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25.07.2005 Press Release

Press statement of the Monetary Policy Committee of the Bank of Ghana

Esi Hammond

1. Ladies and Gentlemen, thank you for honoring our invitation. I would like to share with you available data on key economic indicators and detailed information on financial policies and other developments since the last MPC meeting in May this year. And then I will communicate for the benefit of the general public the decision of the MPC on the Bank of Ghana Prime Rate. 2. Developments in the Consumer Price Index during the second quarter of the year indicate that inflation continues to decline, and prices are increasing at a slower pace than in the same period in 2004. Headline consumer price Inflation fell for the third consecutive month from 16.7 percent in March 2005 to 15.7 percent in June on a year-on-year basis. The drop in Inflation over the quarter has been driven by the continued slowdown in both food and non-food price inflation. The monthly increase in the food price index declined from 3.3 percent in March 2005 to 1.5 percent in June, while the non-food price index declined from 0.6 percent to 0.3 percent over the same period. These increases were much slower than in the same quarter of 2004. The Bank of Ghana's measures of core inflation continue to be stable within a narrow range, with three of the five measures in the single digit range, between 6.6 and 9.5 percent, and marginally above their rates in the same quarter of 2004.

3. The latest numbers show that the growth of the monetary aggregates have continued the slow down from the levels observed in the first quarter 2005. At the end of June 2005, the growth of reserve money stood at 15.7 percent, down from 35.4 percent in June 2004 and 19.7 percent in March 2005. Broad money (M2) growth similarly declined from 40.1 percent in May 2004 to 23.0 percent in May 2005 (the latest data available). M2+ growth has also slowed from 38.4 percent in May 2004 to 23.8 percent in May 2005. And foreign currency deposits in the banking system has increased by $118 million (19.0 percent) between May 2004 and 2005.

4. Interest rates on the money market eased downwards in the second quarter.

· The benchmark 91-day Treasury bill had declined from 17.20 percent in March 2005 to 16.2 percent by June, and further to 15.5 percent by mid-July.

· Similarly, interbank overnight money market, rates had moved from 16.21 percent in March 2005 to 15.8 by June, and fell further by 60 basis points in mid-July.

· Commercial bank base rates, also followed the pattern, declining from an average of 25.0 percent in December 2004, to 22.5 percent in June 2005 but with rigidly large common average real interest rate spreads being maintained by the financial institutions.

· The yields on the two-year and three year Government floating rate notes and bonds have remained stable at 20.0 percent and 21.5 percent respectively but the new instruments had gained market share of 23.4 percent by June (compared to 14.8 percent in December 2004), aided by the diminishing inflationary expectations.

· The portfolio shifts in the auction market have resulted in some further lengthening of the average maturity of treasury bills and notes to 188 days in June from 181 days in March 2005. This implies a continued reduction in the turnover rate of government securities to 1.9 times in a year at the end of June 2005 from 5.0 times at the end of August 2004, the eve of the introduction of the longer-dated government debt securities.

5. The annual growth of credit extended to the private sector and public institutions by the deposit money banks stood at 34.3 percent at the end of May 2005 compared with 47.5 percent at the end of May 2004. The private sector accounted for 84.1 percent of the credit flow. Bank credit to the private sector as a percentage of GDP increased from 11.3 percent in May 2004 to 12.7 percent in May 2005, the highest in the last five years. The increase in the amount of credit to the private sector over the last year was concentrated in five sectors: manufacturing (22.7 percent), Commerce (22.0 percent) Personal loans and Mortgages (14.8 percent), Import Trade (11.5 percent) and Services (10.6 percent).

6. A recent Bank of Ghana survey on credit to small and medium scale enterprises (SMEs) found that over the 2001-2004 period;

· the relatively low inflation environment has spurred growth in real credit to SMEs especially in 2004.

· The share of SMEs in total exposure of banks has increased from 0.95 percent of GDP in 2001 to 1.54 percent of GDP by 2004; whereas total credit to the private sector increased from 11.8 percent to 13.05 percent of GDP over the same period. This is an indication that these enterprises are sharing in the general growth in lending.

· The swings in lending in favour of SMEs are more pronounced in commerce, less so for agriculture, services and manufacturing, and weakest for the transport and other sectors.

7. The Bank of Ghana Survey of business confidence indicates that business sentiments about their own prospects waned in the second quarter but remain generally optimistic about the prospects of the economy in 2005. In May the Bank's Composite Indicator of Economic Activity (CIEA) was marginally (0.6 per cent) above the March 2005 level but this represents an increase of the CIEA of 21.29 percent over the preceding year. This indicates a continued increase in the level of economic activity. Data from SSNIT also indicates that the number of employees on whose behalf the private sector made pension contributions in June 2005 has increased by 11,260 since December 2004.

8. The banking system as a whole continues to remain well capitalized, profitable, fairly liquid and stable, and the Non-Bank Financial Intermediaries sector registered strong asset growth (31.8 percent) in 2004 with improved liquidity.

9. On the fiscal front, provisional data for January-May 2005 indicates that domestic tax revenue growth continues to be robust, at the equivalent of 20.0 percent of GDP (on an annualized basis). Total tax revenue amounted to ¢8,045 billion, a 25.7 percent increase over the same period in 2004 and slightly above the budget target of ¢8,032.0 for the period.

