Dr. Henry Kofi Wampah, Governor, Bank of Ghana
Let me welcome you all to this Press briefing. The Monetary Policy Committee (MPC) held its 59thregular meeting to review economic developments since its emergency meeting in February 2014. I present to you the highlights of the discussions.
Global Economic Developments
- 1. The IMF?s growth projections for the global economy remain largely unchanged, with some improvement in prospects even though risks remain. Key among the risks is the potential effect of a faster pace of Fed tapering which could intensify portfolio reversals from emerging markets and put additional pressure on currencies. A weaker emerging market growth could also have negative effects through trade and financial linkages.
- 2. Economic activity in the United States is projected to gain momentum as the fiscal drag continues to dissipate and Fed policy remains intent on holding down rates. In Europe, growth has been positive since the second quarter of 2013 and expected to gain traction.
- 3. On balance, risks to global growth appear tilted to the upside which suggests that 2014 is expected to see acceleration in the global economy, led by the advanced economies. On the other hand, the outlook for global inflation remains benign even though some upward pressure could be expected in line with expansion in economic activity.
- 4. Latest projections for 2014 indicate that the price of Gold would average US$1,300. The price of Crude Oil is also projected to average $105 per barrel by the end of 2014, while cocoa prices are projected to rally to US$3,200 per tonne by the end of 2014, from the current price of US$2,955 per tonne. These developments are expected to impact on the domestic economy.
Domestic Economic Developments
Inflation and Growth
- 5. Since the last MPC round, pressures observed from the exchange rate depreciation, fiscal strains and the pass through effects of fuel and utility price adjustments have persisted, heightening inflation expectations.
- 6. Headline inflation rose to 14.0 percent in February 2014 from 13.8 percent in January, drifting further away from the target band of 9.5?2 percent.
- 7. On growth, the updated Composite Index of Economic Activity (CIEA) suggests a relative pickup in economic activity in the fourth quarter of 2013. Even though the pace of general economic activity slowed down relative to the previous year. The index grew by 6.8 percent year-on-year in the fourth quarter compared with a growth of 8.2 percent for the same period in 2012. The main drivers were Port activity, DMBs credit to the private sector, Domestic VAT, Exports, and Sales of key manufacturing companies.
- 8. The latest surveys conducted by the Bank of Ghana indicated softening business and consumer sentiments. The softening of Consumer Confidence was associated with the increases in utility and fuel price hikes. Businesses were also less optimistic about achieving targets for capital outlay, employment, sales and revenue.
Monetary and Banking Sector Developments
- 9. Developments in monetary aggregates point to increased liquidity conditions. Broad money (M2+) grew by 25.6 percent for the first two months of 2014, compared with 23.2 percent in the same period last year. This was largely reflected in increases in currency in circulation and demand deposits.
- 10. The pace of growth in private sector credit remained generally unchanged at 33.0 percent year-on-year at the end of February 2014. The annual growth of real private sector credit however declined to 16.5 percent from 20.9 percent. The Credit conditions survey showed a general tightening of credit for all loan types during the period.
- 11. In the first two months of the year, the banking sector remained relatively stable and continued to record growth in total assets. Total assets as at the end of February 2014 went up to GH?39.1 billion, from GH?28 billion in February 2013. This was driven mainly by advances, which accounted for 47.1 per cent of the total. The growth in assets was mainly funded by deposits which recorded an annual growth of 29 percent to GH?25.1 billion at the end of February 2014.
- 12. The non-performing loans (NPL) ratio within the banking industry decreased to 12.7 percent in February 2014, from 13.5 percent in February 2013, while the ratio excluding the loss category, declined to 4.9 percent from 6.0 percent in the same period last year.
- 13. Interest rates have generally trended up on the money markets between December 2013 and February 2014, reflecting movements in the policy rate:
- The 91-day instrument increased to 23.5 percent from 19.2 percent. Similarly, the 182-day increased to 21.2 percent from 18.7 percent.
