BOG Monetary Policy Committee Press Release

1. Developments in the Consumer Price Index indicate that inflationary pressures continue to diminish. Headline inflation dropped further from its December 2003 level of 23.6 per cent to 22.4 per cent by January 2004. The monthly changes in the CPI continued the steady decline since April 2003. Thus, over the 10-month period to January, the CPI has risen by only 4.5 per cent. Overall, increases in both food and non-food inflation have been modest, and among the lowest on record.

2. The latest numbers show that the growth of the monetary aggregates continued to slow down. Broad money (M2+) growth declined from 50 per cent in December 2002 to 38.0 per cent by December 2003. Year-on-year growth in reserve money declined from some 42.6 per cent in December 2002 to 28.2 per cent in December 2003. In January 2004, reserve money growth picked up to 31.9, but this compares with an annual rate of 34.3 per cent recorded in January 2003. The principal factor underlying reserve money growth was the accumulation of net foreign assets by the Bank of Ghana.

3. Interest rates on the money market have stabilized somewhat in the first two months of 2004. These followed sharp declines in the second-half of 2003:

§ The benchmark 91-day Treasury bill rate eased to 18.5 per cent in December 2003 and is now around 17.6 per cent in February 2004.

§ Similarly, on the Interbank money market, rates have moved to around 15.8 per cent by February 2004 from 18.0 per cent at end December 2003 compared to 27.0 per cent in June 2003.

§ Commercial bank base rates have also followed the pattern with many banks announcing base rate drops to around 27.0 per cent in February 2004, from an average of 32.0 per cent in 2003.

§ There continues to be a shifting market preference in favour of long-dated government maturities. The share of 91-day Treasury Bill declined to 38.9 per cent by January 2004 from 43.3 per cent in December 2003, and 50 per cent in December 2002. The share of the one-year note on the other hand has increased to 14.8 per cent by January 2004 from 13.3 per cent at the end of December 2003 and 9.4 per cent at the end of December 2002.

4. The economy has been responding well to the policies underlying the fiscal and monetary policy framework and improved market expectations. Available data shows that economic activity picked up significantly in the second half of 2003. The Bank of Ghana's Composite Index of Economic Activity, which measures real sector activity including output of selected key enterprises, industrial electricity consumption, domestic VAT, port activity, imports, exports, and employment contributions, shows economic activity on the increase. The findings of the Bank of Ghana survey of business confidence for January 2004 continue to show increasing business confidence and declining inflation expectations. In addition, preliminary data released by the Ghana Statistical Service indicates a gross domestic product (GDP) growth of 5.2 percent, higher than initially projected.

5. Available data also indicates that the banking system as a whole remains well capitalized, profitable and fairly liquid. Banks as a whole have made adequate provisioning for non-performing loans and this has placed them in a position to extend credit to the private sector. Indeed, credit to the private and public enterprises from domestic money banks in 2003 amounted to ¢3,400.8 billion (33.9 per cent over the 2002 level). 68.3 per cent of the credit went to the private sector, with manufacturing (32.1 percent), commerce and finance (18.8 percent), agriculture, forestry and logging 15.6 percent) and import trade (12.7 percent) receiving the highest shares of credit to the private sector.

6. The external payments position for 2003 turned out to be significantly better than initially forecast. The current account (including official transfers) recorded a surplus of $40.76 million compared to a deficit of $30.57 million in 2002 and a projected deficit of $130.94 million for 2003. The improvement in the current account was helped by an increase in cocoa earnings and bolstered by net private transfers.

§ Private inward remittance – transfers received from NGO's religious groups, individuals etc. – channeled through the banks and finance companies amounted to $2,164 million for 2003 ($605 million in the last quarter alone), a 57.5 per cent increase over 2002 total of $1,374 million. § Gross International Reserves, which reached a level of $1,422 million at the end of December 2003 (slightly over 4.0 months of imports) further increased to $1,455 million by February 2004, representing some 4.3 months of imports. This is a new record.

7. The cedi exchange rate has continued to remain relatively stable. The cedi depreciated by less against the US dollar and British Pound and by marginally more against the euro in 2003 compared to 2002. The rate of depreciation of the cedi against the US dollar, the British Pound and Euro in 2003 was 4.9, 15.5 and 28.5 per cent respectively in 2003 compared to 14.2, 22.5 and 28.1 per cent respectively in 2002. The relative stability of the cedi on the foreign exchange market has occurred in the context of continued realignments of the major currencies on the international exchange markets, with the euro and pound significantly appreciating against the US dollar. The trade-weighted real effective exchange rate for the cedi shows a real depreciation of the cedi in 2003 by 9.8 per cent and this should help preserve competitiveness.

8. The budget for 2004 sets fiscal policy on the path of continued deficit and domestic debt reduction. The budget envisages a net domestic repayment of 2.2 per cent of GDP (¢1,732 billion) by the end of 2004. If fully implemented, including all the revenue and structural measures, it would serve to lock-in the benefits of the macroeconomic stabilization achieved thus far.

9. In sum, the immediate outlook for continued convergence toward low and durable inflation and increased growth is underpinned by prudent execution of the government budget framework for 2004. Private sector response to the improving economic fundamentals, especially moderation in wage and price setting behaviour would also be essential to the outlook. There are nonetheless some downside risks. Projections for the prices of Ghana's major export commodities indicate some softening relative to last year. Nevertheless exports are projected to grow by some 5.0 per cent in 2004 with increases in the output of cocoa and gold as well as non-traditional exports. Oil price developments are still uncertain as to the direction of movement in light of recent OPEC cuts. It is also important that the Multi Donor Budget Support (MDBS) arrangement be implemented in the same way as was demonstrated in 2003 to ensure the timeliness of donor flows. The accumulation of gross international reserves should however provide some cushioning effect for any unanticipated external shocks.

10. Given the balance of risks and outlook for inflation, the Monetary Policy Committee has decided to reduce the Bank of Ghana Prime Rate from 21.5 per cent to 20.0 per cent.