In 2001, Ghana faced economic meltdown. Prices for the country's main exports, gold and cocoa, were down. The currency was on the verge of collapse, amidst a major surge in inflation and government spending. Into this scenario stepped Paul Acquah to take over the central bank, after 25 years in Washington DC. "I am very happy to be back in Ghana," he says today. As part of an ambitious and able new government, Acquah helped engineer reforms that quickly took the country's economy from the brink of crisis to current growth rates of over 5%. In four years, the currency has been stabilized and single digit inflation is on the cards for 2006. A high degree of fiscal discipline, rapid changes in the banking sector and external help in the form of debt relief have been the ingredients of such success.
Getting his own house in order was a core effort of Acquah's work. After a difficult legal battle, staff levels at the Bank of Ghana have been reduced by nearly 1,000 over the past three years. The bank's work has been refocused on its core to bolster the intellectual and managerial capital of the bank, recruitment has been made competitive, staff numbers have been reduced, and an internal reassignment of personnel has taken place. "We now have a mix of new economics graduates, people who acquired adequate skills in other organizations and some staff that were recruited from abroad," says Acquah.
The current challenge is to computerize the bank's systems and operations fully. A company to carry out the necessary work is about to be selected after a competitive bidding process that began with advertisements locally and in The Economist. "An ICT infrastructure along with a new telephone system has now virtually been completed as part of an extensive programme of modernization," adds Acquah – a comment that points to the challenges the governor faced upon taking up office.
Acquah completed his first degree in economics at the University of Ghana and then left for the US to do a Master's degree at Yale University. After a brief stint at the UN, he took up PhD studies at the University of Pennsylvania, and on completion found his first job as a young economist at the IMF. Rising through the ranks, he eventually became deputy director for the Africa department in 1998.
Working at the IMF gave Acquah the necessary knowledge that now allows him to stand his ground in negotiations with the multilateral institutions. "As a senior person in the Fund, you develop the knack to look at issues from the other's perspective," he chuckles. He describes his government's relationship with the World Bank and IMF as "very good and cooperative" and is keen to point out that Ghana's own solutions to economic problems are reflected in recent IMF reports.
Stable economy
Ghana's domestic economy is largely rural. Subsistence agriculture accounts for 41% of GDP and employs 60% of the work force, which consists mainly of small landholders. Cocoa, timber and pineapples are the main export crops, while gold mining has become one of the biggest sources of foreign exchange. Around one-third of the 20 million Ghanaians live in poverty according to the World Bank, and life expectancy in the country is 54 years. Poverty reduction remains the central goal of the government.
For Paul Acquah, this means consolidating the macroeconomic stability by building a strong banking sector with healthy, independent financial institutions. "We have to ensure a robust system so that the markets do not get the impression that Ghana is an unstable country," he says. "The point has to be reached where people take economic stability for granted." Only a stable economy allows for a vibrant private sector, which is at the heart of the government's economic growth strategy.
The next step in Acquah's plan to modernize the economy is to achieve full capital account convertibility, which allows unrestricted financial flows in and out of the country. Such flexibility would allow for rapid growth rates and increased foreign investment, which has risen rapidly in the past years. Ghana already has a very open trade regime, which has provided mixed results in the past, but could allow the country to benefit from greater access to developed country markets.
"Trade provides a more permanent platform for growth than aid," points out Acquah, who hopes for a removal of agricultural subsidies in the EU and US as a result of the current negotiations at the World Trade Organization. "Any increase in market access goes more to the heart of the problem than debt relief."
HIPC programme
Total debt forgiveness for Ghana has amounted to $3.5 billion in nominal terms under the World Bank's Heavily Indebted Poor Country (HIPC) initiative. Fulfilling the HIPC requirements was a priority for the new government, which also signed an agreement with Paris Club creditors in 2002 to reschedule the country's debt obligations. Last year, Ghana's external debt stood at nearly $8 billion.
Public debt was also reduced due to better revenue generation through a tax reform, which, as Acquah puts it, "required a lot of debate". Revenue collectors focus on the big tax contributors, and tax collection has become much simpler. "Government established a VAT and created procedures to reach those taxpayers that together contribute over 60% of payments. Government also created incentives for the revenue agencies to intensify their efforts," explains Acquah.
The governor is keen to stress that fiscal stringency has not come at the expense of social welfare. "Domestic debt reduction is a tool and not an end in itself. It has brought low inflation and rising GDP growth," he says. "The government's policy has been rather socially sensitive. Of the recent increase in VAT, 2.5% is earmarked for the new national health insurance, which is a good symbol of this sensitivity." The HIPC programme has allowed for increased amounts of money for the social sector, although it remains difficult to measure the results. "The issue is tracking the impact," observes Acquah.
Looking into the future, the governor hopes to see Ghana's development inspired by the economic miracles of the so-called Asian tigers. "In ten years, I would like to see a modern economy, which is open and dependent on private capital flows," he says.
Part of such openness is a push for regional integration in West Africa, for which a model, based on the concept of the European Union, already exists. Plans for integration provide a strong incentive to accelerate macroeconomic convergence and lower inflation. Firm benchmarks to bring down external tariffs for regional trade and achieve capital account convergence exist, but regional trade liberalization remains a difficult issue. The date to enter into a monetary union, originally set for 2005, has just been postponed for the second time to 2009.
With big and rapid changes on the cards for Ghana, Acquah hopes that the process will not come at the expense of some of the country's best qualities. "In Ghana's there is an intrinsic solidarity built into human relationships and a great respect and tolerance for each other. I hope that globalization will take place at the same time that we preserve this rich tradition."