Kwesi Bekoe Amissah-Arthur: Conduct of monetary policy in a
challenging economic environment
Address by Mr Kwesi Bekoe Amissah-Arthur, Governor of the Bank of Ghana, at the
swearing in ceremony of new executives of the Association of Ghana Industries (AGI), Accra,
14 January 2010.
* * *
Mr. Chairman
Hon. Minister of Trade and Industry
Out-going and In-coming Presidents of the AGI
Togbe Afede and Nii La
Members of Council
Members of the AGI
Distinguished Guests
Ladies and Gentlemen
1. It is a pleasure for me to join this important event of the Ghanaian industrial sector; to
swear in new executives of the Association of Ghana Industries (AGI). The membership of
this association is said to be truly national and representative; spreading across small,
medium and large scale enterprises operating in all sectors of the economy across the entire
country.
2. Let me commend members of the Association for their contribution to Ghana's
economic progress over the years. I hope that your hard work will continue in the coming
years.
3. Mr. Chairman, my address today will focus on the "conduct of monetary policy in a
challenging economic environment". Ghana faces two key economic challenges; the
longterm accelerated growth and development agenda which can only be pursued aggressively
after the challenge of macroeconomic instability has been tackled. Restoring macroeconomic
stability is important given that the global (and indeed our own domestic) economy is
gradually recovering from severe economic imbalances that characterized the past two
years.
4. I will begin by explaining to you the peculiar challenges that confronted monetary
policy, the conduct and role of monetary policy in addressing these, and conclude with an
outlook for 2010.
5. Mr. Chairman, in first half of 2009 major economic challenges confronted businesses,
investors, individuals and policymakers. The rate of inflation which began rising in the last
quarter of 2008 increased consistently in the first six months peaking at 20.7 percent in June,
the highest level in over four years. Between January and June, the cedi depreciated by
17.5 percent against our main reserve currency, the US dollar. Gross international reserves
declined to about 1.9 months of imports cover by June 2009. The deterioration in theses
indices were the results of both global and domestic developments. Dramatic increases in
energy prices, combined with high prices of imported foods, contributed to increases in
inflation. On the domestic front, Government's reaction was to accommodate the shocks by
providing subsidies on oil products, leading to large budget deficits partially financed by the
Central Bank. Clearly these developments signaled an economy in distress, underlying the
urgency of implementing policies to reverse the trend and restore stability.
6. Of the economic challenges, the continuing high inflation was particularly worrisome
due to its impact on fixed income earners, savers, investors and the poor. Rising inflation
creates uncertainty in long-term decision-making, delaying investment decisions and
distorting business plans. Therefore inflation has fundamental implications for long-term
employment and growth.
7. Given the adverse economic conditions just described , the Government had to take
decisions to improve the business environment. As I just stated with respect to inflation,
business decisions are taken with a higher degree of confidence and certainty under stable
economic conditions. Consequently, monetary policy had to be decisive in reducing
uncertainty and turning the economy around towards stability.
8. Mr. Chairman, the primary mandate of the Bank of Ghana is to maintain price stability.
To achieve price stability the Bank has to manage the supply of money. In classical theory,
the control of the money supply is the basis of monetary policy; the process through which
the monetary authority controls the cost of money or interest rates and supply of credit,
thereby influencing inflation, exchange rates and employment levels.
9. Interest rate adjustments influence inflation. Rising interest rates reduces consumption
and Investment thereby dampening aggregate demand. A low interest rate environment
results in the opposite effect, raising consumption and investment; therefore aggregate
demand.
10. Now let me turn my attention to the role of fiscal policy on the effectiveness of
monetary policy. To a large extent, the achievement of a stable interest rate and credit
environment depends on the size of Government borrowing (the Public Sector Borrowing
Requirements or PSBR) and how it is financed. The sources for financing Government
borrowing within the domestic economy are the public and the banking system (whether or
not including the Central Bank). When financed such Government borrowing "crowds out" the
private sector from accessing capital. It is often said that for "every cedi government borrows,
the private sector has one cedi less". But more importantly, the effect of excessive borrowing
is to raise the cost of money.
11. Mr. Chairman, The interest rate policy setting process at the Bank of Ghana is very
extensive. The objective is to gain a comprehensive understanding of the state of the
economy.
12. To do this, we assess developments in the external sector, the state of Government
operations, the banking and financial sectors, the real sector through monitoring business
and consumer confidence, and price conditions in the economy. It includes the analysis of
liquidity, credit, balance of payments, employment levels, and a broad range of other
economic data which helps us to create an index of economic activity.
13. The desire to take account of real sector issues in the monetary policy process results
in the construction of a Composite Index of Economic Activity which estimates the upswings
or downswings in economic activity. This Index incorporates indicators such as construction,
exports, imports, consumption, industrial production, formal employment generation, and
credit to the private sector among others.
14. I need to state that contrary to popular perception the Bank of Ghana does not focus
exclusively on price stability. Some of your members may be aware that we conduct
bi-monthly business surveys on some 45 companies in all sectors of the economy, through
which we collate diverse information from the market.
15. Admittedly, the sample size is small and may not capture the broad concerns of
industry but it provides the Bank with relevant information on industrial performance. I would
therefore use this platform to appeal to the Association to open up its membership database
to the Bank of Ghana for policy purposes. This will provide us with useful information such as
employment trends, rising or falling profitability levels. so we can broaden the critical factors
that inform our decision making.
16. Mr. Chairman, the conduct of monetary policy during the economic challenges of the
first part of 2009 focused on restoring macroeconomic stability. The decision to raise the
prime rate in the first quarter of 2009 was essential. I know that the private sector was not
enthused by the decision but by the second half of the year, there was clear evidence that
the policy initiatives were beginning to take effect.
17. Government's fiscal prudence in 2009 paved the way for significant reduction in the
fiscal deficit. The second half of 2009 was characterized by consistent declines in inflation
from 20.7 percent to 16.9 percent by end November and there are strong indications that
inflation will fall further. The currency stabilized in the foreign exchange markets and even
appreciated against some major currencies. Given these encouraging economic
developments, the Bank of Ghana responded by lowering the prime rate in November,
signaling to the market that the economy was entering into a cycle of declining interest rates.
18. Looking ahead, Mr. Chairman, the Central Bank anticipates a much stronger rebound
in economic activities in 2010. The objective of monetary policy is to foster growth by
encouraging further declines in interest rates as inflation declines and inflation expectations
diminish. This will set the stage for the private sector to access credit at relatively cheaper
costs to pursue productive ventures while the Central Bank works to preserve
macroeconomic and financial stability requisite for economic growth.
19. As we move towards an era of low and stable inflationary environment, access to credit
for productive activities will improve and businesses must begin to map out strategies to
improve efficiency and reduce operating costs in order to stay competitive. I will encourage
the incoming executives of the AGI to promote strategies that will ensure that our local
industries stay competitive especially as the Ghanaian economy continues to integrate into
the global economy.
20. To conclude, let me state that the primary objective of the Central Bank is to pursue
sound monetary and financial policies aimed at price stability and the creation of an enabling
economic environment for sustainable economic growth. Together with members of this
Association and the private sector at large, we must collaborate to achieve the common
objective of sustained economic growth.
21. I wish the new AGI executives good luck as they embark on their period in office.
Thank you.