The Monetary Policy Committee of the Bank of Ghana has decided to keep the Prime Rate at 18.5 per cent. The decision, announced Wednesday by outgoing Governor, Dr. Paul Acquah, was influenced by a positive outlook for the economy, explaining that barring any significant shocks, pressures on the exchange market should ease considerably as the external current account deficit appears to be unwinding.
“The risks in the outlook relate to the speed with which oil prices might rebound, with recovery of global demand from the financial and economic crisis. Also, while fiscal consolidation is taking place, shortfalls in revenue and donor disbursements and payments of domestic arrears have meant that some payments in the pipeline would have to be settled that could add some stimulus to the economy. However, the risks to inflation and growth appear well balanced with policies working to strengthen the disinflation process that has begun and keep it on the path towards the inflation target of 14.5 percent for the year. In the circumstances, the Monetary Policy Committee decided to leave the prime rate unchanged at 18.5 percent,” Dr. Acquah explained at a press briefing in Accra.
Below is the full statement by the Monetary Policy Committee.
1. Ladies and Gentlemen, you are all welcome to this Monetary Policy Committee press briefing.
2. One year after the collapse of Lehman Brothers which signaled what became one of the worst global economic crisis, all the uncertainties seem to be dissipating. Initial signs on the global front point to recovery, particularly, in the US, Europe and the leading emerging market economies (China and India). Understandably, policy makers are receiving this news with some cautious optimism, warning against pre-mature withdrawal of stimulus measures which could put the recovery at risk.
3. On the domestic front, we have begun to see some signs of stabilization in the third quarter of the year, an indication that the effects of both monetary and fiscal policies are beginning to take hold. The latest surveys show more positive assessment of the general macroeconomic outlook; and a rebound in both business and consumer confidence, with some downward revision of inflation expectations.
4. Data from the Bank’s Composite Index of Economic Activity (CIEA) show a slowdown in the pace of decline in economic activity. The index which had pulled back in the first quarter, increased by 1.4 percent in the three months to July after remaining flat in the preceding quarter. But developments also show that output growth is much closer to the trend rate of some 6 percent, down from 7.3 percent in 2008.
5. Other indicators such as energy supplied by the VRA over the first seven (7) months of the year increased by 10.5 percent to 5.25 million mwh. Supply to the mines and industry (excluding VALCO) over the same period also has seen an upward trend. Benchmark retail sales similarly showed an increase of 10.3 percent over same period of 2008.
6. Headline inflation which was 20.7 percent in June 2009 declined to 20.5 percent in July 2009 and then further to 19.7 percent by the end of August 2009. The decline in inflation was from both food and non-food sources with the non-food exerting a stronger downward force than food inflation, an indication that the impact of the 30 percent rise in petroleum prices in May has fully been contained. The monthly price increases were the lowest of non-food inflation in recent years, and the decline in the food index was also among the steepest.
7. The Bank’s measure of core inflation (defined to exclude energy and utility) began to decline in August by 0.8 percentage points after increasing steadily in the year to July 2009.
8. Provisional data available at the end of July 2009 show a slowdown in the pace of expansion of the key monetary aggregates. Broad money (M2+) grew by 34.9 percent principally due to an increase in foreign currency deposits. This represented a slowdown from 39.7 percent for July 2008.
9. Foreign currency deposits grew by 70.8 percent in year on year terms at the end of July 2009, but up from 49.8 per cent recorded for July 2008. Foreign currency deposits which amounted to GH¢1,816.8 million in December 2008 increased to GH¢ 2,490.2 million in July 2009, compared with GH¢1,458.1 million for July 2008.
10. The latest credit conditions survey by the Bank of Ghana showed a continued general tightening of credit to both households and enterprises and reduced net demand for credit through the third quarter of the year. Non-price terms and conditions such as shortening of the maturity of loans or credit lines, and the requirement of additional loan covenants and collaterals were employed to tighten credit stance in the third quarter of 2009.
11. Provisional estimates of DMBs credit to the private sector and public institutions show deceleration in credit growth. For the 12-month period to July 2009 credit to both private sector and public institutions increased by GH¢1,659.7 million (32.9 percent) compared with GH¢1,635.3 million (48.0 percent) recorded for the same period in 2008. The private sector accounted for GH¢1,447.3 million (87.2 per cent) of the credit flow.
12. Real annual growth of DMBs credit to the private sector was 11.6 percent at the end of July 2009 down from an end of 2008 level of 25.4 per cent and compares with 32.3 per cent at end-July 2008.
13. There were shifts in the distribution of credit flows during the period. The proportion of credit flow to services reduced from 35.9 percent in 2008 to 16.5 percent in July 2009; commerce and finance from 19.1 percent in 2008 to 2.8 percent in July 2009. On the other hand, manufacturing’s share increased from 10.3 percent in 2008 to 15.1 percent in July 2009; electricity and gas from 3.2 percent to 12.8 percent; transport and communication 2.2 percent to 8.4 percent. All other sectors also gained in shares.
