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BoG has failed us – Togbe Afede dissects sorry state of Ghana’s economy

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General News of Saturday, 6 January 2024

Source: www.ghanaweb.com

Togbe Afede XIV Leader of the Asogli State, Togbe Afede XVI has taken a swipe at the Bank of Ghana over its central role in the worsening state of Ghana’s economy.

The respected financial analyst stated in a piece titled “Bank of Ghana has failed us” that there was no justification for the apex bank to claim credit for the current state of the economy while comparing it to the major crisis of inflation and currency depreciation that hit in 2022 to 2023.

“The Ghana we have today is obviously not what our founding fathers dreamt of. We have failed woefully but have pretended otherwise. Instead of giving hope, our leaders have created a frightening sense of helplessness among the populace, especially the youth,” he stated in part.

Togbe Afede insisted that the economy was in shambles and that even though things can be turned around, it would take a lot of commitment on the part of all stakeholders to achieve that.

“We are victims of predatory economics, where policies or decisions were presented to us well-packaged, only for us to realise during implementation that they were designed to benefit a privileged few, as we saw with some of the COVID-19 initiatives and in the ill-fated award of Electricity Company of Ghana to PDS Ghana Ltd.

“We are also victims of a constitution that protects even our worst leaders. The result is the annoying and arrogant display of “conspicuous consumption” by our leaders and their cronies.

“I hold the view that poverty is not God’s desire for man. So, I remain optimistic that we can turn our fortunes around and make a paradise out of our beautiful country, maximise the welfare and happiness of every Ghanaian, so that we can enjoy genuine sustainable peace and unity and make it unnecessary for the youth to embark on hazardous journeys in search for greener pastures,” he added.

He dissected the issue of debts accumulation by the Nana Addo Dankwa Akufo-Addo government as well as areas like the policy and interest rates as well as inflation. In wrapping up, he addressed the BoG’s mandate, dividends and issue relating to governance.

BANK OF GHANA HAS FAILED US
Togbe Afede XIV – December 26, 2023

INTRODUCTION

It was interesting to hear Bank of Ghana (BOG) officials pat themselves on the back because year-
on-year inflation had dropped to 26.4% in November 2023, from 35.2% in October 2023 and

54.1% in December 2022. This trend should have been expected, I thought, because of the massive
price increases and exchange rate depreciation that were recorded during the corresponding
periods in 2022. It is a fallacy of year-on-year inflation numbers – they tend to be influenced a
lot by what happened one year ago. That is why year-on-year inflation may rise in a particular
month even when the general price level has fallen in that month, and vice versa.
You cannot describe what happened to prices and exchange rates towards the end 2022 as “a blip”
when the effects are still with us. The markets simply adjusted to the rot in the system. A return to

the relatively lower inflation rates of the past does not mean prices have become lower. Year-on-
year inflation rate of 26.4% in November 2023 is not worthy of celebration. Zambia and Kenya,

exposed to the same global shocks, recorded 12.9% and 6.8%, respectively. And the US dollar is
currently trading at more than 150% of its price (cedis) in June 2022.
But I am glad that Bank of Ghana (BOG) has finally bitten the bullet, accepting that it does not
have to set its policy rate above “past inflation”. After decades of insisting that its policy rate must
be fixed above year-on-year changes in the consumer price index (CPI) to ensure “positive real
returns” to investors, BOG had over the past several months, following the collapse of our
economy, kept their policy rate below the year-on-year changes in the CPI. Maybe it was the case
that they just could not set the policy rate above the recent hyperinflation rates.
In my December 2022 article, “Our Self-Inflicted Monumental Economic Crisis”, I presented my
thoughts on the reasons why we, Ghanaians, find ourselves in this undeserved economic mess,
given our massive human and material resource endowments.
The Ghana we have today is obviously not what our founding fathers dreamt of. We have failed
woefully but have pretended otherwise. Instead of giving hope, our leaders have created a
frightening sense of helplessness among the populace, especially the youth.
As I said earlier in December 2021, during a courtesy call by the Speaker of Parliament, Ghana
would have filed for bankruptcy if it were a company. This was effectively what we did when
we went back to the IMF for bailout and implemented the Domestic Debt Exchange Programme
(DDEP). We eventually defaulted on our debts. Holders of Government bonds suffered massive
losses, and the outlook remains dim.
We have been brought to the brink by despicably dishonest, corrupt, reckless, arrogant, and
divisive leadership. We are also victims of bad fiscal and monetary policies. We owe our relative
peace and stability to the resilience and patience of Ghanaians, and I pray that we remain so. I
know what suffering is like, and that is why I will continue to share my thoughts on our
development challenges.

