Wed, 22 May 2013 Business & Finance

BoG increases policy rate to 16%, citing threats to growth and inflation

Dr. Kofi WampahDr. Kofi Wampah

The Monetary Policy Committee of the Bank of Ghana has increased its policy rate sharply for the first time in several months.

The Bank upped its benchmark lending rate to 16 percent from 15 percent.

Announcing the rate at a news conference on Wednesday, Central Bank Governor, Dr. Kofi Wampah said the increment was influenced by threats to economic growth suffering, inflation and dip in business confidence.

The governor also announced the implementation of some new policy measures to stabilize cedi and also a new way of calculating base rate from July.

Below is the statement
Bank of Ghana Monetary Policy Committee Press Release

1. Good morning and welcome to this press briefing. The MPC has held its 55th meeting during which the Committee reviewed the latest economic developments. We present to you highlights of the deliberations and subsequent positioning of the policy rate.

Global Developments
2. Global economic conditions improved following the implementation of various policy measures that successfully contained the threat of the euro area breakup and fiscal contraction in the USA. Overall global growth remained constrained, leading to downward revisions of end year output forecasts from 3.5 percent to 3.3 percent in April 2013. However, the growth is at a multi-speed mode with emerging and developing countries expected to drive the growth at 5.3 percent. The USA is expected to grow at 1.9 percent, while the Euro area will contract by 0.3 percent.

3. Global inflation was largely subdued, having declined to 3.5 percent from 3.8 percent at end 2012, and is projected to remain around this level through to 2014. Inflation is expected to ease further from about 2.0 percent to 1.8 percent in the USA and from 2.3 percent to 1.5 percent in the euro area. In emerging markets and developing economies, inflation pressures are likely to remain contained supported by the recent slowdown in food and energy prices.

4. International commodity prices broadly softened in the first quarter of 2013. Crude oil prices ended the first quarter at US$112.56 per barrel and are projected to end the year at US$100 per barrel. Gold prices have declined sharply to US$1,400 per ounce as at 21st May, and are forecast to rise only slightly to US$1,455 per ounce by year end. However, cocoa prices were at US$2,176 per tonne in the first quarter and it is expected to end the year at US$2,475 per tonne.

Domestic Economic Developments
Inflation and Growth

5. Headline inflation for April 2013 was 10.6 percent, up from 10.4 percent in March and 8.8 percent in January. The upward movement in inflation is partly explained by the continued effect of the upward adjustment of petroleum prices in February, coupled with seasonal effects. Food inflation rose to 6.4 percent in April, from 3.5 percent in January, while non-food inflation edged up to 13.0 percent, from 11.5 percent in the same period.

6. The Bank's Composite Index of Economic Activity (CIEA), which measures the pace of economic activity, contracted by 0.6 percent in March 2013, against 14.8 percent growth in March 2012. All the components of the CIEA recorded negative yearly growth rates with the exception of Tourist Arrivals, Domestic VAT and DMBs' credit to the private sector.

7. The latest surveys conducted in March and April by the Bank of Ghana showed weakened sentiments by both businesses and consumers. The Business Confidence Index declined to 99.0 in March 2013, from 104.1 in December 2012. This was partly due to the energy crisis which in turn lowered business optimism about growth prospects and heightened inflation expectations over the medium-term horizon. Similarly, the Consumer Confidence Index also fell to 96.1 in April, from 105.0 in January 2013.

Government Fiscal Operations (January – April 2013)

8. Provisional estimates on broad fiscal data showed that for the first four months of 2013, government fiscal deficit was equivalent to 3.8 percent of GDP, against a target of 3 percent. This outturn was on the back of a significant shortfall in revenues with expenditures marginally below target.

9. Total revenue and grants was GH¢6.3 billion, against a target of GH¢7.1 billion. Of this outturn, domestic revenue amounted to GH¢5.9 billion, below the target of GH¢6.4 billion on account of lower tax revenues. Total tax revenue amounted to GH¢4.2 billion, below the target of GH¢4.9 billion. The low tax revenue collection over the period was the result of lower company profits and lower imports due to the general slowdown in economic activity. Grant disbursements also fell short of target by 38.3 percent, reflecting non-disbursement from the Multi-Donor Budget Support (MDBS) partners.

10. Non-tax revenues, on the other hand, turned in higher than budgeted at GH¢1.6 billion, compared to the target of GH¢1.5 billion.

