Constitutional Review and the Bank of Ghana

The recommendations of the Constitutional Review Commission (CRC) and the Government White Paper have come to a deadlock on the Bank of Ghana. The CRC made two key recommendations with regard to the Bank of Ghana. The first is to express the independence of the Bank of Ghana in the Constitution; the second is to make the Governor’s term of office the same as the term of the President who appointed him.

It is apparent that these two recommendations are inconsistent. The reasons for expressing the independence of the Bank of Ghana in the Constitution include among others the view that the Bank of Ghana “requires absolute political detachment and must, as such, be devoid of any partisan considerations and governmental control” (Chapter 8, Paragraph 466). However, the recommendation that the Governor’s appointment be coterminous with the appointing President conflicts with the apolitical logic driving the recommendation for Bank of Ghana constitutional independence. This inconsistency is pointed out by the Government White Paper, which while endorsing the constitutional expression of central bank independence goes on to recommend that the Governor should have a fixed 10-year non-renewable term.

In this paper, I argue that both the CRC and the White Paper have taken too simplistic a view of central bank independence and that there is a need for a more nuanced view of the central bank’s statutory position.

The Bank of Ghana

The Bank of Ghana is a constitutionally created institution (Article 183 of the 1992 Constitution) with the following functions: authority to issue the currency of Ghana, promoting and maintaining the stability of the currency of Ghana, be the sole custodian of state funds and encourage and promote economic development and the efficient utilization of the resources of Ghana through effective and efficient operation of a banking and credit system in Ghana. These constitutional functions are further amplified in the Bank of Ghana Act (2002). Section 3 of the Bank of Ghana Act establishes the statutory monetary policy goal as the maintenance of the stability in the general level of prices.

Under the Banking Act (2004) as amended in 2007 and the Non-Bank Financial Institutions Act (2008) and the Bank of Ghana is also given responsibility for the regulation and supervision of the banking system as well as non-bank financial institutions. Thus the Bank of Ghana has a dual role in the

economy: the formulation and conduct of monetary policy institution and regulation of bank and non- bank financial institutions.

The Bank of Ghana has statutory autonomy. Section 3(2) of the Bank of Ghana Act states:

Without prejudice to subsection (1) the Bank shall support the general economic policy of the Government and promote economic growth and effective and efficient operation of banking and credit systems in the country, independent of instructions from the Government or any other authority.

The autonomy provision insulates the Bank of Ghana from any authority in Ghana including the Executive and Parliament. In fact the wording of Section 3(2) means that the Bank of Ghana does not report to anyone.

Internationally, the appropriate level of central bank independence has engaged the attention of political and economic thinkers. The core issue is the distinction between “goal independence” and

“instrument (operational) independence”. Goal independence is about setting goals and targets while instrument independence is the independence to choose appropriate instruments to implement goals and targets.

There are indications that differences in the degree and type of autonomy granted to central banks are shaped by the underlying political culture. There are two polar extremes. At one extreme is a regime under which the Government sets and implements monetary policy. Such regimes were common in many developing countries with authoritarian political systems but are rapidly being replaced by models that give some degree of autonomy to the central bank. At the other extreme are countries in which the central bank has full autonomy to set targets and implement. Many European central banks (Banca d’Italia, Banque de France, Deutsche Bundesbank, Swiss National Bank, U.S. Federal Reserve) are in this category. The current stance of the Bank of Ghana Act, the CRC and the associated White Paper also reflect this full autonomy model with goal and instrument independence.

Between the two extremes lie a whole range of regimes that attempt to strike a balance between central bank autonomy, Government’s economic policy role and political accountability of the central bank. It turns out that countries with political systems modeled on the British political tradition of a weak separation of powers (the executive is a subset of the legislature) such as Canada, New Zealand and Australia) have sought to strike a balance between autonomy, coordination with Government and accountability. This is not surprising given that the British political tradition also puts a premium on the accountability of the executive to Parliament and through that to the wider public. Central bank independence tends to be strong and almost absolute in the countries with a strong separation of powers and fragmented political power (e.g. United States, France, Italy, Switzerland). In New Zealand, the U.K., Canada and Australia, the level and type of central bank independence are recognized and expressed in the enabling acts of central banks. The responsibility of Government for economic policy is also given statutory recognition. Generally, Government sets policy and targets and the central bank implements. In addition, the Government/Minister of Finance has the power to issue directives to the central bank, subject to restrictions on the types of directives, their duration and cabinet/parliamentary ratification. Thus, the question as to the type and level of autonomy of a central

bank should be answered after careful analysis. Ghana, with its hybrid political system, must necessarily take note of good practices across a broad spectrum of countries in the quest to design a central bank independence and accountability model.