14. The banking sector continues to expand as the overall balance sheet registered an annual growth of 31.9 percent at the end of July 2009 compared with 30.7 percent recorded during the same period in 2008. Paid up capital rose from GH¢350.5 million to GH¢627.1 million in July 2009. Total deposits constituted 73.9 percent of the annual flow of funds, while total borrowings also constituted 9.7 percent (a slowdown in growth from 11.8 percent recorded a year ago).
15. Banks external borrowings, as a source of funding continues to be less than 5 percent of their total funding requirements. This confirms that the banks’ less reliance on external borrowings as a source of funding.
16. The ratio of non-performing loans to total loans increased to 11.4 percent in July 2009 from 7.9 percent for the same period in 2008. The industry’s capital adequacy ratio as measured by the ratio of regulatory capital to risk-weighted assets edged up marginally to 14.7 percent, from 14.3 percent in the corresponding period in 2008.
17. Preliminary banking data on the execution of the Government budget for the year up to August 2009 shows a significant reduction in the deficit on a cash basis relative to GDP
18. Total expenditure (excluding foreign financed capital expenditure) at the end of August was GH¢4,439.94 million (20.5 percent of GDP) compared with GH¢4,300.31 million (26.4 percent of GDP) for the same period in 2008. This represents a year-on-year growth of 3.25 percent compared with 41.6 for the same period in 2008. Some GH¢250 million of this spending represent payments for 2008 in arrears.
* Total revenue and grants at the end of August 2009 was GH¢3,703.80 million (17.1 percent of GDP) compared with GH¢3,021.24 million (18.5 percent of GDP) for 2008. In year-on-year terms, total revenue and grants increased by 22.6 percent, compared with 9.7 per cent recorded in 2008.
* Grants for the period amounted to GH¢426.00 million (1.97 percent of GDP) compared with GH¢405.19 million (2.49 percent of GDP) for the same period in 2008.
19. While revenue growth was somewhat robust, the collections represented 78.6 percent of the projection for end September. Donor disbursement for the period was also about 50 percent of projection, leading to a shortfall in projected budget resource envelop. Partly because of this shortfall, there are some outstanding payments including statutory payments to DACF and GETFUND that would need to be settled later in the year.
20. The overall budget operations for the first eight months of the year resulted in a narrow cash deficit (including grants) of GH¢901.55 million (4.17 percent of GDP) compared with GH¢1,433.99 million (8.8 percent of GDP) for the same period in 2008. The deficit was financed mostly on the domestic money market.
21. The stock of domestic debt which was GH¢4,800.2 million (27.2 percent of GDP) at the end of 2008, increased to GH¢5,489.66 million (25.4 percent of GDP) at the end of July 2009. External debt also increased from US$3,9826 million (28.1 percent of GDP) at the end of December 2008 to US$4,470.2 million (30.2 percent of GDP), bringing total public debt stock to US$8,120.04 million (54.9 percent of GDP) at the end of July 2009, up from US$7,918.1 million (54.6 percent of GDP) at the end of December 2008.
22. Interest rates remained broadly stable in the third quarter.
* The benchmark 91-day Treasury bill rate firmed up marginally by 5bps to 25.89 percent at the end of August compared with an increase of 35bps in June.
* The 182 day treasury rate similarly edged-up by 3bps over the same period to 28.85 percent compared with an increase of 103bps in June.
* The 1-year-note rate was unchanged at 21.0 percent in August 2009 after gaining 100bps in March 2009. The 2-year fixed rate note however moved to 25.50 percent in August from 21.0 percent in June 2009.
* The interbank rate edged up by 18bps to 22.72 percent between June and August 2009 compared with an increase of 105bps in June.
23. Average base rate quotations of the banks were revised marginally upward by 37bps between June and August to the range 25.75 percent – 32.0 percent, compared with 160bps increase in the second quarter and 170 bps in the first quarter. Average lending rates remained unchanged at the second quarter level of 32.75 percent and were in the range 25.75 – 40.0 percent
24. The external payments position shows significant adjustment with sharp reduction in the trade and the current account deficits.
25. Total merchandise exports during the first half of 2009 was US$3,056.27 million, compared with US$2,845.83 million for the same period in 2008. Exports of cocoa beans and products grew by 17 percent in year on year terms amounting to US$1,064.8 million for the six month to June, compared with 22.6 percent growth in 2008.
26. Total merchandise imports amounted to US$4,010.67 million in the first half of the year, compared with US$5,000.85 million for 2008 (a decline of 19.8 percent).
* Non-oil import for the period was US$3,429.12 million compared with US$3,674.39 million in 2008.
* Oil imports for the period was US$581.55 million as against US$1,326.46 million for 2008. The significant drop in the oil bill has been driven by lower crude oil imports mainly as a result of shifts in the hydro/thermal mix to 75.8 percent hydro as at July 2009 compared with 52 percent in July 2007; and lower prices for higher product imports.
27. The merchandise trade deficit for the first half of the year narrowed to US$954.4 million in June 2009, compared with US$2,155.02 million for the same period in 2008, with sharp cut in the oil import bill, while exports held firm.
28. The current account (including official transfers) for the first half of the year is provisionally estimated to be in a deficit of US$299.06 million, an improvement of US$1,160.53 million over the deficit recorded for the same period last year.
