Abstract
This Selected Issues paper examines competitiveness and the equilibrium real exchange rate for Ghana. It estimates a behavioral equilibrium exchange rate model for Ghana to establish to what extent real effective exchange rate (REER) movements have been driven by an adjustment to its equilibrium values, consistent with changing fundamentals. The paper discusses measures of Ghana’s external competitiveness other than the gap between the actual and the estimated equilibrium REER. Achievements, challenges, and priorities in the areas of public financial management, wage policy, tax administration, and tax policy are also described in detail.
V. Growth in Credit to the Private Sector in Selected Sub–Saharan African Countries1
1. Several African countries, including Ghana, have experienced rapid growth in credit to the private sector in recent years. This may reflect two very different developments. First, a genuine financial deepening2 after structural reforms and rapid development of the financial sector; second, cyclical excessive credit growth that fuels strong domestic demand, leading to overheating and deterioration in the external current account.3
2. Some recent facts about the Ghanaian banking sector indicate that Ghana may be in the former category,i.e., undergoing a phase of genuine financial deepening:
Private sector credit growth has picked up in the wake of macro stabilization as measured, for example, by the decline in inflation.
Credit expansion is significant, but from a very low base: the ratio of private sector credit to GDP increased from 11.9 percent in 2004 to 17.4 percent in 2006.
The expansion of lending to the private sector has been accompanied by a moderation of credit risk, as suggested by a declining non–performing loan (NPL) ratio. The NPL ratio declined to 7.5 percent in January 2007 from 22.7 percent in December 2002.
The solvency of the banking sector has continued to improve. The capital adequacy ratio (CAR) was 17 percent at end–January 2007, well above the statutory requirement of 10 percent, and all banks are compliant with the new minimum capital requirements introduced at the end of 2006.
Ghana: Bank Credit to the Private Sector and Inflation, 2000–2007
Citation: IMF Staff Country Reports 2007, 208; 10.5089/9781451814972.002.A005
Source: Ghanaian authorities and IMF staff estimates.Ghana: Bank Credit to the Private Sector and Inflation, 2000–2007
Citation: IMF Staff Country Reports 2007, 208; 10.5089/9781451814972.002.A005
Source: Ghanaian authorities and IMF staff estimates.Ghana: Bank Credit to the Private Sector and Inflation, 2000–2007
Citation: IMF Staff Country Reports 2007, 208; 10.5089/9781451814972.002.A005
Source: Ghanaian authorities and IMF staff estimates.
Ghana: Non Performing Loans, 2002–20071
(Percent of total loans)
Citation: IMF Staff Country Reports 2007, 208; 10.5089/9781451814972.002.A005
Source: Ghanaian authorities.1 For 2007, as of January 31.Ghana: Non Performing Loans, 2002–20071
(Percent of total loans)
Citation: IMF Staff Country Reports 2007, 208; 10.5089/9781451814972.002.A005
Source: Ghanaian authorities.1 For 2007, as of January 31.Ghana: Non Performing Loans, 2002–20071
(Percent of total loans)
Citation: IMF Staff Country Reports 2007, 208; 10.5089/9781451814972.002.A005
Source: Ghanaian authorities.1 For 2007, as of January 31.3. This chapter investigates the hypothesis that Ghana is indeed under going financial deepening by employing one possible analytical tool, which attempts to assess an “equilibrium” level of credit for an economy, based on structural as well as economic “fundamentals.” The chapter uses estimates of an econometric model of structural determinants of banking credit to the private sector (BCPS).4 The model relates the BCPS/GDP ratio to:
The public debt–to–GDP ratio (PublicDebtY), as an indicator of how much private sector credit is being crowding out;
Per capita GDP (GDPPC), as an indicator of the total economic development of a country;
Inflation, as an indicator of economic stability;
Indices of financial liberalization (LibIndex), bank entry requirements (Entry Restrictions), and quality of governance (Inst);
The origin of the country’s law (German, French, or English)(German Origin);
A trend, introduced to control for any omitted trend variable (the coefficient is, however, fairly small).5
4. The model was estimated for 24 emerging market and developed economies, using annual data for 1973–1996 and a random effects GLS estimation procedure.
