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The race to the flagstaff house: The State of the Ghanaian Economy

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The countdown to the polls on December 7 has begun in earnest. Presidential hopefuls are travelling the length and breadth of the country canvassing for votes. These tours have been characterized by numerous promises, some pretty outlandish. Labor agitations are on the ascendancy, as one worker group after another make all sorts of requests on government.

Will the country’s economic underpinnings be able to support these worker groups’ requests, and which finances amidst mounting debt stock, would fund the numerous promises being hurled on electorates? In an interview with the Director of one of Ghana’s foremost research organizations, the Institute of Statistical, Social and Economic Research (ISSER) based at the University of Ghana, Professor Felix Ankomah Asante, dissected the critical issues surrounding Ghana’s economic growth.

The Waning Agric. Sector

It appears that Sub-Saharan countries are directly replacing agriculture with services as the largest economic sector without passing through the intermediate phase of industrialization and an expanding manufacturing sector, the experience of almost all successful economies. Moreover, a large part of the services sector in many Sub-Saharan countries consists of lowtechnology and low-value activities.

These trends are of great concern, since manufacturing has historically been the main source of technological learning. This trajectory has also played out in Ghana, where the Services and Industry sectors have outstripped the Agric. sector in recent years.

Commenting on this trend, Professor Asante asserts, that “governments must find a way of improving how Agric. is done in the country” if we intend to improve the lot of farmers. He bemoaned the low standard of living amongst peasant farmers, who form the bulwark of food supply in the country.

He warns, that the entire country’s food security is predicated on the goodwill of peasant farmers. He notes, that the labor force coupled with the purported investments by government into the sector, is not commensurate with the output.

Comparing Ghana to developed nations, he points out the absence of incentives to farmers, undermining the commercial drive and mindset that is required within the sector.

Diversifying the Economy

The recurring chorus in Ghana is that the country remains too susceptible to price cycles of specific raw materials on the international economy. Sadly, this chorus is hundred years old and has lived with colonial and all modern governments.

The call for diversification of our economy has been made by many Economists, as an avenue for the country to explore new market opportunities and to wean itself of the sole-dependency on traditional exports such as cocoa. The fact that as much as 83 per cent of all Ghana’s exports come from only three sectors– gold, cocoa and bauxite – which happen to be commodities with volatile prices on the world market.

A diversified export base can minimize volatility in foreign exchange earnings, which for small, open developing economies allows access to capital, technology, and critical intermediate inputs. For many African countries exports are concentrated in a narrow range of primary products that has remained much the same over the past 40 years.

The top five export commodities account for about 70% of merchandise exports in SubSaharan countries. Oil-driven economies such as Saudi Arabia, Qatar and United Arab Emirates, among others, are making frantic efforts to strategically focus their attention on economic diversification.

The diversification agenda in principle is much supported. However, the approach is not strategic, as the Non Traditional Exports (NTEs) are made up of so many products.

“Where is our comparative advantage? Which agric. product should be prioritized?” Professor Asante questioned and also suggested that all these have to be supported by evidence-based research. Though, Professor Asante concurs with the rationale to diversify Ghana’s economy, he however notes, the approach being adopted via focusing on non-traditional exports (NTEs) is not very strategic.

A cursory look at the country’s NTEs reveals several products, which he feels fails to leverage the comparative advantage of the country. He contends that the country focuses on a few products, informed by empirical research.

This strategic focus, he continues, “will deepen the country’s competencies and expertise in relations to those products. This may even lead to agric-based services, where Ghanaian experts with the NTE sector are exported into other countries”.

The Enterprise Map of Ghana, which examines Ghana’s growth poles, exports contributors and profiles all major industrial concerns that contribute to the majority of Ghana’s exports, recommend that the country can only sustain its current growth rate of above 10 per cent for the next 10 years, unless it makes significant turnarounds in its policy environment.

This policy must enable local companies to integrate to the international supply chains and companies should continue to run their affairs properly. The country should use the cocoa, mining and now oil and gas sectors as growth poles to diversify the economy. This should have linkages with the rest of the economy and spur growth in other sectors and engender the springing up of several businesses, mostly indigenous.

Several countries had walked that path successfully including China, India, who integrated their manufacturing sector into the international value chain and “piggy-back on those to give international exposure to local exports.” Government through the Ghana Export Promotion Authority (GEPA) set an ambitious goal under the National Export Strategy in 2013 to achieve a $5 billion target from non-traditional exports (NTEs) by the year 2019. According to GEPA, exports of non-traditional products from January to December 2015 amounted to $2.5 billion, representing an increase of 0.32% over the year 2014.

