Analysis of the Impact of Globalization and Capital Market Returns on the Ghana Stock Exchange

Abstract

After independence in 1957, Ghana’s economy was characterized by a massive involvement of the state in almost every sector of the economy, which resulted in the public sector completely dominating production activities and formal employment. By the early 1980s, the economy had witnessed a long period of economic decline that manifested itself in low or negative GDP (Gross Domestic Product) growth, falling export revenue, and deteriorating infrastructure. Additionally, most of the state enterprises were faced with poor financial performance and low productivity culminating in increasing the burden of subsidy costs for government.The challenge faced by Ghana, like other sub-Saharan African countries, prompted the search for renewed economic strategy that would ensure economic growth necessary to reverse the rising unemployment rates. There were also efforts by successive governments to enforce efficiency and productivity in the state enterprises, as well as the wider financial and capital markets. With these objectives in view, the Government of Ghana launched an Economic Recovery Program (ERP) in 1983 aimed at reversing a protracted period of serious economic decline characterized by lax financial management, inflation rates well over 100 percent, and extensive government involvement in the economy. The policies included fiscal and monetary restraint, exchange rate adjustment/devaluation, trade liberalization, divestiture of state-owned enterprises, and private sector promotion. With the implementation of the economic recovery program, Ghana’s economy was poised to embrace globalization with the increased interaction with other economies, which opened the economy to greater and freer external trade and capital inflows. As part of the globalization efforts, the Ghana Stock Exchange (GSE) was incorporated in July 1989, and was subsequently recognized as an authorized stock exchange in October 1990 under the Stock Exchange Act of 1971 (Act 384). One of the main objectives of the Ghana Stock Exchange is to provide the facilities and framework to the public for the purchase and sales of bonds, stocks, shares, and other securities. Since the inception of the Exchange, some significant developments have taken place that has resulted in huge steps towards the liberalization or globalization of the stock market in Ghana. Key among them is the decision by the government to off load its shares in certain strategic state enterprises and banks, including Ashanti Goldfields Ltd. and Ghana Commercial Bank, through the Exchange. Additionally, the Exchange in 1993 opened the market to both non-resident Ghanaians and foreigners, enabling them to invest directly without prior approval. These actions, among others, were recognized by many as an opportunity to attract top rated foreign institutional buyers, which would add a big boost to the development of the stock market in Ghana.With increased efforts still being made by the Ghana Stock Exchange to further open the stock market to the global market, there is the need to assess the effect globalization has had on the stock market since its inception. Thus, after almost two decades of operation by the Ghana Stock Exchange, the issue then arises as to whether the stock market has indeed benefited from the effects of globalization. This study, thus, seeks to evaluate the development of the stock market in Ghana from 1990 to 2010, and assesses the extent to which opening up the market to the global markets has impacted on the development of key stock market indicators.