The CRC has identified two categories of Independent Constitutional and Other Bodies (ICBs). The first category is institutions that have adjudication and oversight roles that are carried out independently of the executive, legislative or judicial arms of Government. These are the National Commission for Civic Education, the Electoral Commission, the Commission on Human Rights and Administrative Justice, the National Media Commission, the Office of the Auditor-General (and the Audit Service) and the Public Services Commission. The Bank of Ghana is described as an institution of governance which is not expressly listed as independent. Thus the framers of the 1992 Constitution rightly recognized that the Bank of Ghana is sufficiently different from the other ICBs because of its far reaching policy mandate. Indeed the same challenge is posed by the NDPC whose constitutional mandate is to advise the President on development planning. Given that in a democracy policy is formulated and adopted through a political process, statutory independence is difficult to justify for a policy-making institution in the absence of concomitant provisions for political accountability.

There are several precedents to guide Ghana in how to structure the statutory roles of the Bank of Ghana and Government in economic management. Sampled below are the relevant statutory requirements in New Zealand, the U.K., Canada and Australia.

New Zealand Reserve Bank Act, 1989

The preamble to the Act recognizes the “Crown’s [Government’s] right to determine economic policy” and the central bank to be responsible for “formulating and implementing monetary policy designed to promote stability of the general level of prices”. Government (The Minister) sets the inflation target but the Reserve Bank has operational independence in deciding how that inflation target will be achieved. The inflation target must be made public – there is a requirement that all Government instructions to the Reserve Bank shall be made public.

The Minister has specific powers. At the time of the appointment of the Governor, the Minister fixes in agreement with the Governor policy targets for carrying out the Bank’s functions. The Minister and the Governor may from time to time review or alter the policy targets. The Minister shall ensure that policy targets are published and a copy laid before Parliament. Government may from time to time direct the Bank to formulate and implement monetary policy for any economic objective other than price stability for a period not exceeding 12 months. The Minister may for the purpose of influencing the exchange rate or exchange rate trends, from time to time, by notice in writing to the Bank, direct the Bank to deal in foreign exchange within Guidelines prescribed by the Minister. The Minister may fix exchange rates for foreign exchange dealing by the Bank and in consultation with the Bank determine the level at which foreign exchange reserves shall be maintained.

Bank of England Act, 1998

The Bank of England Act states that the objective of the Bank shall be to contribute to protecting and enhancing the stability of the financial system. In pursuing this objective, the Bank shall aim to work with other relevant bodies (including the Treasury and the Financial Services Authority). The Bank is directed by the Act to support the economic policy of the Government. There are specific powers of the Treasury. The Treasury may by notice to the bank specify what price stability is to be taken to consist of and what the economic policy of Government is. The Bank of England Act 1998 further stipulates the Treasury’s Reserve Powers as follows: 1) the Treasury, after consultation with the Governor of the Bank, may by order give the Bank directions with respect to monetary policy if they are satisfied that the directions are required in the public interest and by extreme economic circumstances, 2) the Chancellor of the Exchequer retains the power to set the numerical inflation target for the Monetary Policy Committee of the Bank of England subject to the proviso that a statutory instrument containing such an order shall be laid before Parliament after being made. Unless the order is approved by resolution of each House of Parliament before the end of the period of 28 days beginning with the day on which it is made, it shall cease to have effect at the end of that period.

Bank of Canada Act, 1985

The preamble to the Act establishes the role of the Bank of Canada as follows: “to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of Canada”. The Minister and the Governor are required to consult regularly on monetary policy and on its relation to general economic policy. If, notwithstanding the consultations there should emerge a difference of opinion between the Minister and the Bank concerning the monetary policy to be followed, the Minister may, after consultation with the Governor and with the approval of Cabinet, give to the Governor a written directive concerning monetary policy, in specific terms and applicable for a specified period, and the Bank shall comply with that directive. Such a directive shall be published in the Canada Gazette and shall be laid before Parliament within fifteen days or if Parliament is not then sitting, on any of the first fifteen days when Parliament sits next.