The figure represents just over half of the $5 billion target. The statistics indicate that the marginal increase in revenue from $2.5 billion in 2014 to $2.522b in 2015, was mainly due to increase in agricultural products exports, particularly cashew nuts.

Total earnings of the sector stem from three sub-sectors – agriculture, handicraft, and processed and semi-processed products like canned tuna, cocoa paste, shea oil, among others.

New revenue streams, more growth?

The next government will coincide with two new oil fields coming on stream, TEN and Sankofa fields. It is been estimated that these new fields will lead to an economic boom next year, as revenues pour in from the oil, and the gas is used to fuel the country’s power plants.

The ISSER boss, however, feels the impact on the economy will not be as high as experienced in 2011, “because the basic infrastructure for the oil and gas sector are already in place”. The TEN fields started producing its first oil in August this year, 2016. This milestone was achieved on time and on budget, three years after the plan of development was approved by government in May 2013.

The TEN project, which begins at a time Parliament has passed the Exploration and Petroleum Bill into law to streamline operations in the oil and gas sector, adds on to the Jubilee oilfield which began commercial production of oil in 2010.

The field is expected to produce about 300 million barrels of oil equivalent over its lifetime (approximately 20 years), 80 per cent of which is oil and 20 per cent gas.

Average annualized production in 2016 will be roughly 23,000 barrels of oil per day, with full production at 80,000 barrels of oil per day. Associated gas production at TEN is expected to be re-injected into the Ntomme reservoir gas cap until gas export begins. Gas export was planned to commence 12 months after field start up, with the Tweneboa gas reservoir coming on stream a further 12 months later.

However, plans to accelerate gas export are currently under evaluation as the fabrication of the gas export facilities has been completed early and can be installed by year end, allowing connection to the existing gas infrastructure early in 2017.

The TEN fields will drive economic growth in Ghana through the marketing of our crude oil and boosting gas supply to generate power for industrial and domestic use.

The fact that the TEN project has come on-stream, just six years after the jubilee field goes a long way to demonstrate GNPC’s commitment to ensuring that Ghana benefits from its oil and gas resources’ The country’s Sankofa-Gye Nyame field is on track to deliver first oil in August 2017 and first gas in February 2018 to augment thermal power generation that will ensure sustainable electricity production.

The Sankofa project is expected to deliver an additional 30,000 barrels per day of oil and 180 million cubic feet per day of gas to Ghana. Gas from the project is expected to help generate 1,100 MW of additional electricity and once on stream, it will produce enough gas to increase the country’s electricity supply by 50%. The US$7.9 billion ENI led project represents the largest-ever foreign direct investment into Ghana.

The World Bank put in place US$700 million worth of backstop guarantees for the project in August 2015. This was comprised of a US$500 million guarantee, supporting timely payments for gas purchases by Ghana National Petroleum Corporation (GNPC), allied to a loan guarantee of US$200 million, allowing the project to secure financing from its private supporters.

Professor Asante advocates for the efficient spending of the revenues that will accrue from the new oil fields. He cites the thin spread of the revenues from the Jubilee field, as a cautionary example. His assertion is buttressed by expenditure analyses conducted from the Public Interest and Accountability Committee (PIAC) as well as other civil society organizations.

Ghana has earned $3 billion from oil since the beginning of commercial production in April 2011. $1.2 billion of this amount was used to fund projects outlined in the budget. However, despite the prioritization of four critical areas, petroleum revenues has been spent on capacity building activities with donations to MUSIGA, and other contentious expenditure like the mass bus branding.

Prioritize oil revenues into Agric. sector

Professor Asante asserts that we need to invest massively in Agriculture, as the country has enormous comparative advantage as well as the large labour force in that sector.

He continued that, “the much talked about industrial economy requires an agrarian backbone to provide inputs”. Despite modernization of agriculture is a priority area under the Petroleum Revenue Management Act (PRMA), the sector is still characterized by rainfall dependency and the predominant usage equipment of cutlasses and hoes.

Revenue expenditure within the sector has been largely inefficient. For instance, in 2014, GH¢170.62 million in oil revenues was designated for modernization of agriculture and 70 per cent of that was spent on construction of coastal defenses for fishing communities and construction and rehabilitation of irrigation dams. GH¢118.38 million of the allocated amount went into construction of sea defense walls in four fishing communities.

