MPC Press Statement Nov. 2005

1. Developments in the Consumer Price Index (CPI) indicate that underlying inflationary developments continue to be relatively subdued with monthly price increases remaining low and within a narrow band. The CPI recorded an average monthly decline of 0.1 percent through the third quarter or 2005, the lowest in the last six years. Food prices declined by an average of 0.2 percent in the third quarter while non-food prices increased by 0.4 percent (the lowest in the last seven years). Seasonally smaller than expected decline in the food price index, and an uptick in non-food inflation (by 0.3 percent) with the pass-through of petroleum price adjustments pushed inflation (which had peaked at 16.7 percent in March) up from 14.7 percent in August to 15.4 percent in October. In the month of October 2005, the overall CPI declined by 0.2 percent, with the non-food price index increasing by 0.3 percent and the food index declining by 0.6 percent. The Bank of Ghana's measures of core inflation however, continue to be stable and trending downward within a narrow range.

2. Growth of the key monetary aggregates in the year through October broadly continued to slowdown. Annual growth of reserve money slowed from 37.4 percent in September 2004 to 21.1 percent in October 2005 while broad money ( M2+) growth has also slowed from 41.6 percent in September 2004 to 16.0 percent in September 2005 (the latest data available).

3. Interest rate movements in the money market reflected changes in the underlying monetary conditions. Interest rates on the money market continued to decline and the trend has been maintained through the fourth quarter of 2005.

• The benchmark 91-day Treasury bill rate had declined further from 13.8 percent in September to 12.6 percent by mid-November 2005; and similarly, interbank overnight money market, rates had moved from 13.7 percent to 11.7 percent.

• Commercial bank average base rates, declined to 22.2 percent in October 2005 after remaining sticky at 23.7 percent for the most part in the third quarter. Lending rates were similarly reviewed downward to 26.25 in October from 27.92 percent in August.

• The yields on the medium-term Government instruments also declined marginally. The interest rate on the two-year fixed rate note had declined from 18.0 percent in September 2005 to 17.3 percent by mid-September.

4. Alongside the general decline in interest rates is a continued increase in the market share of the longer-dated instruments, reaching 29.0 percent in October from 23.0 percent in June 2005. On the other hand, the share of the 91-day Treasury bill declined from 57.0 percent in June 2005 to 47.0 percent in October 2005. With these shifts in portfolio, the average maturity of treasury bills and notes lengthened to 208 days in October from 104 days in October 2004. This has implied a continued reduction in the turnover rate from 3.5 times in October 2004 to 1.75 times per year by October 2005, and thus a source of significant savings in the cost of funding the public sector borrowing requirement. The shift in preference toward long-dated securities is an indication that expectations are for continued disinflation.

5. Economic activity in the real sector of the economy increased in the third quarter after some decline in the second quarter. The Bank of Ghana's Composite Index of Economic Activity increased by 6.2 percent over the June 2005 level and 17.3 percent over the September 2004 level, in line with the trend annual growth recorded over the past four years. Other real sector indicators such as tourist arrivals and the number of private sector contributors to SSNIT, and vehicle registrations also showed an upturn in economic activity. However, the Bank of Ghana Survey of Business Confidence indicates that while the overall assessment of economic prospects remains positive, there has been a softening of business confidence between August and October 2005 relative to the preceding quarters.

6. Credit to the private sector and public institutions by DMBs expanded significantly by ¢4,616.5 (37.0 percent) in the 12-months to September 2005, following a ¢3,649.3 (41.3 percent) expansion over same period in 2004. The private sector continued to get the bulk of the credit flow (a share of 72.3 percent), with outstanding credit to the private sector at the end of September 2005 at 13.7 percent of GDP, up from the end-June 2005 level of 12.5 percent of GDP and 12.4 percent during the corresponding period in 2004. The expansion of credit to the private sector however, was more concentrated in the services, commerce and finance, manufacturing and import trade sub-sectors.

7. The banking system continues to be robust with strong asset growth and improving capital base. Total assets of the banking system grew by 22.3 percent on an annual basis to ¢34,666 billion by end September 2005. Non-performing loans ratio (proportion of loans that have remained overdue for more than 90 days) remained at the previous quarter's level of 13.3 per cent by the end of the third quarter in spite of the significant growth in credit. At end September 2005, the Non-Bank Financial Institutions (NBFI) sector also revealed improved performance in terms of asset growth, liquidity and compliance with prudential norms. Year-on-year growth in earning assets of NBFIs stood at 51.9 percent at end-September 2005.

