BAWUMIA TAKES NOISE OUT OF POLITICAL ECONOMY -- A REVIEW OF MAHAMUDU BAWUMIA’S ‘MONETARY POLICY AND FINANCIAL

The author of this excellent case study on monetary policy and financial reforms in post-colonial Africa is a leading expert on the subject, not only as an academic, but as one of the key policy initiators and operators during a period that saw, arguably, the most comprehensive reforms in Ghana’s financial sector and monetary policy – from 2001-08, when he rose to become Deputy Governor of the Bank of Ghana (2006-2009). Even though, as the running mate to Nana Akufo-Addo (the man who lost by a margin of 0.46% in the 2008 presidential election), for those who do not know, Dr Bawumia gives no indication of his political bias in any part of the 248 pages of his book. He offers analyses that are economic but not political. Yet, Bawumia’s empirical analyses of the concrete realities of the Ghanaian economy since 1957 leave the reader with no option. The facts speak for themselves. Without stating it expressly, the reader would invariably conclude, after spending six hours and some cups of coffee reading the book, on which of the several regimes since independence offered the best economic paradigm for Ghana.
In 2002, with the passing of the Banking Act, 2002, Ghana was revisiting an arrangement, which would have given our development rush the discipline it required after independence, the Bank of Ghana Ordinance of 1957, which established the central bank and provided it with both statutory and operational independence. This independence was lost with the passage of the Bank of Ghana Act, 1963, ushering Ghana into a 45-year period of governmental interference with the nation’s Central Bank, culminating in Ghana’s economic crisis of 2000, and HIPC status in 2001.

While effortlessly suppressing his political bias, what comes clear in the book is the author’s passion for Ghana’s development.

He believes the only way forward is for Ghana to move from a cash-based economy to an electronic payment based economy. He uses a project he engineered, the e-Zwich, to show the possibilities. But, adds that it can only be possible if it is given particular political push. Already, Ghana has taken a leadership role in Africa and around the world in the area of payment system reforms with the implementation of reforms such as the Real Time Gross Settlement System, Central Securities Depository, Codeline Cheque Clearing, Automated Clearing House, E-zwich platform, etc., he says, adding, “The transition from cash to electronic payments is qualitatively similar to the transition from driving on the left to driving on the right hand side of the road in the 1970s. It didn’t just happen. It had to be made to happen.”
He moves on to indicate that to move from a cash-based economy, the banks have to stop being elitist. And, a myriad of policies cannot bring interest rates down unless our saving habits improve and the supply of savings improves. The experience of other more developed economies shows the key to sustainable low interest rates is to increase access of the population to financial services alongside maintaining macroeconomic stability. Macroeconomic stability on its own is insufficient. Part of the solution, he believes, is to rapidly increase the concept of rural banking.

The book effortlessly navigates the reader through empirical-historical and theoretical waters that every Ghanaian government has traveled and concludes by offering top grades to the reform efforts of Dr Kwesi Botchwey and Dr Joe Abbey under Chairman Jerry John Rawlings’ PNDC and Yaw Osafo-Maafo and his team under President John Agyekum Kufuor’s constitutional administration.
He also makes the extra effort beyond describing the aggregate bipolar image in the Ghanaian mirror to call for a national consensus on how to move the Ghanaian economy forward in the right direction. He does this by simply pointing back at the images in the mirror and he seems to be saying, ‘Look, after all, both parties share similar morphological features, underscored by a common economic ancestry and goal to see Ghana either moving forward or bettering.’

The author gives the historical setting for the state capitalism and direct control policies, which continued from the First Republic, right down to 1983.
“In 1949, after a split with the UGCC, Kwame Nkrumah formed the Convention Peoples Party (CPP). The constitution of the CPP stipulated the establishment of ‘a Socialist State in which all men and women shall have equal opportunity and where there shall be no capitalist exploitation’. The CPP was victorious at elections held for the Legislative Assembly in 1951, ushering in a period of “self- government”.

What unfolds is an in-depth review of Ghana’s monetary policy regimes and financial sector deformities and reforms since independence. These include regulatory and legal reforms, capital market and money market reforms, banking reforms, currency redenomination reforms, payment system reforms, rural banking reforms, and Ghana’s debut sovereign bond issue. There are enough facts to kill the cacophony and settle scores on issues of political football, such as, which of the first 18 months of any of the presidential terms has performed best in the last 20 years and; on the use of the $750 million proceeds of Ghana’s maiden sovereign bond issue and redenomination.