This nature of spending in agriculture modernization comes at a time when growth of Ghana’s services sector has outstripped agriculture and when agricultural productivity in Africa, is reported to still be lower than other world regions.

Democratic Rule, Manifestos and NDPC’s 40-year plan

Professor Asante notes that our democratic era since 1992 has been crucial to our economic development. Though he concedes that democracy is expensive, in terms of finances expended on different arms of government and the sometimes slow pace of decision.

He personally advocates for a “governance arrangement tinged with a little dictatorship”, though he doubts such a system would ever be practiced in the country. Regarding the brouhaha about political parties releasing their manifestos to inform the decisions of electorates come December 7, 2016, he offered a different opinion.

He notes that, “in nations where longterm development plans exists, manifestos merely offer tactical or operational plans to achieve the national goals therein”. He continued that “the overarching goal should be the quality of life”. This underpins all the critical needs of a people– education, health, jobs, shelter, food, etc.

Thus, he opines that “in the race to the flagstaff house, political aspirants need not promise to do anything outlandish, but rather focus on improving the quality of life of the people”.

It is that regard that Professor Asante agrees in principle with the National Development Planning Commission’s quest to design a 40- year strategic plan. He notes, “the final document should be concise and brief, and all governments must be compelled to operationalize their manifestos in alignment with the strategic plan”. He states that a “country’s developmental strategy/plan should go on irrespective of political ideologies”.

Fifth Eurobond & IMF Program

The government during the first week of August 2016 put on hold issuing a fifth Eurobond till the market conditions were right. The government stated it would continue to build on its dialog with international investors while monitoring the markets and the International Monetary Fund (IMF) Board process with respect to the third review of the program and will issue new notes at the optimal time and the right conditions.

Despite receiving positive feedback from investors on the ongoing fiscal consolidation process Ghana was unable to convince investors to dish out cash at a rate lower than 10.75 percent obtained in the last Eurobond.

The international media reported that investors rejected the bond because of the deteriorating Ghanaian economy. They also cited government’s unrestrained election year spending for the rejection.

Professor Asante believes Ghana’s historical data and government expenditure patterns during previous election years underpin the fears of these international investors. He continues, “the constant labor agitations and the political expediency in sometimes executing infrastructural activities in ‘record’ time, also does not build investor confidence”.

On April 3 2015, the IMF approved a threeyear arrangement under the Extended Credit Facility (ECF) for Ghana in the amount of $918 million with zero percent interest rate and a repayment period of 10 years to support the governments’ medium-term economic reform program.

The program calls for a strong front-loaded fiscal adjustment; structural reforms to strengthen public financial management and enhance fiscal discipline; rebuild external buffers to increase resilience to shocks; and enhance the effectiveness of monetary policy by limiting its fiscal dominance.

The planned strong fiscal consolidation is expected to dampen economic growth and reduce inflation in the short term. Growth is however projected to pick-up in the medium term, supported by the expected coming on stream of additional crude oil production while lower inflation and interest rates, combined with a stable exchange rate environment will help support private sector activity.

Though, Professor Asante concedes the government had no alternative than to resort to the IMF, he feels “as a country, we failed to learn from history and conditions that led Ghana to previous IMF programs”. He admits, the employment freeze and the fiscal discipline aspects of the program seem to be working but for how long can we sustain this. However, he doubts whether the government will have solved taxing the informal sector conundrum before the end of the program.

Issues to focus on during Election season: The six strings to Ghana’s economic growth

Regarding the impending elections, Professor Asante enumerated a number of critical issues he wants political parties to focus on. The first is the need for sustainable, inclusive growth. According to the OECD, Inclusive growth is economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society.

It is about ensuring that the benefits of development reach the entire population, including the most vulnerable members. The United Nations Development Program chief economist, Thangavel Palanivel also states that though there are multiple definitions of Inclusive growth, there are some common features, namely, growth is inclusive when it takes place in the sectors in which the poor work; occurs in places where the poor live; uses the factors of production that the poor possess; and reduces the prices of consumption items that the poor consume.

In many countries, people have not seen their incomes rise for years. The gap between rich and poor has widened, with those at the top capturing the ‘lion’s share’ of growth.