- The 1-year note rate also rose to 22.5 percent from 17 percent, and the rate on the 2-year note increased to 23 percent from 16.8 percent.
- The 3-year bond rate rose to 23 percent from 19.2 percent.
- 14. The weighted average interbank rate also increased to 18 percent from 16.3 percent in December 2013.
- 15. Average lending rates of the banks remained the same at 25.6 percent. However, the base rate has increased from 21.5 percent in December 2013 to 22.8 percent in February 2014. The average rate on 3-month term deposits remained unchanged at 12.5 percent.
Government Fiscal Operations
- 16. Provisional outturn for broad fiscal performance in 2013 suggests an overall budget deficit estimated at 10.8 percent of GDP against a budget target of 9.0 percent, following a deficit of 11.8 percent in 2012. The fiscal slippage was underpinned by shortfalls in revenue and grants, higher spending on wages and salaries as well as interest costs.
- 17. Total revenue and grants was GH?19.2 billion, against a budget target of GH?22.5 billion. Of this outturn, domestic revenue amounted to GH?18.7 billion, below the target of GH?21.3 billion. Total tax revenues amounted to GH?14.3 billion, lower than the target of GH?17.1 billion.
- 18. The low tax revenue collection over the period was the result of: lower import volumes which negatively affected import taxes, declines in commodity prices on the world market which affected company taxes and mineral royalties, and the slowdown in economic activities during the first half of the year resulting partly from the energy crisis. Grant disbursements amounted to GH?437.6 million, short of budget target of GH?1.3 billion.
- 19. Non-tax revenues for the period amounted to GH?4.3 billion, compared to the budgeted target of GH?4 billion.
- 20. Total expenditures, including payments for the clearance of arrears and outstanding commitments amounted to GH?28.6 billion, lower than the budget target of GH?30.5 billion. The wage bill for the year amounted to GH?8.1 billion, against a budget target of GH?7.5 billion, almost 64 percent of tax revenues, the highest in the West African sub region. Similarly, interest payments amounted to GH?4.4 billion, against a target of GH?3.2 billion.
- 21. These developments resulted in an overall budget deficit of GH?9.5 billion (10.8 % of GDP) for the year, compared to the budget target of GH?8 billion (9 percent of GDP).
- 22. The deficit was financed mainly from domestic sources, resulting in a Net Domestic Financing (NDF) of GH?6.9 billion, higher than the budget target of GH?5.7 billion. Foreign financing of the budget amounted to GH?3.2 billion, higher than the GH?2.5 billion target.
- 23. Provisional data for January and February (narrow basis) on the execution of the 2014 budget revealed that total revenue & grants was GH?2.4 billion (2.3% of GDP) compared with GH?2.1 billion (2.4% of GDP). Tax revenues amounted to GH?2.2 billion (2.1% of GDP) compared to GH?1.8 billion (2% of GDP) recorded in the same period in 2013.
- 24. Government spending (including arrears clearance) on the other hand amounted to 4.1 percent of GDP and was below the 5.0 percent of GDP recorded for the same period of 2013.
- 25. These developments resulted in a (narrow) budget deficit equivalent to 1.8 percent of GDP. In the corresponding period of 2013, the (narrow) budget recorded a deficit equivalent to 2.7% of GDP. The deficit was financed entirely from domestic sources.
- 26. The stock of public sector debt as at end of February 2014 was GH?55.6 billion up from GH?51.6 billion in December 2013. Of the total public sector debt, domestic debt constituted 48.5 percent and external debt was 51.5 percent.
External Sector Developments
- 27. The continued fiscal pressures together with the challenging external conditions led to pressures on the external accounts.
- 28. In 2013, the overall balance of payments deficit remained largely unchanged at US$1.2 billion. This was mainly due to deterioration in the current account which was partly countered by increased net inflows to the financial account.