The book gives real meaning to the ‘Clintonesque’ slogan, “It’s the economy, stupid!” Without stating it in plain words, it shows with facts and figures how governments have fallen because of bad or harsh economic decisions and how political expediencies have misled the country down the bumpy lane of economic hardships. There have been three kinds of governments in Ghana’s history: constitutional dictatorship, military dictatorship and constitutional democracy. There have been three basic monetary policy regimes, namely, Direct Controls, Monetary Targeting, and Inflation Targeting. In short, Bawumia says, “The monetary policy of direct controls of interest rates and state interference in the banking sector (largely implemented between 1957-1983), only served to reduce saving, did not result in a sustainable expansion in the financial system and enhanced macroeconomic instability.”

Economic policies of the 1957-83 era emphasized controls over interest rates, exchange rates, commodity prices, state ownership of enterprises and import substitution as the vehicles for economic development with social equity. At the time of independence in 1957, the author tells us, “Ghana’s inflation was less than 1 percent and a year later was zero,” by 1965, inflation had short up to 22.7%. This all started to change when exchange controls and import licensing were introduced in 1961 under the Exchange Control Act. The book provides a table to illustrate the fact during this period, the interest rate tool was dormant, remaining fixed at 4.5 percent between 1961 and 1965 even though inflation rose from in 1958 to 6.2 per cent in 1961 and to 22.7 percent in 1965, underlining an artificial situation which only worked to weaken the banking system, the very instruments that were set up to fuel the rapid industrialization programme.
The beauty of this book is in its simplicity and patriotic passion for Ghana’s development. From earlier efforts to accelerate Ghana’s development with urgency, the book warns us that where as Ghana needs to grow, if the balance with funding such a rapid growth without breaking the bank is not found, Ghana would only end up broke and destabilized. Thus, “Nkrumah’s ambitious development program had taken its toll on the economy,” he reminds us.
But, Nkrumah was not alone; the Great Depression and its interventionist remedial measures gave some justification to it, steeped in the then en vogue Keynesian economics of overspend to develop and create jobs, and theoretically grounded on the Singer-Prebisch thesis of the infant industry argument. Before Ghana and along with Ghana, other developing countries in South America and Asia were also pushing Import Substitution Industrialization (ISI). However, it failed in smaller South American countries, such as Honduras and Ecuador and had limited success in Uruguay, Venuzuela and Chile. However, in an Asian Tiger country like South Korea it was subsidized by the United States because of the geo-political strategic interest of America to help build and grow a ‘contention belt’ of capitalist states around Communist China and other Communist countries in the area. The author tells us, Kwame Nkrumah, captured this interventionist consensus of the period when, in 1963, he commented, "Government interference in all matters affecting the economic growth in less developed countries is today a universally accepted principle".
The book also looks at Ghana’s financial sector development and reforms, from the time we thought Government should own banks, including nationalisation of foreign-owned banks, to the time when we were happily inviting Nigerian banks to come in and help improve competition in the sector.

Alhassan Andani, the MD of Stanbic Bank, has described the easy-read-like nature of the book as “Economics for Idiots’, adding, “It takes the noise of politics out of economics”. Simple but informative graphs and tables help this. For example, there is a long table of selected list of divested state enterprises under the Structural Adjustment Programme, implemented under Rawlings.
Bawumia notes, “The total divestiture proceeds for all the 192 state enterprises divested between 1989 and 1999 was the equivalent of some US$747.7 million.” The divestiture included the sale of Government’s interests in Ashanti Goldfields Company, (US$462.4 million), state-owned banks (US$65.2 million) and a 30% strategic stake in Ghana Telecom (US$38 million), Ghana National Trading Corporation (GNTC), State Fishing Corporation, Achimota Breweries Company, Star Hotel, Continental Hotel, Juapong Textiles, Lever Brothers, GIHOC, GHACEM, Aluworks, Neoplan Ghana Ltd, Pioneer Tobacco, Ghana Aluminium, Tema Food Complex etc. What he does not add, however, leaving it for the discerning mind to deduce is that the NPP in 2008 managed to get $900 million for selling some 70 percent of Ghana Telecom to Vodafone, a sale that was criticised by the opposition as a give away, yet, more than the combined receipts of the divestiture of all the listed assets.