Rising inequality in earnings and in wealth is a major concern, but money is just one aspect of people’s wellbeing. In just about every area, whether it is education, life expectancy, or employment prospects, success is determined by socioeconomic status, wealth and assets, sex, age or the places where people live.

In other words, inclusive economic growth is not only about expanding national economies but also about ensuring that we reach the most vulnerable people of societies. The “equality of opportunity” and “participation in growth by all” with a special focus on the working poor and the unemployed are the very basis of inclusive growth.

The second issue he cites is that the country’s economic growth should be employment-centred.

Presently, the country produces thousands of graduates annually, with very few being absorbed into paying jobs. Professor Asante notes that with a coherently designed strategy in place, the country can even export its human resources, as Cuba has successfully done in the health sector with their world-class doctors.

Today, unemployment seems to be the most serious development challenge confronting the nation, so much so that it has become the number one concern of Ghanaians that they want the government to address. In Ghana, the importance of employment is underscored by the recognition of the right to work not only as a basic human right but also as a constitutional right.

This right to work, however, is gradually becoming very difficult for both government and individuals to realize due to the rising levels of joblessness. A recent World Bank report on jobs in Ghana revealed that about 48 percent of the youth in the country, who are between 15-24 years do not have jobs. The report explored the opportunities for youth inclusion in Ghana’s labor market.

Third is the need for judicious management of the country’s natural resources.

He advocated the need for governments to think about future generations when resources are being utilized today. African leaders have consistently failed to prioritize development challenges confronting their countries so that revenue from the extractive industry did not just fill budget gaps but rather catalyzed specific development agenda.

The bane had been corruption and bad governance. Good governance on the continent had become a slogan much talked about but not delivered.

In Ghana, a large section of the populace were expecting the oil and gas sector to be the panacea for the economic challenges confronting the country, however, five (5) years down the road, it has become apparent that the sector alone cannot break the back of poverty.

The fourth issue is developing the country’s infrastructure.

The Government of Ghana is currently facing monumental challenges in infrastructure development, which are proving to be a constraint on growth and development. The provision of public infrastructure is one of the prime mandates of governments all over the world and Ghana is no different. Infrastructure (roads, power, water, sanitation and airports, among others) is a fundamental prerequisite for economic growth and development.

Studies across the world have consistently shown the close relationship between infrastructure and the strength of economic output. A study recently carried out by a World Bank team at the request of the Ministry of Finance on behalf of the Government of Ghana to address Ghana’s infrastructure deficit shows the country requires sustained spending of at least $1.5bn per annum over the next decade to plug the infrastructure gap that exists.

To close the infrastructure gap, Professor Asante advocates for a Public Private Partnership (PPP) approach. A PPP has several advantages in the provision of infrastructure and services.

Principally, it enables the government to provide better infrastructure through the use of private sector financial, human and technical resources, thereby freeing government resources for other equally important uses.

Fifth is the critical role of science and technology to the development of any country.

He bemoans the sad situation where few of our tertiary institutions (mainly universities), offer science related courses. The few that offer science related courses (mainly public universities), he continues are also bedeviled with limited facilities and vacancies, thereby limiting their impact. This he says does not augur well for the economic fortunes of any country.

First world economies like USA, UK, and the Asian tigers have spurred on their growth rates through a relentless focus on science and technology. Science and technology has helped these economies to sustain their growth as well as improve efficiency.

It has also placed them in good stead to transition smoothly into an information society.

Lastly, there should be a laser – like focus on improving the country’s human capital and also increasing access to quality education.

The World Bank report on unemployment, recommended as one of the panaceas, the need to equip the youth with relevant skills through the educational system. Access to quality education is essential for development.

Not only does education provide children, youth and adults with the knowledge and skills to be active citizens and to fulfill themselves as individuals, literacy in particular contributes directly to poverty reduction.

It has been estimated that global poverty could drop by 12 % if all children in low income countries could read. Education also contributes to sustainable economic growth and to more stable and accountably societies and governments.

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Business Interview

Recapitalization– The panacea to the woes of Ghana’s insurance market? – Mr. Justice Yaw Ofori -Commissioner of Insurance, Ghana

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In a bid to ensure a robust Ghanaian insurance industry, the National Insurance Commission, NIC, has initiated moves towards recapitalization. The initiative, yet to be officially announced, involves a planned increase in the Minimum Capital Requirement (MCR) for insurance and re-insurance companies by over three (3) fold. The industry regulator has engaged stakeholders to ensure smooth implementation of the exercise which has seen financial analysts draw a parallel with that witnessed in the banking industry last year.