5. The estimated coefficients were then used to evaluate the equilibrium level of the BCPS for selected SSA countries for 2005. 6 Various sources were used to obtain SSA country data.7 The predicted or equilibrium level of private credit in 2005 was well above actual levels in all SSA countries in the sample, including Ghana. This may imply that rapid credit growth in these countries is a “catching–up” phenomenon. The findings must be interpreted with caution, however, given that the estimations are imprecise. Indicative though they may be, the results are similar to those obtained in Central and Eastern Europe and in former Soviet Union countries that are undergoing rapid structural transformation and strong credit growth.8
Ghana and Comparator Countries: Bank Credit to Private Sector, 2005
(Percent of GDP)
Citation: IMF Staff Country Reports 2007, 208; 10.5089/9781451814972.002.A005
Source: World Economic Outlook; World Bank; and IMF staff estimatesGhana and Comparator Countries: Bank Credit to Private Sector, 2005
(Percent of GDP)
Citation: IMF Staff Country Reports 2007, 208; 10.5089/9781451814972.002.A005
Source: World Economic Outlook; World Bank; and IMF staff estimatesGhana and Comparator Countries: Bank Credit to Private Sector, 2005
(Percent of GDP)
Citation: IMF Staff Country Reports 2007, 208; 10.5089/9781451814972.002.A005
Source: World Economic Outlook; World Bank; and IMF staff estimates6. However, even if what we see in SSA is genuine financial deepening and catching–up from low initial credit levels, the speed with which credit growth takes place warrants careful supervision. This is particularly important in countries where the banking sector is still relatively underdeveloped, with inadequate risk management, poor information on borrowers, and large concentration risk due to lack of diversification in the economy. Some of these factors (concentration and credit risks) are issues in Ghana, as well as potential maturity mismatches. In these cases, reinforcing prudential regulation with strict provisioning requirements and accumulating more information on borrowers by setting up credit bureaus should have high priority. Moving to more risk–based regulation, such as the simplified version of Basel II, could also be advisable in countries, such as Ghana, where the regulatory fundamentals are already well established.
References
Abiad A. and Mody A., “Financial Reform: What Shakes it? What shapes it?”, IMF Working Paper WP/03/70 1 (Washington: International Monetary Fund).
Barth R., Gerard C. and Levine R., 2002, “Bank Regulation and Supervision: What Works Best?”, Journal of Financial Intermediation, National Bureau of Economics Research, Working Papers Series (U.S.) No. 9323: pp. 1-46. (November)
Cottarelli C., Dell'Ariccia G., and Vladkova–Hollar I., 2003, “Early Birds, Late Risers, and Sleeping Beauties: Bank Credit Growth to the Private Sector in Central and Eastern Europe and the Balkans”, IMF Working Paper WP/03/213 (Washington: International Monetary Fund)
Detragiache E., Abiad A., and Tressel T., 2007 “A New Database of Financial Reforms,” IMF Working Paper, forthcoming
European Bank for Reconstruction and Development, 2005, Transition Report, (London: EBRD)
Financial Stability Report, March 2007, Vol. 7, No. 1 2007, Bank of Ghana.
International Monetary Fund, 2004, Are Credit Booms in Emerging Markets a Concern? in World Economic Outlook, April. (Washington: International Monetary Fund).
La Porta R., Lopez–de–Silanes F., Shleifer A. and Vishny R., 1999, “The Quality of Government”, Journal of Law, Economics and Organization, Vol. 15, No. 1 pp 222-79, Oxford University press.
La Porta R., Lopez–de–Silanes F., Shleifer A. and Vishny R., 1998, “Law and Finance”, The Journal Political Economy, Vol. 106, No. 6, pp 1113-1155, The University of Chicago Press.
Sacerdoti E., “Access to Bank Credit in Sub–Saharan Africa: Key Issues and Reform Strategies”, IMF Working Paper WP/05/166 (Washington: International Monetary Fund).
Prepared by Elena Loukoianova and Amar Shanghavi.
Financial deepening is a phenomenon where the growth in private sector credit exceeds that of GDP.
HihgInfl is a dummy for inflation above the threshold level(1/Infl–1/InflThreshold)measures how far below or above the threshold inflation is for country i at time t. The LibIndexi represents an index of the financial liberalization of the domestic financial system and the capital account, which is expected to have a positive impact on financial deepening over the long run. Entry Restrictions is an index of banking sector liberalization that measures the stringency of specific legal requirements for obtaining a license to operate a bank; it is expected to have a negative impact on financial deepening. A quality of governance (instit) index is included to control for information on which lending decisions are based; it is expected to have a positive impact on financial deepening as more information reduces the risk premium over risk–free assets. The origin of a country’s law also seems to have a significant effect on financial deepening. In particular, German civil law systems have more protection of private property, better enforcement of contracts, and well–developed banks. To account for this GermanOrigini was included in the model.
The SSA countries selected, based on data availability, are Cameroon, Côte d'Ivoire, Ethiopia, Ghana, Kenya, Mozambique, Nigeria, Senegal, South Africa, Tanzania, Uganda, and Zimbabwe.
The macroeconomic data for 2005 were taken from the WEO. The financial liberalization index for Ghana for 2005 was constructed by the desk economists, and for the rest of the countries is taken from Detragiache, Abiad, and Tressel (2007). The quality of governance indicator was calculated as a simple average of the six World Bank governance indicators. The bank entry restrictions were calculated based on Barth, Caprio and Levine (2002), greater values indicate greater stringency. This index is available at: http://www.worldbank.org/research/interest/prr_stuff/bank_regulation_database.htm
European Bank for Reconstruction and Development (2005).