29. The capital and financial account for the period up to June 2009 however, moved from a surplus of US$845.0 million over the half year of 2008 to a deficit of US$48.84 million in 2009. This was driven mainly by higher amortization of private sector loans and external trade credit, and some redemption of government securities in the midst of the global financial crisis.
30. The consequence was that overall balance of payments deficit reduced to US$625.98 million, as against a deficit of US$782.67 million in 2008.
31. Latest data on trade suggest that exports have increased to US$3,829.13 million at the end of August, and imports to US$5,268.58 million. The trade deficit rose from US$954.4 million as at June to US$1,439.45 million at the end of August 2009.
* Exports of cocoa beans and products for the year to August amounted to US$1,023.85 million (an annual growth of 7.4 percent) compared with US$953.06 million for the same period in 2008 (annual growth of 21.3 percent). Cumulative cocoa purchases in the first eight weeks of Ghana’s Light Crop season (which started on 16 July) of the 2008/09 Crop Year came to 44,930 tonnes (as at 03 September) compared with 16,826 tonnes over the first eight weeks in the light season of the previous crop year.
* Gold export for the period amounted to US$1,624.99 million compared with US$1,601.37 million over the corresponding period of 2008, an annual growth of 1.5 percent, a net effect of both increases in volume and some declines in prices.
* Non-traditional exports on the other hand amounted to US$729.14 million, compared with US$613.64 million for the same period in 2008, representing an annual growth of 18.8 percent.
32. Non-oil imports at the end of August stood at US$4,582.35 million, a decline of 10.5 percent from the US$5,121.55 million for the same period in 2008. This is compared to a growth of 37.3 percent recorded during the same period last year.
* Oil import bill at the end of August increased to US$826.20 million, but compares with US$1,782.77 million for the same period of 2008, a significant annual decline of 53.7 percent.
* Capital and intermediate goods together accounted for 68.7 percent of total imports, down from 69.3 percent for the same period a year earlier.
33. The foreign exchange market showed a reduction in volume of activity. Total purchases and sales in the foreign exchange market by banks and forex bureaux during the period to August 2009 amounted to US$3,903.58 million, a 21.1 percent decline from purchases and sales over the corresponding period in 2008. Foreign exchange purchases amounted to US$1,534.06 million while sales was US$2,369.52 million, resulting in a net sale of US$835.46 million.
34. Private inward transfers – received by NGOs, embassies, service providers, individuals etc. - through the banks in the January – August period of 2009 amounted to US$5.8 billion, which represents 2.9 percent increase over those for the same period in 2008, which had risen by 32.0 percent over the first eight months of 2007.
* Of the total inward transfers in January – August 2009, US$1,003.66 million (or 17.3 percent) accrued to individuals, compared with 19.7 percent in the corresponding period of 2008.
35. Gross international reserves position at the end of August 2009 was US$1,772.14 million. This compares with US$2,036.22 million in December 2008 and US$2,497.28 million in August 2008; and represents 1.7 months cover of imports of goods and services. As at September 18, 2009, Gross international reserves was at US$2,270.21, including new SDR allocations, and represents 2.2 months cover of imports of goods and services.
36. The volatility in the exchange market eased in the third quarter. Developments in the exchange rates of the cedi against the three core currencies – the US dollar, the pound sterling and the euro – show that between January and August 2009, the cedi depreciated, cumulatively, by 16.7 percent against the dollar, 24.7 percent against the Pound Sterling, and 17.5 percent against the Euro. In year-on-year terms, the comparative depreciations were 12.9, 5.4 and 12.5 percents respectively. The depreciation however, slowed down after the first half of the year and the cedi actually appreciated by 1.7 and 0.5 percent against the US dollar and the pound sterling respectively in August. The result was a cumulative real effective depreciation of 8.1 percent in trade-weighted terms compared with 1.8 percent depreciation over the January – August period in 2008.
37. In sum, there are signs of stabilization in prices and in the exchange market. Inflation expectations are beginning to turn around. Consumer price inflation as well as core inflation remain high around 20 percent, but the recent monthly increases have been modest and there are signs of reduced volatility in prices and in the exchange rate of the cedi against the major currencies.
38. Fiscal policy and a tightening of monetary and credit conditions are putting downward pressure on prices as growth eases downward close to trend.
39. The external payments position has benefited from the continuing terms of trade gains, a reduction in energy bill arising from structural shifts in the generation mix of energy, along with lower oil prices. And the external current account deficit seems to be unwinding, and should ease the pressures on the exchange market barring any significant shock.
40. The risks in the outlook relate to the speed with which oil prices might rebound, with recovery of global demand from the financial and economic crisis. Also, while fiscal consolidation is taking place, shortfalls in revenue and donor disbursements and payments of domestic arrears have meant that some payments in the pipeline would have to be settled that could add some stimulus to the economy.
41. However, the risks to inflation and growth appear well balanced with policies working to strengthen the disinflation process that has begun and keep it on the path towards the inflation target of 14.5 percent for the year.
42. In the circumstances, the Monetary Policy Committee decided to leave the prime rate unchanged at 18.5 percent.
Thank you all for your attention.
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