introduction providing either a concise or a more comprehensive review of the conceptual and empirical models in modern open-economy macroeconomics and finance equipping the reader to better understand the economic thinking of the Bank of Ghana, which explains its successive choices of monetary policy regime in Ghana, especially since they generally were consistent with accepted economic thinking. However, it is clear as one reads the book that the author aimed to make the book practical rather than theoretical and several chapters do present the underlying perspectives that the Ghanaian decision-makers were confronted with as chapter introductions. The analysis supports the view whether it takes 500 years or 60 years, most policy makers and most of the population will not live long enough to see the desired future Ghanaian economy even though policy actions today will determine the path and timing of its attainment. This implies that there would have to be a significant amount of altruism, selflessness and forward thinking at the heart of policy making in Ghana and Africa today.
Another important view taken by the author is that Ghana’s financial sector reform programme between 2001-2008 was not donor driven. To the extent that donors helped, it was complementary to ongoing efforts. With a lot more domestic ownership of its reform process, Ghana was able to move faster and accomplish a lot in the process. This reinforces the view taken by the author that the quicker Ghana and other African countries can wean themselves from donor dependence on a sustainable basis, the better would be their prospects for development. The preface highlights a number of key issues: People in developing countries like Ghana look at the economic performance of the developed countries and the emerging market economies like China with awe. “Why can’t we have what they have?” Why can’t we have low inflation and low interest rates with exchange rate stability and high economic growth? Moreover, why were these monetary policy regimes adopted? What role did the political economy play in the reforms and outcomes? What was the impact of the different monetary regimes and financial sector reforms on the performance of Ghana’s economy?
The volume consists of 12 chapters of different lengths, which could have been split into 3 or 4 parts (part 1, Ch.1-2; part 2, Ch.3-4; part 3, Ch.5-10; part 4, Ch.11-13), the book attempts to answer by providing a detailed and chronological account of the period during which Ghana adopted three monetary regimes and carried out financial sector development reform. Based on this enlightening and comprehensive treatment of all the various policy issues associated the change in monetary regime and financial sector reform, Dr. Bawumia draws a number of important conclusions. The major lesson from the era of direct controls of prices and interest rates that were largely in place between 1957 and 1983 is that direct controls did not achieve the desired objectives of increasing credit or lowering the cost of borrowing. Direct controls in Ghana rather reduced savings, investment, and growth. Indeed, this book shows a major difference between the Ghanaian and Korean direct control regimes was that the latter mobilized financial resources at controlled prices to support export-led industrialization while the former supported import-substituting industrialization.
On the other hand, the era of indirect monetary instruments in Ghana introduced a more market driven approach to monetary policy but the deviation of monetary growth targets from actual growth rates as well as inflation targets from actual was wide. The major finding is that the inflation targeting regime thus far has delivered the best results in terms of the deviation of inflation from its target as well as the volatility of inflation and other macroeconomic variables. The financial sector reform programme (FINSAP) which was implemented between 1988 and 2000 achieved a great deal. The legal framework for the financial sector was enhanced with the passage of bills. The Financial Sector reforms between 2001 and 2008 under FINSSIP built on these reforms with the goal of addressing many of the constraints in the financial sector and repositioning Ghana’s financial sector as an international financial services center (IFSC) in the sub-region. The wide ranging reforms that were implemented in the 2001-2008 period, resulted in a significant deepening of the financial sector in the 2001-2008 period compared to the 1984-2000 period. Concerning the policy issues, taking the reforms between 2001 and 2008 as the starting point, a number of important lessons learnt are drawn. The ability of the Bank of Ghana and the Government to undertake the wide ranging reforms between 2001 and 2008 was primarily because the reform programme was domestically owned and an independent Bank of Ghana was mandated to drive it. He based this conclusion on the observation that it would be difficult to imagine a Bank of Ghana where Governors in the past constantly had to look over their shoulders with concern about the reaction of political authorities to various initiatives being able to move the financial sector reform process as quickly as the Bank of Ghana did in the 2001-2008.
With its new found independence under a democratic political dispensation, the Bank of Ghana had a clear focus on the type of financial sector it desired and was willing to think outside the box to achieve this. Finally the author takes the innovative view within an African context that without systems and institutions such as: A unique identification number, an address system and financial inclusion (banking the unbanked) in place, no monetary policy framework will be sufficient in the long run to engender the type of financial sector that will be critical in the growth process. He makes the interesting observation that no donors have thus far required that countries put in place Address Systems, Unique IDs, etc. as conditions for aid and African countries would have to do this themselves to be competitive globally. Dr. Bawumia argues forcefully that in the presence of such market failure, there is an important role for the State, working with the private sector, to put in place some of these efficient rules or norms that underpin any modern society or financial system to allow for the efficient functioning of monetary policy and the financial sector within a market economy.
Together with some of the literature that he refers, Dr. Mahamudu Bawumia’s book is sure to be essential reading for bankers, economists, policy makers, students of economics, banking and finance, and practically anyone on the African continent and beyond who wants to find a competent and well-informed discussion on Ghana’s monetary policy and the remarkable financial sector reform process. It contains important lessons for other African countries and is also a rich source of data on Ghana’s economy.