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AN ECONOMY IN SHAMBLES
Very alarming, as I wrote in my December 2022 article, is the fact that we have piled on so much
debt, and are now Africa’s most indebted country, yet we still lack the basic socio-economic
infrastructure required for development – good roads, hospitals, schools, etc. Making matters
worse, are the massive judgment debts, the results of greed and recklessness, staring us in the face.
The dollar had been on the loose, gaining almost 200% over the cedi since 2017. The cedi is
still under pressure notwithstanding our positive trade surplus in recent times. Total exports at the
end of October 2023 stood at USD13.4 billion. Compared to total imports value of USD11.3
billion, the result was a positive trade balance of about USD2.1 billion.
Inflation, as I have already said, is still high, at 26.4%, and business failures, joblessness and
poverty levels are worse than ever. That is why too many of our younger compatriots are
desperately on the lookout for ways out of our potentially rich but poor country.

We are victims of predatory economics, where policies or decisions were presented to us well-
packaged, only for us to realise during implementation that they were designed to benefit a

privileged few, as we saw with some of the COVID-19 initiatives and in the ill-fated award of
Electricity Company of Ghana to PDS Ghana Ltd. We are also victims of a constitution that
protects even our worst leaders. The result is the annoying and arrogant display of “conspicuous
consumption” by our leaders and their cronies.
I hold the view that poverty is not God’s desire for man. So, I remain optimistic that we can
turn our fortunes around and make a paradise out of our beautiful country, maximise the welfare
and happiness of every Ghanaian, so that we can enjoy genuine sustainable peace and unity and
make it unnecessary for the youth to embark on hazardous journeys in search for greener pastures.
But we need, first, to identify and understand the causes of our predicament. So much has been
said about corruption at a scale we could never have imagined, our battered reputation, bad fiscal
policy, lawlessness, divisive tribal politics, our weak institutions, our attitudes, etc. But, as I have
said many times, one segment of economic policy that has escaped scrutiny over the years is Bank
of Ghana’s monetary policy.
THE CHICKENS HAVE COME HOME TO ROOST
Recent events, including the Government’s inability to service its debt obligations, have finally

exposed BOG. Over the past several months, BOG maintained its policy rate below the year-on-
year inflation rate, departing from its previous approach. And the Bank recently announced

massive losses in 2022, totaling GHS60 billion, and year-end negative net worth of GHS55 billion,
making it technically bankrupt. This is unprecedented in our history. The loss, equal to 10 % of
our 2022 GDP of GHS606.82 billion (USD72.24 billion at the average 2022 cedi-dollar exchange
rate of 8.4:1), is one of the largest one-year losses ever recorded by a central bank.
It is an irony that BOG finds itself in this mess after it only recently aided the collapse of several
“poorly managed” local banks, savings and loans companies, microfinance institutions, finance

