Ghana needs secure and reliable technological innovations to facilitate economic transformation – Dr. Addison

The Governor of Bank of Ghana (BoG), Dr. Ernest Addison says Ghana needs to ensure that technological innovations are secure and reliable to ensure robust infrastructures are in place in order to facilitate transformation in the economy.

Speaking at this year’s Annual Banker’s Dinner organised by Chartered Institute of Bankers on the theme “The Digital Economy of Ghana – The Strategic Role of the Banking Industry,” he said the banking sector is mostly the main sector in which technological innovations have had the most profound effects.

He explained that digital innovation and transformation have been made more significant during the pandemic.

On the assessment of the economy and banking sector, the Governor said, the country experienced a steady economic recovery from the pandemic effects since the last quarter of 2020 which continued into the year 2021.

The Governor noted, the Bank’s measure of economic activity (the Composite Index of Economic Activity) recorded an annual growth of 11.2 percent in September, compared with 10.8 percent and 4.2 percent in the same periods of 2020 and 2019, respectively.

“For instance, we have seen strong growth and rebound in domestic VAT collections, industrial consumption of electricity, port activity, imports, and air-passenger arrivals. This sustained rebound in economic activity is underpinned by turnaround in both consumer and business sentiments, driven by perceived improvements in economic prospects, although consumers expressed some concerns about current household finances”, the Governor noted.

On the external front, Dr. Addison further noted that Ghana’s external position has continued to remain strong despite a narrowing trade surplus as the economy recovers and imports increase, stressing that, production of key export commodities, Cocoa and Gold remained firm although Oil output fell behind projections.

He continued that, at the same time, higher services outflows continued resulting in a widening of the current account deficit to US$1.9 billion compared with US$1.2 billion in 2020.

According to him, the still supportive policy environment and the effective manner in which government managed the Corona Virus allowed confidence to remain strong in the economy which resulted in higher inflows from foreign direct investments and portfolio flows in addition to IMF SDR allocation.

“All these put together led to a balance of payments surplus of US$1.7 billion, higher than the US$334 million surplus recorded a year ago”, he added.

Dr. Addison said those developments supported the build-up of international reserves to US$10.8 billion (equivalent to 4.9 months of import cover) in October 2021 from US$8.6 billion (representing 4.0 months of import cover) at the end of December 2020 while providing enough cushion in the foreign exchange market as pressures are demanded from corporates, importers, and offshore investors increased since October 2021.

He added that cumulatively, the Cedi recorded a year-to-date depreciation of 2.7 percent against the US dollar in November 2021, compared with 3.9 percent depreciation in the same period of 2020.

On inflation, he said, during the year, inflation steadily eased to as low as 7.5 percent in May 2021 from 11.4 percent at the peak of the pandemic in July 2020.

Globally, inflation has trended up to 11.0 percent in October 2021 outside the medium-term target band of the Central Bank, due to both supply (food prices) and demand (petroleum price pressures) shocks.

“The underlying inflation pressures are also elevated, highlighting the risks to the inflation outlook”, he said.

He further stressed that the above developments informed the MPC’s assessment of emerging risks and threats to inflation, particularly as these supply side constraints become embedded in general price setting behaviour.

“To prevent the potential risk of de-anchoring inflation expectations in the outlook, and undermining the price stability objective of the central bank which has underpinned and supported the broad-based recovery, we have experienced so far the MPC raised the Monetary Policy Rate by 100 basis points”, he noted.

The Governor again announced that the economic outlook for 2022 is positive although there are some potential risks which should be closely monitored, adding that, the uncertainties surrounding food prices, petroleum price adjustments, and the potential second round effects of these are likely to exert inflationary pressures in the outlook.

Stressing on the economy, the Governor said the recent widening of the Ghana’s sovereign bond spreads after a successful bond issue in April 2021 although aware of investor sentiments and their assessment of Ghana’s fiscal risks as they see the fiscal deficit out-turn for 2020 as unsustainable while expecting very bold and decisive measures from the government to re-anchor fiscal consolidation and stabilize debt.

“Investors have assessed that, as compared to our peers, Ghana required a stronger fiscal rectitude

to re-establish investor confidence, and did not see the mid-year budget as addressing their sentiments”, he said.

He indicated that the markets assessment of the 2022 budget also suggest lingering doubts about the ability of the revenue measures announced to translate into a large increase in domestic revenue, stating that, government expenditure is projected to increase significantly in 2022.

According to him, the widening spread triggered investor sell-offs and has created a huge financing gap and put pressure on the local currency.

“As a Market Access Country, we have a huge burden to demonstrate a strong recovery and to ensure that the bold revenue measures introduced yield the required results. We are at a point where there is no room for policy forbearance on all levels, otherwise the huge financing burden could unravel the anchor and erode the gains we have made in the last 4 years”,

“This calls for a social contract on fronts with common aspirations across the aisle to make sure we sustained the recovery momentum”, he noted.

On the banking sector, Dr. Addison said, the sector has been significantly transformed due to the recapitalization and comprehensive regulatory reforms.

He said, the reforms repositioned banks with strong capital buffers before the 2020 COVID-19 pandemic hit, adding that, after the shock, the Bank granted macroprudential regulatory reliefs to ease liquidity constraints within the financial sector.

“To a large extent, these supportive policies, together with stringent supervision and regulation, ensured that the banking sector remained sound and well-capitalised with strong growth in total assets, investments and deposits, despite the challenging pandemic environment”, he stressed.

The Governor indicated the size of the balance sheet of the banking system continues to expand because the first ten months of the year, total asset increased by 16.1 percent year-on-year to GH¢173.8 billion.

“Total deposits grew by 17.2 percent on an annual basis to GH¢117.4 billion, supported by strong liquidity flows, while the gradual improvement in gross advances has continued, with 8.9 percent growth at end-October 2021 compared with 5.2 percent at end-June”.

Dr. Addison further noted the industry’s Capital Adequacy Ratio of 19.8 percent as at end-October 2021 was well above the current regulatory minimum threshold of 11.5 percent while profitability, the industry was strong with a 21.8 percent annual growth in profit before tax to GH¢6.0 billion at the end of October 2021.

He added, the macroprudential policy measures and regulatory reliefs implemented at the onset of the pandemic remain in place to support a more robust recovery of the economy, but however, the expected boost to private sector credit growth has been sluggish amid relatively sticky lending rates in the banking sector.

The recently published Annual Percentage Rates (APRs), which reveal actual lending rates in the banking sector indicated an average base rate charged on small and medium enterprises on a 1-year loan ranged between 19.5 percent and 30.4 percent at the end of September 2021.

These rates are very high and have proven inimical to private sector credit expansion that was expected from the regulatory reliefs, even considering the lingering uncertainties surrounding the pandemic.

Annual growth in private sector credit was 10.1 percent in October 2021 compared with 13.4 percent in October 2020. In real terms, private sector credit contracted by 0.8 percent compared with 3.0 percent growth over the same comparative periods.

“As regulators, we expect that as the growth momentum gains traction, supported by COVID-19 vaccination efforts, private sector credit will rebound”, the Governor stressed.

He again said, the banking sector outlook remains positive because the results from the November 2021 stress tests show a banking sector that remains resilient to mild and moderate credit risk and liquidity stress conditions.

The potential effects of a prolonged pandemic on the banking sector, particularly on asset quality, he however said, needs to be monitored carefully to inform policy measures.

“The Committee decided that macroprudential policy measures and regulatory reliefs announced at the onset of the pandemic should remain in place to support a more robust recovery of the economy”, the Governor noted.

Source: africaneditors.com/Eric Nii Sackey