- 29. The current account deficit widened to US$5.7 billion from US$4.9 billion recorded in the corresponding period of 2012. This was as a result of deterioration in net transfers while the trade balance improved marginally. The capital and financial accounts on the other hand improved to a surplus of US$4.9 billion from US$3.7 billion in the same period of 2012.
- 30. Merchandise exports amounted to US$13.8 billion, compared to US$13.5 billion a year earlier. Earnings from gold fell to US$5 billion from US$5.6 billion, while exports of cocoa beans also declined from US$2.2 billion to US$1.6 billion, due to lower export volumes. Oil exports, however, improved from US$3 billion to US$3.9 billion, as a result of increased production. Earnings from non-traditional exports (including cocoa products), improved to US$3.3 billion from US$2.7 billion in 2012.
- 31. The value of imports was US$17.6 billion compared to US$17.8 billion in 2012. Oil imports went up by 6.6 per cent to US$3.6 billion, while non-oil imports declined by 2.7 per cent to US$14.1 billion.
- 32. Provisional estimates of the trade balance for the first two months of 2014 was a deficit of US$294.3 million compared to US$232.3 million in the corresponding period of 2013.
- 33. Gross international reserves as at March 28, 2014 was estimated at US$4.7 billion, compared with US$5.6 billion at the end of 2013, representing 2.6 months of import cover.
- 34. The imbalances in the fiscal and external sectors, together with continued uncertainties in the external economic environment exerted significant pressure on the domestic currency in the first quarter. The local currency therefore depreciated by 17.6 percent against the US Dollar for the first quarter of 2014 compared with 1.1 percent in the corresponding period in 2013.
Summary and Outlook
- 35. Global conditions are showing some marginal improvement, largely on account of developments in the advanced countries, led by the US. Consequently, the outlook for commodity prices suggests there could be improvement in 2014 compared with 2013, which could impact positively on the external sector. On the other hand, prospects about a faster tapering by the US Fed coupled with evidence of a slowdown in China, as well as geo-political tensions arising from the political tensions in Ukraine could pose some challenges to the global economic outlook.
- 36. The domestic economy will be impacted by these developments going forward. In particular, favourable commodity price developments in the international markets as well as higher inflows could impact external sector performance. While gold and oil revenues may be flat, cocoa revenue is expected to improve.
- 37. The increase in the policy rate and the recent foreign exchange measures introduced in February has to some extent slowed down the pace of depreciation. However, vulnerabilities still remain.
- 38. The strict adherence to 2014 budgetary estimates is critical for macroeconomic stability. Reining-in the deficit should therefore be a priority, as this will not only create space for development spending but also reduce borrowing and pressure on interest rates. This will also help boost international confidence in the economy, encourage capital inflows and facilitate donor disbursements.
- 39. The Committee noted that disruptions in the energy sector and utility price shocks as well as falling gold production and prices took their toll on growth in 2013. Consequently, growth is expected to stay below par in 2014, reflecting the lingering energy sector challenges and other supply side shocks. The Committee was also concerned about the waning consumer and business sentiments as well as tightened credit conditions that could impact on the outlook.
- 40. In assessing the outlook for inflation, the Committee noted that inflationary pressures have heightened, driven by periodic increases in fuel and utility prices, currency depreciation and supply-demand gaps in the general economy. The Bank?s latest forecasts show that inflation will only return to the target band of 9.5?2 percent towards the end of the first half of 2015.
- 41. The risks to inflation remains high. However the Committee is of the view that the impulses from the recent monetary policy hike are still working through the system, and therefore decided to maintain the policy rate at 18.0 percent.
- 42. However, to address the liquidity overhang and improve supply of foreign exchange in the markets, the cash reserve requirement (CRR) of banks has been revised upwards to 11 percent from 9 percent, while the Net Open Position (NOP) limits of Banks have been revised downwards. The single currency NOP has been reduced from 10 percent to 5 percent and the aggregate NOP has been reduced from 20 percent to 10 percent. The time frame for implementation will be communicated to the banks.
- Source: BoG