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houses, and fund management companies, at a cost of GHS20 billion, when an estimated GHS9
billion could have kept them in operation. Such wasteful approach to cleaning up the financial
sector could only have been pursued by an organization that thought it had too much money.
In the competitive world of private enterprise, where standards and consequences of failure are
exacting, BOG would have gone under. Details of the 2022 annual report reveal budgeted and
actual expenditures that do not look like those of a struggling country’s central bank: USD250
million for a new head office, equivalent to 0.35% of our GDP; GHS97.4 million for travel;
GHS131 million for motor vehicle maintenance/running; GHS32 million for communication;
GHS67 million for computers; GHS336.9 million for currency issue expenses (currency in
circulation amounted to GHS40.73 billion); and GHS8.6 million for directors.
And they rewarded themselves very well, increasing their salaries by a whopping 68%! Personnel
costs amounted to GHS1.6 billion. With a total of 2,203 employees, this means an average of a
colossal GHS726,282 per annum or GHS60,523 per month per employee. Staff loans amounted to
GHS1.247 billion, an average of GHS566,818 per employee. I still cannot believe BOG staff are
living in a different world. Unlike in the case of Bank of England (BOE), with a labour force of
4,793, BOG’s financial statements do not disclose the remuneration of individual executives.
BOG, guilty of the poor business practices it had accused the collapsed banks of, had obviously
been misled by the spurious profits it reported in previous years to embark on the recklessness
depicted above. I call them “spurious profits” because they included revenues (interest payments
due from the Government) that were never going to be realised. The Bank reported a profit of
GHS1.57 billion (USD270 million) in 2020. Comparatively, Bank of England (BOE) made a profit
of only GBP57 million (USD76 million) in 2020/21. The size of the Ghanaian economy was
USD72 billion, and that of the UK was USD2.7 trillion. Thus, BOG reported almost 4 times as
much profit as BOE, even though the UK economy was 40 times that of Ghana.
It is surprising that the BOG, the Government’s bankers, had been oblivious to the obvious
possibility of the Government defaulting on its obligations, and failed to make appropriate
provisions. It is also surprising that the external auditors appeared not to have noticed the poor
quality of debt owed to BOG by the Government. The BOG directors were similarly unaware. The
impairment did not happen suddenly. In effect, BOG was monitoring the quality of the assets of
the financial institutions it regulates but forgot to examine its own.
BOG’s huge “profits” were largely the result of unnecessarily high interest rates which have been
detrimental to the real sectors. These profits supported their unnecessarily high operating costs,
including the abnormally high remunerations paid to staff and directors. The commercial banks
also benefitted from the high interest rates. But, like BOG, their debtors (Government and other
loan customers) could not bear these abnormally high lending rates, hence the massive debt losses
these banks also reported in 2022.
We are not out of the woods yet because the impact of all this on the economy means defaults by
borrowers will continue for some time. Just a few months before our economy run into trouble,
BOG was praising the banking sector, claiming, “The banking industry’s performance has defied
the general economic downturn with strong growth across key metrics including total assets and

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deposits, as well as sustained improvement in profitability within the industry during the first half
of 2022.” And that, “The sector’s total assets increased by 22.8 percent to GHS200billion at the
end of the period. The domestic component of total assets recorded a higher growth rate of 23.5
percent in June 2022 compared to a growth of 18 percent in June 2021”. They added further that
“…the higher growth in the industry’s assets by mid-year was primarily on the back of an upsurge
in deposits and borrowings during the review period”.
But as I pointed out, the undeniable truth is that all these “growths” were fueled by high interest
rates and were, effectively, a transfer of assets from government, the public, and the
real sectors to the banking sector. BOG and the commercial banks’ huge parasitic profits put
a lot of stress not only on the private sector, but on the public sector as well. They imposed a huge
burden on those outside the banking sector and frustrated the realisation of the structural changes
needed in the economy.
POLICY RATE, INTEREST RATES AND INFLATION
BOG’s monetary policy has escaped scrutiny over the years because many of us had assumed that
the ladies and gentlemen at BOG were infallible professionals. We have been wrong, at least so
says the evidence.
Not since 2003 when I complained about monetary policy in this country has there been any open
debate about how monetary policy has been conducted. The arguments I made in 2003, more than
20 years ago, are still valid today. BOG had virtually indexed its policy rate to year-on-year
inflation, a self-fulfilling prophesy, with predictably adverse consequences for inflation, the value
of the cedi, and the economy at large. I believe many of us have now realised that the failure of
monetary policy has been a key part of our problems.
By this dogmatic interest rate policy, BOG tried to keep its policy rate above year-on-year
inflation. In their December 2021 article in response to my concerns, BOG argued that “The simple
theory underpinning finance suggests that investors will always have to be compensated for
inflation and that investors always factor in real interest rates in making decisions. With an
inflation rate of 11 percent, the central bank’s policy rate of 13.5 percent implies a real interest
rate of 2.5 percent”. That is poor economics, sadly supported by some “eminent African
economists in their comment on the concerns I raised, thus, “..it should be noted that 13.5% lending
rate is nominal. Ghana’s current inflation rate is about 10.5%, and hence the real rate is 3%”.
Now that the economy has taken a nosedive, the BOG suddenly became happy to keep its policy
rate below the year-on-year inflation rate over several months, when they had always argued for
the opposite.
It is important to appreciate that year-on-year inflation is a historical concept, and that, it is not
past price changes that interest rates must seek to compensate for. The relevant inflation rate for
fixing the policy rate is expected inflation, adjusted for seasonality, etc. Expected inflation is what
astute investors are interested in, much the same way they look at forward price-earnings (P/E)
ratios as opposed to trailing P/E ratios in evaluating shares for investment purposes.