What Bawumia shows is that any new Government inherits economic difficulties. It is likely that ordinary Ghanaians celebrated Nkrumah’s overthrow more because of the worsening economic crisis they faced. The three-year National Liberation Council (NLC) faced a situation that contemporary Ghanaians may recognize. It achieved stabilization at the expense of economic growth and jobs. GDP per capita fell by -0.4 percent in 1967 and rose only by 0.7 percent in 1968. Worker discontent with the economic achievements of the regime was reflected by 27 strikes in 1967, 36 in 1968, and 51 in 1969. Bawumia, says, “The strikes significantly undermined support for the regime, and the NLC announced a transition to civilian rule with general elections to be held in 1969.”

However, by 1971 the economy found itself in the same position as it was in 1965 with increasing fiscal and current account deficits, the author says. Like the mid-1960s, the economic situation under Busia’s Second Republic was aggravated by a dramatic drop in cocoa prices in 1971 resulting in a balance of trade deficit. The Progress Party continued the NLC policy of providing incentives for the development of a market economy and privatization. However, monetary policy in the NLC-Busia era was operated, as under the Nkrumah era, under a regime of direct controls. The key difference however was that there was better coordination between fiscal and monetary policy.

The Busia government responded with a devaluation of the cedi by 42 percent in December of 1971. Also a new nationwide tax on development was levied on annual profits above ¢1,000. Bank interest rates were raised, and gasoline prices were increased. Government employees and servicemen lost their discounts for rent and upkeep of cars. Severe cuts in military expenditure was also implemented. “The devaluation and economic difficulties provided the pretext for a coup d’état on 13th January 1972 by the National Redemption Council in 1972 under Colonel I.K. Acheampong,” he reminds us.

Direct control policy continued and, like Busia before him, Hilla Limann’s attempt after 1979 to take unpopular but necessary fiscal and monetary measures resulted in his overthrow on December 31, 1981. He highlights what made direct control appealing to successive governments: “By having a direct control over the financial system, the government could have access to funds more cheaply,” but, as it transpired, not responsibly.

Bawumia, a passionate believer in Ghana’s potential to think big and act big, is opposed to government interference and uses Ghana’s own development experiences and experiments to make the case that state-ownership or reliance on the International Monetary Fund (IMF) and donor support cannot be the solution. He makes the point that one of the keys to dealing with the problem of fiscal dominance and its threat to macroeconomic stability is empowering the private sector to deliver projects and services that can be done more efficiently by it or in partnership with government.
“History was made in 2007 when Ghana issued its debut $750 million Sovereign Bond on the international capital markets, the only Sub-Saharan
African country other than South Africa, and joined only by Egypt and Morocco on the entire continent to do so. The bond issue was successful and was four times oversubscribed,” writes one of the main architects of a move, which effectively freed Ghana from IMF constraints, but only until the NDC regained power in January of 2009.

After the perceived humiliation of having to adopt the HIPC initiative, and its exposure of how dependent the economy was on aid, there was consensus that for Ghana to develop, She “had to move away from aid dependency” which does not appear to have served the country well, especially looking at the growth performance of the economy between 1960 and 2000.”

The author recalls that until the mid-1960s aid was unimportant in Ghana. Where we went wrong then was in turning the state into a producer rather than a facilitator. He isolates the period between 1972-83 for particular criticism as “a decade of consistent poor economic performance, even though this happened under six “different governments, but, all underpinned by a restrictive foreign exchange regime, and quantitative restrictions upon imports and price controls. “The credit control regulations” of pre-1983 Ghana, he argues, “proved to be ineffective because they were flouted by the Government itself, which put pressure on the banks (which were government-owned) to grant loans to state enterprises which were running at losses.”

After 1984, the liberalization process had began, except of course it relied mainly on aid, with Overseas Development Assistance (ODA) being as high as $49.79 per capita in 1991 (in 1987 dollar value). Bawumia makes the case for expanding the funding of Ghana’s development beyond the traditional sources, by saying, “Notwithstanding this considerable amount of aid received in the 1984-2000 period, the economy still ended up as a HIPC economy at the end of 2000. “ The Kufuor government, he informs readers, was “determined to reduce Ghana’s dependency on aid by diversifying financing sources, including developing the domestic capital market and accessing the international capital market.”

The book shows clearly that Chairman Rawlings’ eleven-year regime’s economic performance was far better than the eight years of President Rawlings. This started with the PNDC’s 1983 Budget, announced by Dr. Kwesi Botchwey, the Finance Secretary, which had no choice but to signal the governments' adoption of the very “Washington Consensus” Limann’s PNP attempted to its fatality. But, the author, true to his economic liberalism, says, “This marked the beginning of Ghana's market-oriented Structural Adjustment Programme (SAP). With it, the PNDC moved Ghana away from Kwame Nkrumah’s socialist economic philosophy towards the capitalist free market philosophy that the government railed so much against at its inception.”
An example of the problem is this, “At the onset of the SAP, there was a wide divergence between the parallel market and the official exchange rate of the cedi, reaching some 2,100 percent in 1982.”