Australia Reserve Bank Act, 1959

Australia’s Reserve Bank Act (1959) contains similar provisions for consultation with Government and procedures to be followed if there is a difference of opinion between the Australian Government and the Reserve Bank Board as to whether the monetary and banking policy of the Bank is “directed to the greatest advantage of the people of Australia”.

From the above, the considerations relevant to the fine tuning of the Bank of Ghana’s mandate are independence, a structured engagement with Government and accountability.

Independence

The rules and practices cited above suggest that the issue of constitutional independence of the Bank of Ghana should be handled with extreme care. In the case of Ghana, the central bank is given

independence both with respect to means (i.e. the choice of monetary policy instruments) as well as goals. The challenge arises from how to resolve an impasse between the central bank and Government on the goals of monetary policy.

The Bank of Ghana Act is also at variance with trends on the issue of autonomy and within a democratic dispensation. The Bank is not required by law to formulate and implement monetary policy within the dictates of Government’s economic policy. Compared to New Zealand, the U.K. and Canada, the Government has no directive/reserve powers to intervene in monetary policy even in a national emergency.

The granting of blanket independence to the Bank of Ghana in the Constitution would also apply to the second major role of the central bank – the supervision of bank and non-bank financial institutions.

This would in effect transfer critical dimensions of economic policy to an institution with no political accountability. The supervision mandate and the independence clause are mutually inconsistent in the context of democratic governance. Regulatory policy lies in the political domain and reflects political choices about the financial sector such as ownership and competitive structure. For example, decisions about capital requirements of banks have far reaching implications for the ownership and competitive structure of the banking system. Some countries such as Canada, Malaysia and India have policies that limit foreign ownership of banks. In Canada, the approval of bank mergers and acquisitions is by Government. The pertinent questions are: who do Ghanaians want to hold accountable for such far reaching decisions? Where do Ghanaians want these powers to reside at this stage of our political and economic development? We may well conclude that this should be a central bank function but the issue has not yet been seriously interrogated.

Consultation with the Government

By Article 58(1) of the 1992 Constitution, the executive authority of Ghana is vested in the President. There are specific responsibilities of economic governance assigned to the President as follows:

1. Reporting to Parliament at least once a year all steps taken to ensure the realization of the policy objectives contained in the Directive Principles of State Policy (Chapter 6 of the 1992 Constitution) and in particular, the realization of basic human rights, a healthy economy, the right to work, the right to good health care and the right to education (Article 34(2))
2. Presenting to Parliament within two years after assuming office, a coordinated program of social and economic development policies, including agricultural and industrial programs at all levels and in all the regions of Ghana [Article 36(5)]

The Minister of Finance and Economic Planning exercises delegated authority from the President for the management of the finances of the country as well as the strategic economic management of the economy.

At issue is the compatibility of central bank independence with Government determination of monetary policy objectives. The 2007/2008 global financial crisis has revealed the mutual dependence of the central bank and Government. In particular, it has become clear that combating a recession

requires coordinated fiscal and monetary measures. Many countries have recently found the need to combine a fiscal stimulus with quantitative easing on the monetary side in order to contain deficits.

A significant gap in the enabling legislation of the Bank of Ghana is that there are no provisions that impose mandatory consultation and agreement between the Bank and the Government on the goals and targets of monetary policy. Taking a cue from New Zealand, the U.K. Canada and Australia, the law should specify the conditions under which Government can issue directives to the central bank and impose reasonable limits to ensure that such directives are used sparingly. In Australia, these rules have not been used since the law was passed in 1959. Nevertheless structured consultation and agreement serve as a bulwark against a damaging fragmentation of economic management. Thus, the configuration of the autonomy of the Bank of Ghana either within the Constitution or in the Bank of Ghana Act should take a long view of the future by anticipating situations in which a policy impasse might arise between Government and the Bank of Ghana.