This has prompted questions- some comparative analysis with the banking one as well as questions about its economic significance. The Insurance Commissioner, Justice Yaw Ofori, in an interview with the Vaultz Magazine, gave a detailed explanation of the exercise.

 

State of the Ghanaian insurance sector

Ghana’s insurance industry has in recent years witnessed a significant growth especially in terms of the number of new entrants recorded. The industry however continues to record low insurance penetration which still hovers around 3%.

The Insurance Commissioner believes this among other issues highlight the need for the industry recapitalization.

I would say Ghana’s insurance industry is strong despite the challenges with respect to recapitalization. The market is still virgin and there are a lot of areas which are untapped and that is why we see foreign companies coming into Ghana to do business. The oil sector is booming and so is agriculture as well as inclusive insurance and all we need to do is to make sure companies are well capitalized so far as they want to operate in Ghana” Mr. Ofori stated.

According to the NIC’s annual report, Return on Equity (ROE) for insurance companies has consistently been less than the corresponding year’s prevailing treasury-bill rate with the overall picture worsening year on year especially for life insurance companies. Mr. Ofori attributes this to the tendency for investors to choose high-yielding financial instruments over insurance which is a relatively long-term investment option.

MR. JUSTICE YAW OFORI -Commissioner of Insurance

“I think it’s all because people get more returns when they invest their monies in T-Bills and other non-banking financial instruments.  For instance, there was a time people were promised 25% to 35% on their investment which was more attractive so they didn’t see why they should invest in other assets like insurance. So some insurance companies were consequently recording underwriting losses” he explained.

The insurance industry has been contributing significantly to Ghana’s economic growth– albeit constantly at less than 2% of GDP through the provision of long-term investment finance to the economy whilst influencing production and consumption, internal and international trade among others.

“Insurance is a vital pillar of every economy. In Ghana for instance, it contributes about GH¢ 5billion in terms of business generated annually. About 12, 500 people earn a living directly from the industry and many more indirectly such as lawyers, doctors, carpenters, masons, and mechanics. Without insurance you can’t get bank loans because they need some kind of guarantee that they can recoup their money in the event of default”.

 

Insurance recapitalization– the facts and figures

Following its engagement with stakeholders including brokers and shareholders alike, the NIC has proposed an increase in the Minimum Capital Requirement (MCR) for life and non-life insurance companies from the current GH¢ 15million (approximately US$ 3million) to GH¢ 50million approximately US$ 10million).

Re-insurance companies will also see their MCR reviewed upwards from GH¢ 40million (approximately US$ 8million) to GH¢ 125million (approximately US$ 25 million) while that of brokers will be increased from GH¢ 300,000 (approximately US$ 60,000) to GH¢ 500,000 (approximately US$ 100,000).

“We came about these figures by taking into consideration how much a company would need to break even and stay profitable. We realized it will take 4 to 6 years for a newly established insurance company to break even with GH¢ 50 to GH¢ 60 million capital” the Commissioner noted.

The last time the market underwent recapitalisation was in 2015 and this was pegged against the dollar with an initial plan of an annual increment which after a considered review, was implemented differently.

“On an annual basis, the minimum capital was supposed to be adjusted to reflect inflation but it has not been done for about 4 or 5 years. But even if we had those increments, the current minimum capital would have been around GH¢ 25million which is about half what we are proposing now because Ghana’s economy is not like it was about 10-15 years ago; it’s bigger now” he stated.

In 2017, about three (3) companies reportedly had challenges meeting the then minimum capital requirement of GH¢ 15million. Mr. Ofori confirmed this as a normal industry development.

“It’s always been so in every insurance industry. There are times that companies will have challenges meeting the minimum capital but that does not mean that it’s time to shut them down. We, as regulators, try as much as possible to encourage the shareholders to recapitalize because shutting down an insurance company is not an easy thing and it is the last thing a regulator wants to go through,” he disclosed.

 

The ultimate goal

The Insurance Commissioner reiterated that the purpose of the recapitalisation was to ultimately grow the industry to the benefit of the economy by protecting the interest of the policy holder.

“Following our stakeholder engagements, we’ve done our concept paper which has been reviewed by the board. We’ve explained to stakeholders, the rationale behind the calculation and of course not everybody is going to like it but at the end of the day, we want the best for the industry. The Commission is not interested in closing any entity but rather building a strong market that takes care of the interest of the policy holder,” Mr. Ofori stated.