· Direct taxes amounted to ¢2,321.0 billion, 16.0 percent higher than programmed, with company taxes yielding ¢1,069.1 billion, which was 50.0 percent above the ¢712 billion collected for the same period last year and 36.0 percent above the budget target.

· Revenue from indirect taxes amounted to of ¢3,840.0 billion, or 36.3 percent above that collected for the same period in 2004 but 5.4 percent below the budgeted estimate for 2005.

· International trade taxes amounted to ¢ 1,689.0 billion, 15.0 percent higher than budgeted and 22.0 percent higher than what was recorded for the same period (January-May) in 2004.

· Total Government revenue and grants for the first five months amounted to ¢9,334.2 billion compared to a programmed ¢10,818.2 billion, with the shortfall mostly attributable to lower than expected grant inflow. Grants received amounted to ¢1,069 billion compared to a programmed ¢2,190.0 billion with the remainder expected in the second half of the year

· Non-tax revenue (mainly fees and charges) amounted to ¢219.8 billion, 63.0 percent below budget and 36.0 percent lower than what was recorded for the first five months of 2005.

10. Government expenditure for January-May 2005 is provisionally estimated as ¢9597.6 billion, some 14.0 percent below the budgeted expenditure of ¢11,157.2 billion but about 25.0 percent above the expenditure for January-May of 2004.

· Recurrent expenditure of ¢6,020.9 was 12.2 per cent less than the budgeted level, with expenditure on personal emoluments amounting to an estimated ¢2,899.5 billion, within the budget ceiling of ¢3,598.0 billion for the first half of the year. · Capital expenditure recorded a shortfall of some ¢900.0 billion, amounting to ¢2,987.9 billion for the first five months of the year.

11. Overall, the central government budget recorded a deficit provisionally estimated to be ¢1,512.5 billion, (1.56 percent of GDP) compared with a programmed deficit of ¢772.1 billion. The domestic primary balance however recorded a surplus of ¢1,293.3 billion, (1.34 percent of GDP) close to the budget target of ¢1,348.8 billion, (1.40 percent of GDP). Net domestic financing of the budget amounted to ¢911.3 billion in May and ¢1,250.9 in June and compares with a programmed net domestic repayment of ¢237 billion at end June 2005.

12. Provisional balance of payments figures indicate that by the end of the first half of 2005, total merchandise exports amounted to $1,642 million, 20.0 percent above what was recorded for the first half of 2004. After topping 700,000 tons in 2004, cocoa production in the 2004/2005 is estimated at some 550,000. Export earnings from cocoa for the first half of the year stood at $500.4 million compared with $564.9 million for the first half of 2004. Merchandise imports for the first half of 2005 amounted to $2,301.0 million, 13.0 percent above 2004 levels, resulting in a trade deficit of $659 million, similar to the $670.5 million recorded last year. Oil imports amounted to $366.5 million, 11.5 percent above the level recorded for the first half of 2005. The current account showed a deficit of $48.7 million compared with a surplus of $59.7 million in the first half of 2004.

· Private inward remittances – transfers received from NGOs, religious groups, individuals etc. – channelled through the banks and finance companies amounted to $1,630.9 million for January-May 2005 compared to $1,027.5 million in January-May 2004. This is a 58.7 percent increase above last year's level. Of the total remittances received, 30.0 percent (i.e. $483.5 million) was from individuals.

· In the foreign exchange market, total purchases and sales of foreign exchange by deposit money banks amounted $2.9 billion by June 2005 and this compares with $1.9 billion, which represents an increase of some 53.0 percent over the total for the same period in 2004.

· Gross International Reserves, which reached a level of $1.73 billion at the end of December 2004 was at $1.47 billion by June 2005, equivalent to some 3.0 months of imports of goods and services, with significant cocoa proceeds and donor disbursements still in prospect.

13. The cedi exchange rate has appreciated in nominal and real terms against the British Pound and Euro while remaining stable against the US dollar. Between January and June this year, the cedi appreciated in nominal terms gainst the Euro (11.6 per cent) and British Pound (6.1 percent) while it was virtually unchanged against the US dollar. For the same period (January-June) in 2004 the cedi depreciated by 2.2 percent against the US dollar and 7.5 percent against the British Pound, while remaining against the euro. The trade-weighted real effective exchange rate for the cedi shows a real appreciation of the cedi by 17.8 percent in the first six months of 2005, restoring the index close to its level in the first half of 2000.

14. The outlook, is for continued consolidation on the path toward low and stable inflation with relative exchange rate stability, providing a basis for increased GDP growth, given the economic fundamentals and also prudent implementation of the fiscal and monetary framework and the supporting policies for 2005.

15. Crude oil prices on the international markets are now in the $58-$60/barrel range and prices are not expected to decline for the rest of the year given world demand conditions. The surge in oil prices if sustained, would be a significant source of downside risk to the external payments, requiring flexibility in pricing and other efficiency measures to reinforce economic resilience.

16. Overall, given the stance of policies and the economic fundamentals in the outlook, the Monetary Policy Committee has decided to keep the Prime Rate unchanged at 16.5 percent.