Mills’ economy bleeds
What Ghanaians are expecting today is lower interest rates, which go a long way to boost the private sector and encourage small businesses to thrive. Efforts by government to reduce interest rates, though, seem to be encouraging but can be stiffened by other economic forces.
It started with the Monetary Policy Committee (MPC) of the Bank of Ghana reducing the prime rate by 50bps to 18.00%.
Financial analysts were anticipating that by end of November this year, rates were going to go down in the 100-200bps easing.
However, the situation gives some relief that this could be the first of a series of rate cuts, and therefore an expected monetary easing of as much as 400bps over some period.
The growth trajectory was one of the major drivers behind the MPC's policy decision. While the latest survey conducted by the Bank of Ghana in October, 2009 suggests some recovery in both consumer and business sentiment, as the economy experiences an important stabilisation following last year's twin deficit crisis, other indicators are more worrying.
The Bank of Ghana's Composite Index of Economic Activity (CIEA) recorded significant slowdowns over the first three quarter of 2009, declining by 4.32%, 0.91%, and 0.94%, respectively.
By September 2009, the CIEA had declined by 6.2% year-on-year, compared with growth of 14.7% in the corresponding period of 2008.
Surprisingly, in the context of an economy that will soon emerge as an oil producer, construction and port harbour activities both appeared to be weak.
The economic policy of the Mills-led administration in dealing with domestic debt is of much relevance, but then the economy needs to bring down interest rates to preserve macroeconomic stability.
Adding more urgency to the need for monetary easing are increasing signs that high interest rates are hurting the economy.
Non-performing loans rose sharply between the end of September 2008 and end-September 2009, from 7.6% to 13.2%.
More subdued balance sheet growth (24.6% in the year to September 2009 from 36% earlier) may also be explained by the interest rate environment. But perhaps the most worrying aspect of the high interest rate environment is the imbalanced growth that appears to result. Much of the tightening of credit experienced in the Ghanaian economy has been on non-price terms through the shortening of loan maturities, or the requirement of additional collateral and/or loan covenants.
Households and SMEs appear to have been disproportionately hit by this credit tightening. For large corporates, access to credit remains reportedly unchanged.
This is symptomatic of the general read on the Ghanaian economy. While there is confidence that better times are ahead, Ghana's accession to oil-producer status will signal a structural shift in the economy, navigating the near-term factors that constrain growth is nonetheless a challenge.
While large corporates can access credit based on this eventual improvement in Ghanaian fundamentals, for the household and SME sector, near-term tightness is much more of a binding constraint.
President Mills and his team are likely to react by easing monetary policy gradually, in the hope that the improvement is transmitted to the general credit environment, and more are able to benefit.
While rising oil prices pose some risk to the inflation outlook – domestic oil production is conservatively expected to commence by early 2011.
Razai Khan, Head of Research, Standard Chartered Bank, pointed out that while the improved fiscal balance on a cash basis may have had an important role to play in the Bank of Ghana's decision to cut interest rates, the fiscal picture is important in other respects too.
“Of particular concern is the debt overhang, with interest payments on domestic debt likely to exceed initial budget estimates by 21% over the course of financial year 2009. Notwithstanding the recent improvement, the legacy effect of Ghana's previously outsized fiscal deficits pose some risk to price stability.”
According to Razai, although the share of short-term securities in the outstanding stock of government debt has eased to 61.8%, after peaking at 66.2% in August 2009, fears over the potentially destabilising effects of Ghana's dependence on short-term deficit financing persist.
Currently, the Bank of Ghana's own holdings of government securities has fallen from 19.1% in August 2009 to 11.8% by the end of October 2009. But there is little doubt that in order to move to a more sustainable position, Ghana needs to see lower domestic debt service costs.
Ghana could therefore increase its dependence on external debt – but given that its external debt ratios are already deteriorating, and that the international financial institutions would likely frown on any substantial, new, non-concessional borrowing, this is unlikely to be the preferred policy choice.
The other options would include extending the maturity of existing domestic debt by borrowing more long-term to alleviate the pressure at the short end of Ghana's yield curve, or to reduce short-term interest rates. While Ghana has seen a shift in the average maturity of its debt, more long-term issuance combined with interest rate easing is needed to bring debt service costs down to more sustainable levels.