11. Total expenditures, including payments for the clearance of arrears and outstanding commitments amounted to GH¢9.7 billion, lower than the budget target of GH¢9.8 billion. The wage bill amounted to GH¢3 billion, against a target of GH¢2.8 billion. Similarly, interest payments amounted to GH¢1.6 billion, against a target of GH¢1.1 billion.

12. These developments resulted in an overall budget deficit of GH¢3.4 billion (3.8% of GDP) in the first four months of the year, against a target of GH¢2.7 billion (3% of GDP).

13. The deficit was financed mainly from domestic sources, resulting in a Net Domestic Financing (NDF) of GH¢2.7 billion, higher than the budget target of GH¢2.2 billion. Foreign financing of the budget amounted to GH¢687.2 million, also higher than the GH¢482.1 million target.

14. The stock of public debt increased to GH¢38.3 billion (43.2% of GDP) at end April 2013, from GH¢35.1 billion in December 2012. Of this, the stock of domestic debt amounted to GH¢20.3 billion compared to GH¢18.5 billion in December 2012. External debt stood at US$9.5 billion up from US$8.8 billion over the same period.

Monetary and Banking Sector Developments
15. The pace of expansion in monetary aggregates moderated in the first quarter of 2013. Broad money (M2+) grew by 24.1 percent in March 2013, compared with 29.1 percent in the same period a year earlier. This was largely driven by a sharp drop in the annual growth of foreign currency deposits to 14.1 percent in March 2013 from 47.7 percent in March 2012.

16. The latest Bank of Ghana credit conditions survey showed a general net tightening of credit conditions. With the exception of consumer credit which saw some easing, the credit stance for all other loan types including SMEs, large enterprises, short and long term loans were tightened in the period.

17. Annual growth in private sector credit slowed to 28.7 percent in nominal terms at the end of March 2013, from 44.6 percent in March 2012. Similarly, annual growth of real private sector credit was 17.6 percent in March 2013, down from 32.9 percent in March 2012.

18. Banking sector performance was strong in the first four months of the year, with increased competition, asset growth, improved liquidity and profitability. Total assets of the banking industry increased to GH¢29.6 billion at the end of April 2013, compared with GH¢23.2 billion in April 2012. This was driven mainly by advances, which accounted for 42.5 percent of the total. The asset growth was funded by deposits which recorded an annual growth of 22.4 percent to GH¢20.7 billion at the end of April 2013.

19. Non-Performing Loans (NPL) ratio within the banking industry decreased to 13.3 percent in April 2013, from 14.1 percent in April 2012, while the ratio excluding the loss category, declined to 5.2 percent from 6.1 percent in the same period.

20. Interest rates on the Treasury bill market have broadly declined. Between December 2012 and April 2013,

• Both the 91-day and 182-day Treasury bill rates remained broadly unchanged at 23 percent.

• The 1-year note rate fell from 23 to 22.1 percent, and the rate on the 2-year note declined from 23 to 22.4 percent.

• The 3-year bond rate fell from 21 to 16.9 percent.

• There was no issue of the 5-year bond, therefore the rate remained unchanged at 23 percent.

21. The weighted average interbank rate declined to 16.9 percent in April 2013, from 17.5 percent in December 2012.

22. Average lending rates of the banks were revised upwards to 27.1 percent in April 2013, from 25.7 percent in December 2012. The average rate on 3-month deposits remained stable around 12.3 percent, resulting in a wider spread of 14.8 percent in April 2013, compared with a spread of 13.2 percent in April 2012.

External Sector Developments
23. The current account recorded a deficit of US$1.1 billion in the first quarter of 2013 compared to a deficit of US$986.6 million in the same period of 2012. This was reflected in all its components. The trade deficit worsened to US$334.6 million in the review period from a near zero balance in the corresponding period of 2012. The services, income and transfer account recorded a lower deficit of US$788 million compared to a deficit of US$986.8 million in 2012.

24. The outturn for the trade account was driven by some moderation in the prices of the major export commodities on the international market and slower growth in imports. Total exports declined by 7.3 percent in year-on-year terms to US$3.8 billion during the first quarter of 2013. Of the total,

• Gold exports were US$1.5 billion,
• Cocoa beans and products were US$725.8 million, and

• Crude oil exports amounted to US$1.1 billion.
25. Total imports, on the other hand, recorded a marginal year-on-year growth of 0.8 percent to US$4.2 billion in the first quarter. Of this, non-oil imports went down by 7.1 percent to US$3.2 billion while oil imports increased by 44.2 percent to US$913.3 million.