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Future price trends are measured more accurately by the annualised latest average changes in the
CPI, say 3-month average, adjusted for food and energy prices, etc. (Core CPI), which would give
better real-time information for fine tuning monetary policy.
The Fisher effect, named after Irving Fisher, defines the link between inflation, nominal interest
rate, and real interest rate, and explains the tendency for interest rates to rise when expected
inflation is high and fall when expected inflation is low. Thus, a fall in expected inflation, if the
expected real interest rate is unchanged, should cause an equal fall in the nominal interest rate. In
our current context, the expected inflation is BOG’s 8% target. So, 8% plus the expected real
interest rate should give us an acceptable nominal interest rate. The current policy rate of 30%
translates into an expected real interest rate of 22%!
It is sad that our economists have failed to realise the fallacy in comparing the current interest
rate to past year-on-year inflation to determine the real interest rate. BOG’s fixation of its
policy rate based on year-on-year inflation, with little or no interest in recent month-on-month
changes, has been a self-fulfilling prophesy that has only succeeded in importing past inflation into
the future, trapping us in a vicious circle of high inflation→ high interest rate→ high inflation, and
making Ghana’s inflation rate one of the worst on the continent over the past two decades.
POOR VS RICH COUNTRY; COST-PUSH VS DEMAND-PULL INFLATION
BOG’s persistence in trying to fight inflation in Ghana using high interest rates does not make
logical sense, and especially when it is indexed to (historical) year-on-year inflation. Raising
interest rates to fight inflation often works in a rich country like the UK. The minimum wage in
the UK is GBP9.50 an hour or GBP76 for an 8-hour workday. In Ghana, the minimum wage is
GHS14.88 per day, less than GBP1. The average cost of a litre of petrol currently is about GBP1.57
in the UK, that is, 2% of the daily minimum wage. In Ghana, the average cost of petrol is about
GHS14, that is, 94% of the daily minimum wage.
The relativities are similar with regard to other necessities of life. So, unlike in the UK, increasing
interest rates will only increase cost of living in Ghana, but will not encourage the average
Ghanaian, who can hardly make ends meet, to spend less and save more.
Also, it is difficult to see how policy rate increases can fight cost-pushed inflation resulting
from factors like food or crude oil price increases or increased taxes on petroleum products. Sadly,
even at the height of the COVID-19 pandemic, when income levels had fallen worldwide, and
stimulus packages were being implemented everywhere to boost economic activity, BOG still
ensured that we suffered under strangulating high interest rates.
EFFECTS OF BOG’S INFLATION TARGETING MONETARY POLICY APPROACH
BOG’s monetary policy over the years has succeeded in creating one of the most profitable
banking sectors in Africa per the accounting reports, while ensuring a growth-stifling high
inflation→ high interest rate→ high inflation environment, with disastrous consequences for the
cedi and the economy.

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