Measuring Financial Stability in Ghana: A New Index-Based Approach

We compute aggregate financial stability index (AFSI) for Ghana to gauge the performance of the financial system since the adoption of inflation targeting in 2017. The index is derived from four sub-indices, namely financial development index (FDI), financial soundness index (FSI), financial vulnerability index (FVI), and the world economic climate index (WECI). The trend in AFSI identifies three distinct developments in Ghana’s financial system. These are (1) the period of financial strain following the global financial crisis (June 2007 – September 2010); (2) period of sustained improvement in financial stability (December 2010 – June 2015); and (3) a return to financial stress (September 2015 – December 2016). We observe that the risks to financial stability still persist as sub-indices especially FVI, FDI and FSI (in 2016) remain well below their respective levels in since 2012. Analysis of the sub-indices thus suggests that the risk factors to financial stability primarily emanates from the weakening domestic factors which could be linked to the uncertainties that surrounded the election in 2016. Our metric therefore provides a more powerful gauge of financial stability in Ghana and very relevant for monetary policymaking decision.