26. The net inflows into the capital and financial account improved to US$1.4 billion compared with US$156.7 million in 2012. This was on the back of higher official capital inflows amounting to US$316.3 million, net short-term capital flows of US$262 million, portfolio investments of US$246.3 million and private capital of US$570 million.

27. These developments resulted in an improved balance of payments deficit of US$136.3 million in the first quarter of 2013, compared with a deficit of US$1.3 billion in the same period of 2012.

28. In the period January to mid-May 2013, the Ghana cedi cumulatively depreciated by 2.3 percent against the US dollar. During the first quarter of 2013, however, the real exchange rate appreciated by 5.9 percent.

29. Private inward transfers received through the banking system from January to March 2013 declined by 14.1 percent on a year-on-year basis to US$3.9 billion. Of the total transfers, US$393.2 million accrued to individuals compared with US$478.5 million in the same period of 2012.

30. Gross international reserves amounted to US$5.2 billion at the end of April 2013, compared to a stock position of US$5.4 billion at the end of December 2012. This is equivalent to 2.9 months of import cover.

Summary and Outlook
31. In summary, the Committee has noted the continued vulnerabilities in the global economy, despite some modest gains in economic conditions. In particular, the weakening of commodity prices on the international markets has increased the risks to the external outlook.

32. The Committee observed challenging domestic economic conditions in the first four months. Specifically, the pace of growth in economic activity has weakened, evidenced by a contraction in the CIEA. Business and consumer sentiments on growth prospects have softened amid heightened inflation expectations. The pace of growth in credit to the private sector has also moderated, while the credit stance of banks has tightened.

33. On the external front, the trade deficit has widened further on the back of a significant deterioration in the terms of trade. This was on account of low international commodity prices which have fed through to lower exports receipts, despite imports remaining broadly flat. The combination of these factors have resulted in heightened exchange rate pressures in the foreign exchange market, although at a measured pace relative to 2012. Inflation has also gone up for the third consecutive month, raising the central path of the forecast by a percentage point.

34. The fiscal outturn for the first quarter also pointed to significant revenue shortfalls although expenditures remained broadly within targets. It is important to note that government has put in place measures to address the revenue shortfalls and rationalise expenditures including a freeze on new projects to help with the fiscal consolidation efforts. Also, government has initiated a program to restructure its debt by substituting the high cost short-term debt with longer-term instruments. This is expected to help reduce the high interest payments.

35. On assessment of risks to inflation and growth, the Committee took note of the impact of the combined effects of the upward adjustment in petroleum prices and the high twin deficits of 2012 resulting in aggregate demand pressures. Food prices continue to pose significant near-term risk to the inflation outlook. The inflation profile is therefore currently dislodged from trends over the recent past.

36. The major upside risks to the inflation outlook are therefore: heightened inflation and exchange rate expectations, the lingering fiscal pressures, challenges in the energy sector, the effect of weakened commodity prices on the external sector, and the likelihood of full cost recovery in the energy sector.

37. On the growth outlook, the Committee noted risks emanating from lower commodity prices, energy sector challenges, weakened business and consumer confidence, and tightened credit stance.

38. On balance, the Committee held the view that risks to the inflation outlook were elevated and outweighed the risks to growth and therefore decided to increase the policy rate from 15 percent to 16 percent.

Additional Policy Measures
39. In addition to the increase in the policy rate, the Bank has recently introduced changes to its monetary operations by:

• Realigning the policy corridor by widening the band. The Reverse repo rate is now 200 basis points above the policy rate while the repo rate is at 100 basis points below it.

• Changing its mode of presence in the interbank market by introducing an “informal standing facility” to operationalize its policy decisions and enhance the transmission mechanism. This process will be formalized shortly.

40. These changes have steered the interbank rate within the policy corridor. It is expected that as government restructures its debt and consolidates its fiscal operations, the Treasury bill rates will also fall within the corridor.

41. The policy measures introduced by the Bank in May 2012 with regards to cash reserve requirements, Net Open Position limits, and Vostro balances will continue to be in place.

42. The Base Rate formula will be implemented by all banks with effect from 2nd July, 2013 to ensure transparency in the pricing of credit in the banking system.

43. The Bank will continue to monitor developments and take appropriate measures to ensure that the price stability objective is attained.