“Our economy has also grown. The GH¢ 15million was implemented some years ago. Now we have the oil boom and the country is losing so much revenue, we are actually sending money out because our companies are not financially strong to take much of the risks,” he added.

“Over 90% of our risks have to be insured on the international market and these are some of the reasons our cedi is always affected by the dollar. There is more demand for the dollar than the cedi and this actually arises because we are sending these risks out which demands paying insurance premium in dollars. So, what we are trying to do is, we want everyone to increase their intake. The more absorption they can take, the less flight of insurance premium,” the Commissioner asserted.

He also defended the proposed 300% increase in the capital requirement as crucial in stimulating the desired growth.

 

Correlation with the banking crisis and recapitalisation

The NIC has already indicated the banking crisis and recapitalisation somewhat delayed its planned exercise in the insurance sector. This, according to the Commission is because banks were already looking for capital from the same market the insurance companies will be considering to recapitalize.

A recapitalisation directive in the insurance sector would have thus led to competition between banks and insurers in raising capital– making it a lot more difficult for both entities.

With the bank recapitalisation now over, analysts believe the way has now been paved for a similar exercise in the insurance sector. The Insurance Commissioner confirmed this assertion citing the banking crisis as a major factor affecting insurance recapitalisation efforts in 2017 which almost led to the collapse of about three (3) companies.

 “When we assess an insurance company, we don’t look at only the minimum capital but the totality of the risk that it carries. So GH¢ 15million is the minimum but we have companies worth over GH¢ 200million. So if you are worth over GH¢ 200million and you have risk of let’s say GH¢ 600million and you cannot pay your claims on time, it is a challenge despite meeting the minimum requirement. And most of the challenges some of our companies are facing are linked to the banking crisis because they have monies with these banks and they cannot access these monies,” he added.

The Insurance Commissioner also dismissed assertions that the insurance recapitalisation is a mere replication of that witnessed in the banking sector and states that the two exercises are mutually exclusive.

 

“No it’s not a replication for the fun of it. Everything is interconnected. Even some individuals have lost their monies because some of these banks have been consolidated. When such entities go under, it affects everybody. When insurance companies make their monies, these monies are kept in the bank for investment in the economy. Insurance companies go for those monies when there are claims or a need for it. Now we have an insurance company going to the bank and the bank has no money. Although on paper they have monies, once it’s inaccessible, it cannot be considered– affecting their Capital Adequacy Ratio,” he revealed.

This, according to the Commissioner, only makes a stronger case for the recapitalisation.

Meanwhile, banking and insurance operations are distinctly different with diverse inherent risks. Some analysts thus insist recapitalization may not necessarily be the way forward for addressing the woes of the insurance industry. Mr. Ofori however asserts, insurance companies even need more capital than banks.

 

Risk-Based Capital requirement

The NIC’s current regulatory approach is geared towards the global trend of Risk-Based Supervision framework and the Commission is still pursuing this approach by way of a Risk-Based Capital (RBC) requirement.

 

“The minimum capital requirement is also part of the risk-based framework because, that means, so much assets to absorb more risks. Risk-based means we’re looking at the totality of your portfolio to see the inherent risks and how we can manage them. It is a complex thing. Even though we asking for minimum capital, risk-based provisions will also come from it. When you suffer from malaria you don’t take only chloroquine. You add multivitamins and some pain killers to make you survive,” he illustrated.

 

Recapitalisation has always been used as a regulatory tool to check the financial soundness of the industry.  There is, however, an emerging school of thought that this is not as crucial as the regulator focusing on ensuring effective management of the capital of the companies by ensuring they maintain capital levels commensurate with their respective risks.

 

Mr. Ofori says all these complement each other in strengthening an industry.

“Even new companies entering the market are not allowed to start up with the GH¢ 15million which was the minimum but at least GH¢ 25million. We couldn’t ask for the GH¢ 50million and even with that, they are investing more.”

 

Local versus International standards

Internationally, capital is not necessarily used as the basis for assessing the strength of an insurance company as opposed to the company’s net worth– an assertion Mr. Ofori confirmed.

“In advanced countries, their capital requirement could be like that of Ghana or even less.      That doesn’t mean that the companies that applied for the license to operate insurance don’t have the capital backing. These companies know that insurance business is risky. So if the minimum capital required is US$ 3million, that company comes into the business with US$ 500million by way of net-worth.

