Liquidity Scare

There are growing fears that the settlement of the huge wage bills on the public sector payroll and the payment of arrears owed contractors will present a major risk to the outlook of the economy and its managers.

Central Bank Governor, Mr Kwesi Amissah-Arthur re-echoed those fears at a news conference in Accra to announce the decision of the Monetary Policy Committee (MPC) on its policy rate after a week’s deliberations.

These concerns come on the back of rising arrears on the public sector wage bill following the implementation of the single spine salary structure, which had seen the salaries of public sector workers increase in some instances two fold as well as the non payment of arrears owed contractors for job done since 2008.

The Bank of Ghana, (BoG) which left its main policy rate unchanged at 13.50 per cent for the second time in a row, was concerned that the potential sources of risk to the 2011 budget are the management and settlement of arrears and the settlement of rising wage bills.

“The potential sources of risks to the 2011 budget were recognised as the management and settlement of payment arrears, the pace of settlement of wage arrears and the inflexibility of the expenditure programme, especially by the continued earmarking of revenues”, Governor Amissah-Arthur said.

“The nature and pace of growth of the budget deficit needs to be moderated”, the Governor added.

But a Finance Ministry source has told the Graphic Business that, the rising wage bill and settlement of government’s debts are causing some discomfort among the managers of the economy.

Government is therefore, making an excursion onto the international capital market to source for capital to finance the country’s fiscal deficits.

First is the expected Eurobond foray by government, which is expected to raise some US$500 million to speed up the development of the country’s infrastructural development and to finance the budget deficit.

If the government is successful in its attempt, it would be the second time in three years that Ghana would seek financing through a sovereign bond issue on the international capital market.

Ghana went to the international market in September 2007, for the first time, to raise funds through a sovereign bond issue. The US$750 million bond issue was oversubscribed by over 400 per cent, amounting to US$3.7 billion.

About 40 per cent of the bond was placed with US investors, 36 per cent with UK investors, with the remaining going to the rest of Europe. Altogether, 158 interested parties bought into the 10-year dollar bonds that yielded 8.5 per cent at par.

Euro bond coupon rates are set at an interest spread above the London Inter-bank Offered Rate, the spread depending on the perceived sovereign risk of the issuing country.

In September this year, officials of Goldman Sachs were in the country to hold discussions with government officials over the attempts to raise some funds from the US financial powerhouse.

Government’s consideration of a new Eurobond issue is however in contrast to its earlier inclination not to contract new loans on commercial terms, but rather restrict itself to concessionary borrowing from multilateral institutions such as the World Bank and the International Monetary Fund, and bilateral development partners.

Though Governor Amissah-Arthur would not directly confirm government‘s latest move to raise some capital on the international market. He says “we are advising government on those issues and at the right time you will be informed”.

The decision was announced by Governor Kwesi Amissah-Arthur, who said the Bank expected inflation to finish the year close to its 9.5 percent target and dip below nine percent next year.

“Given the inflation outlook for 2011, the recovery in economic activity and the counter-balancing effects of the risks in the outlook”, annual inflation was flat at 9.38 percent in October, with November's figure due to be released later this week.

Analysts expected the Bank to hold the rate to cushion Ghana’s economy against potential future inflation pressures as it gears up to pump its first oil from December 15, 2010.

Ghana expects to produce an average 120,000 barrels per day from its off-shore Jubilee field with reserves estimated at 1.5 billion barrels. Production is expected to increase to 250,000 bpd after three years about an eighth of Nigerian output.

The Monetary Policy Committee maintained the prime rate at 13.5 per cent at its last meeting in September after cutting it by 150 basis points in July.