8. Projected results for the 2005 budget fiscal programme indicate that the process of fiscal consolidation is broadly on course, with some tightening of revenue collection and expenditure management and full disbursement of committed resources under the Multi-Donor Budget Support mechanism in the last quarter. • The domestic debt to GDP ratio is expected to be reduced from 16.4 percent of GDP in 2004 to 11.5 percent of GDP in 2005. This would mean net foreign inflows of ¢1,829.0 and an exceptional financing, including debt relief of some ¢1,545 billion. • Tax revenue is expected to exceed the budget estimate of ¢21,027.8 billion (22.3 per cent of GDP) by 2.3, and represents a growth of 23.6 per cent above the outturn for 2004. However, non-Tax Revenue is expected to yield ¢ 1,260.0 billion, some ¢112.3 billion below the budget projection of ¢ 1,372.3 billion. • Total expenditure for 2005 is projected at ¢30,713.0 billion (31.7 per cent of GDP), close to the budget ceiling of ¢30,949.6 and some 17.1 higher than the outturn for 2004.

• These developments are expected to yield an overall fiscal deficit (including grants) of ¢2,281.6 billion (2.4 per cent of GDP) compared with the budget target of ¢2,161.0 billion (2.2 per cent of GDP) and a domestic primary balance is expected to be in a surplus of ¢2,593.9 billion (2.7 per cent of GDP) compared with a surplus of ¢2,531.8 billion (2.6 per cent of GDP).

9. The external payments position continues to reflect an expansion in trade and payments transactions. Provisional estimates show that total exports of goods amounted to US$2,110 million through the third quarter, and is projected to reach US$2,743 million for the year.

• Cocoa ($712.5 million), Gold ($679.7 million) Timber (546.1 million) accounted for the bulk of the export earnings. However, other exports (mostly non-traditional exports) increased to US$546 million compared with US$449.8 million in 2004.

• Non-oil imports are estimated to amount to US$2,761 million through the third quarter, an increase of 9.7 percent over a year earlier; and expected to reach US$3,733 million (6.0 percent) for the year. The oil bill amounted to US$694.5 million through September, (compared to US$555.0 million in 2004), and the trade deficit widened to US$1,345.25 million (from US$982.40 million in 2004).

• The external current account recorded a deficit (of $272.30 million), or the equivalent of 2.55 percent of GDP over the three quarters, compared with a surplus (of US$21.95 million) in the same period of 2004, which was underlined by a strong balance on the net income and transfers account.

• The overall balance of payments position was in deficit of US$173.19 million through the third quarter, a decline from US$191.48 million in the corresponding period of 2004. The overall balance is projected to record a surplus of US$155 million at the end of the year. Gross International Reserve position of Bank of Ghana stood at US$1.650 billion in October and translates into 3.3 months import cover for 2005.

10. Private inward remittances – from NGOs, religious groups, individuals etc. - through the banks and finance companies for the first three quarters of 2005 amounted to $3.18 billion, which represents 57.3 per cent increase over the corresponding period in 2004. This amount was in turn 29.7 per cent higher than the inflows recorded for the same period in 2003. Of the total remittances in January – September 2005, $882.8 million (27.8 per cent) were from individuals.

11. The local foreign exchange market continues to grow in size and depth with low currency volatility. Foreign exchange transactions (i.e. purchases plus sales) by banks and forex bureaux in the first ten months of 2005 amounted to $5.06 billion, which was 45.4 per cent increase over purchases and sales over the same period in 2004. The cedi continues to show stability in its movements against the core major currencies – the US dollar, the pound sterling and the euro. Over the January–October 2005 period, the cedi held firm within a tight band against the US dollar and gained in strength by 7.8 and 11.8 per cent against the pound sterling the euro respectively. This compares with depreciation of 2.3, 7.7 and 5.4 per cent against the three currencies respectively over the same period in 2004. In trade-weighted terms, the cedi strengthened by 4.9 percentage points over the first ten months of the year.

12. Looking ahead, the key economic indicators point to subdued inflationary expectations. The Government budget for 2006 continued to be oriented toward stability while providing stimulus to aggregate demand in the economy through tax relief and enhanced resources for capital expenditure. The 2006 budget sets targets for domestic revenue (23.5 percent of GDP) and expenditure (30.1 percent of GDP) to underpin a reduction in the overall deficit from 2.4 percent of GDP to 2.1 percent of GDP. This is in line with the fiscal objective to provide room for the 'crowding-in' of private investment and will imply a further reduction in the domestic debt to GDP ratio to 8.5 percent in 2006.

13. The major downside risk continues to be associated with volatility of crude oil prices on the international market and the potential for the pass-through of its effects into domestic cost and prices. While still uncertain, the general expectation is for oil prices to ease downward to the range of $55-$60 per barrel, and under deregulation, domestic prices appear closely aligned with international market prices. Considering the economic fundamentals the outlook is for macroeconomic consolidation providing a basis for achieving single digit inflation and the GDP growth target established for 2006.

14. The economy continues to absorb the progressive easing of inflationary expectations and shifts in savings, investment and lending portfolios associated with the recent realignment in interest rates. The risks to the outlook for inflation and growth are balanced.

15. In the circumstances, the Monetary Policy Committee has decided to maintain the Bank of Ghana Prime Rate at 15.5 percent.