When we say minimum like the GH¢ 50million, that money is not going to sit down doing nothing. It could be your businesses, assets and other investments. Insurance monies have to be working. So if you have an insurance company that owns apartments, it’s part of their total worth. When we assess your worth, we look at both your liquid cash and assets because an insurance company can have a chain of hotels which means it can take as much risks and when there is a problem, it can fall on them. The Aon’s, Allianz and CGI’s have big investments all over the world and when they have challenges, they know where to draw money from. So when we say minimum capital requirement, it is not only liquid cash but also investments in T-Bills and so on,” he further explained.

The MCR in the Pan-European Solvency RBC regime is only € 3.2million (approximately GH¢ 19million) for life and reinsurance companies and € 2.3million (approximately GH¢ 14million) for non-life insurance companies. Some analysts have in this light predicted Ghana may only end up being one of the over-capitalised industries in the world by end of the recapitalisation.

But Mr. Ofori is challenging such views insisting that the local insurance industry which is still a burgeoning one cannot be placed on a level pegging with such developed regimes when it comes to capital requirement.

The dollar equivalent of GH¢ 50million is about $ 10million or less depending on the exchange rate and other factors. Don’t forget the financial strength of those companies operating in those markets. One company is even worth more than all companies put together in Ghana. When we make reference to other places, Ghana is different. When you come to Ghana, the way people respond to work is different. Minimum capital has nothing to do with international best practices,” he emphasized.

Ghana is not the country with the highest minimum capital requirement in the world. There are African countries such as Kenya whose was higher than Ghana. We’ve done a lot of research. Kenya is about US$ 8million or so and in Ghana the GH¢ 50million which was supposed to be $10 million will probably come low depending on exchange rate and other things. Insurance is international and transnational and each company must be worth its weight in gold on the international risk market otherwise businesses coming from outside Ghana will not consider Ghanaians,” he elaborated.

 

Expected Outcomes

The Insurance Commissioner is confident the industry will respond positively to the exercise – citing special provisions to facilitate the process.

“If we should introduce the minimum capital, almost 50% of companies will meet it per our analysis. Looking at their portfolio, some of them qualify already, some with a little push will be there and a few may have challenges. But we will encourage them; that’s why we have transitional provisions.”

According to Mr. Ofori, the recapitalization is ultimately expected to reposition the insurance industry and the economy as whole on a stronger footing by addressing issues like low insurance penetration and undercutting.

“If you have a lot of companies on the market that are not financially strong, you will definitely have problems like undercutting because some of them are ready to sell for cheap. They take low premiums and when there is a loss, they are unable to pay. Strong companies have bad days but their account is so big and they are able to pay claims. So I think we’ll have a much disciplined market because minimum capital is not going to be easy. Recapitalisation will help eliminate undercutting because the more you undercut, the more it affects your minimum capital. So you’re going to do prudent underwriting”

In terms of the bigger picture by way of economic impact, he stated “I believe all in all, the industry can also retain much of their underwriting income and probably create more jobs. The more money we can create, more employment can be created, less monies leaving the country, our cedi might be more stable and the economic benefits are numerous”.

He also revealed a new bill is currently under consideration to complement the recapitalisation in addressing the longstanding challenge of low insurance penetration in Ghana.

“We’re working on a bill to make sure we can have more compulsory insurances. We are trying to make sure that these compulsory insurances will help boost the interest in insurance. We’re also increasing market conduct supervision to enable companies pay their claims on time. We’re providing a lot of insurance education to the industry and the general public. This year for example the Commission out of its own budget, through the Ghana Insurance College will train 10,000 Ghanaian youth as insurance agents nationwide for free so that there will be a pool of agents from which the industry can always fall on to recruit. We’re also doing much with respect to the compulsory fire insurance; creating awareness that it is compulsory to have these kinds of insurances. So we’re doing all we can.”

Even though the recapitalisation in the banking industry led to consolidation of several banks and lay-offs, Mr. Ofori believes the final narrative in the insurance sector may not necessarily be the same– allaying such concerns of concomitant job losses as a result of companies failing to meet the capital requirement.

With the banking recapitalisation, some banks were affected. We don’t want to have those challenges. We don’t want the companies to go under. Much as we want the minimum capital to go up, we want to do it in such a way that we move along with everybody,” he concluded.

 

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