By February 1987, the official exchange rates were unified at ¢150/US$. This led to a free fall, as the NDC lost its way and economic growth declined between 1992 and 2000. Thus, by December 2000, a dollar was being bought at ¢7,000.
The author illustrates Ghana’s stag-development with a depressing comparison with South Korea, which had a similar per capita income with Ghana in 1957.
But, Korea is a special case. Like, Ghana, it had abandoned import substitution, when it led to two coups in the 1960s, for export-driven economic development, but supported by America opening its ports for Korean goods.
Over the period 1965 to 1990 the rate of growth of per capita GNP of South Korea was greater than any other country in the world.

Bawumia does not hide his admiration for much of the PNDC’s economic policies. He cites a major plank of the home grown Economic Recovery Program (ERP) and World Bank’s SAP as the rehabilitation and provision of physical infrastructure to help improve productivity, focusing on roads, highways, water, sanitation and electrification projects. GDP growth, which was negative and declining in the three years before the SAP, recorded a remarkable recovery to register an average of some 5.0 percent per annum between 1984 and 1991.

“The turnaround in economic performance was masterminded by technocrats like Dr. Kwesi Botchwey and Dr. J.L.S. Abbey who working within a military (socialist) government, reoriented Ghana onto a path of market reform under the IMF/World Bank SAP and the homegrown ERP (the very path that the Nkrumahist Peoples National Party under the leadership of Dr. Hilla Liman was prevented from pursuing by the 1981 PNDC coup d’état) . This one can imagine was no small feat.,” he writes.

Inflation declined from some 122 percent in 1983 to 10.0 percent by 1991. While, macroeconomic stability was restored between 1984 and 1991 “and the
stability was not attained at the expense of growth,” he underlines.

Where the PNDC failed on the fiscal side was credit to the private sector (as a percentage of GDP) which stayed relatively static during this period, increasing from 3.0 percent in 1984 to 5.6 percent by 1989 and declining subsequently to 3.2 percent by 1991, “reflecting in part the weaknesses and lack of confidence in the financial sector.” It would take another ten years, for a government with which the private sector felt comfortable with, which significantly liberalized the financial sector, for credit to flow and economic growth to quadruple.
Growth however declined after 1991 to 3.7 percent by 2000, stressing the economic failures of the NDC. The decline in growth in 2000 notwithstanding, the growth performance of the 1983-2000 period was a significant improvement over the growth record a decade earlier.

The book also shows clearly that, apart from 2004, every election since 1992 has led to economic instability. In the run up to the 1996 elections, large fiscal slippages occurred again (as in 1992). As in 1992, there was significant erosion in the government’s revenue base. The fiscal stance in 1996 resulted in an overall budget deficit of 9.5 percent of GDP (the same as in 1992). Again, the excessive fiscal expansion in the run-up to the 2000 Presidential and Parliamentary elections tipped the economy into a cycle of inflation and currency depreciation, and this coincided with a sharp deterioration in the commodity terms of trade.

In contrast, “By the end of the first term of the Government in 2004 (an election year) a good measure and a track record of macroeconomic stability had been established. There was sustained disinflation, reduced exchange rate volatility and inflationary expectations.”

By the end of the book, it is clear that the best sustained performance that Ghana has experienced came under President J A Kufuor. On top of that, the 2001-2008 period also saw a significant increase in social spending aimed at protecting the poor and vulnerable in society.
“…one cannot help but notice the irony of the “free-market” oriented NPP government implementing policies that were to some extent more social democratic in orientation on the one hand, and the “social democratic” government of the PNDC/NDC on the other hand adopting a free market approach in the management of the economy under IMF guidance. One can only hope that this is the beginning of the forging of a “Ghanaian Consensus” on the management of the economy across the political divide”.

Thus, there is room for forging a “Ghanaian Consensus” in the area of economic policy.
This book is a must read for all patriotic and nationalistic development oriented Ghanaians and others who want to learn from Ghana’s experiences.

The Reviewer is the Executive Director of the Danquah Institute

Title of book: Monetary Policy and Financial Sector Reform in Africa: Ghana's Experience
Hard Cover ISDN: 978-1-60910-414-6
Paperback ISDN: 978-1-4507-3403-5
©2010 Mahamudu Bawumia
Printed by: Combert Impressions Ltd. 2010

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