Accountability

The flip side of central bank independence is accountability. Advocates of greater central bank independence accept that such independence entails greater accountability to ensure that the independence is used in the public interest. According to Allan Greenspan, former Chairman of the U.S. Federal Reserve Board,

…. if we are going to have independent central banks then implicit in that independence is accountability. You cannot in a democratic society have an institution which is fully or partly dissociated from the electoral process and which has powers that central banks inherently have. The question really amounts to how one positions the central bank with respect to the issue of disclosure and accountability – which are related questions. [At the Tercentenary Symposium of the Bank of England in 1994]

Under Ghana’s current statutory arrangements we have independence without accountability. The accountability requirements of the Reserve Bank of New Zealand Act 1989 are very instructive for the purposes of designing an accountability regime for the Bank of Ghana. In New Zealand the Reserve Bank is held accountable in the following ways.

1. Personal Accountability: The Governor is held personally accountable for achieving the inflation target set in a Policy Targets Agreement signed with the Minister of Finance. If the Minister or the Reserve Bank’s Board of Directors believes that the Governor’s performance in meeting this target has been inadequate, then the Governor can be dismissed.
2. Regular reporting to the Government and to the people of New Zealand: At least every six months, the Reserve Bank must publish a Monetary Policy Statement. Each Statement reviews monetary policy over the previous six months and describes how price stability will be delivered in the months ahead. The Governor and other Reserve Bank officials regularly appear before Parliament’s Finance and Expenditure Select Committee to answer questions about these Statements, as they do for the Annual Report.
3. Board of Directors: On the Minister’s behalf, the Reserve Bank’s Board of Directors is required to keep the Reserve Bank’s and the Governor’s performance under constant review. The Board determines whether the Reserve Bank’s Monetary Policy Statements and actions are consistent with achieving and maintaining price stability, and with the Policy Targets Agreement. However, the Board does not participate in the monetary policy decision-making process and does not receive market-sensitive information prior to the markets.
4. Funding agreement: The law makes the Reserve Bank accountable for its use of public money. Every five years a funding agreement is drawn up between the Government and the Reserve Bank, which specifies a level of expenditure for the Bank over the upcoming period.

With the coming into force of the 1992 Constitution and the establishment of Parliament, new critical dimensions of economic governance were addressed. Chapter 13 of the Constitution has extensive provisions that reinforce the oversight role of Parliament in the management of the country’s finances. In addition to the explicit powers, Parliament is involved in economic governance through its consideration of bills that have major economic policy implications. With respect to the Bank of Ghana, Parliament should be given the opportunity to vet and approve nominees for Governor.

Annually, the Governor should appear before the appropriate Committee of Parliament to defend his objectives and targets for monetary policy for the upcoming year. Section 58(3) of the Bank of Ghana Act requires that the Bank’s Annual report be presented to Parliament annually to Parliament through the Minister of Finance, which is a good starting point. However the accountability to Parliament could be strengthened by requiring the Governor to report to Parliament at least half yearly on the extent to which the objectives of monetary policy were achieved and explain any deviations from the targets.

Returning to CRC and the White Paper, the above discussion suggests that the recommendations on the Bank of Ghana are too simplistic and should not be carried into a constitutional amendment without further interrogation. The Bank of Ghana should be given statutory operational independence. However, this should be provided for in the Bank of Ghana Act rather than the Constitution. In the Bank of Ghana Act we will have the flexibility to spell out additional requirements for engagement with Government and accountability. The current wording of the independence clause in the Bank of Ghana Act is problematic because it does not make a distinction between goal independence and operational independence and leaves open the possibility that the Bank of Ghana and Government could be working at cross purposes to the detriment of the economy. The autonomy clause in the Bank of Ghana Act should be appropriately reworded to strike a balance between goal independence and instrument (operational) independence. The law should specify the policy decisions that require consultation with and/or approval of Government and provide for accountability. The proposed 10- year term for the Governor is too risky in an environment in which we have not institutionalized central bank engagement with Government and accountability. Indeed the idea is too novel and untested. The most authoritative study I was able to locate covered 137 Central banks during the period 1970-2004 and found that the average term of a central bank Governor was 3.6 years. What then happens to national economic management if there are irreconcilable views on the goals and objectives of economic policy between a Governor with a 10-year term and Government?