Monetary Policy Committee Report November 14, 2012

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1. Ladies and Gentlemen, you are welcome to the 53^rd MPC Press briefing. The Committee has held its last meeting for the year during which the latest economic conditions and risks to the outlook were deliberated on. We present highlights of these discussions and the ensuing positioning of the policy rate.

Global Economic Developments

2. Growth in the global economy remained constrained by persisting uncertainties in the euro area, fragile financial markets, and the looming US ?fiscal cliff? which involves automatic spending cuts and tax hikes early next year. The combined effect of these threats to the global economic outlook led to further downward revisions of growth forecasts.

1. 3.?? The IMF?s WEO update in October revised its earlier global growth forecast for 2013 downwards by 30 basis points to 3.9 percent. For advanced economies, the growth projection was reduced to 1.5 percent from 2 percent, while for emerging and developing countries it went down to 5.6 percent from 6 percent.

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1. 4.?? Global headline inflation declined, driven by slackened growth in economic activity and lower commodity prices. In advanced countries, headline inflation reduced to 2 percent in August from 2.9 percent at the

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beginning of the year. In emerging markets and developing economies, headline inflation also continued to decline. Inflation in China reached 2 percent in August, from 4.6 percent at the beginning of the year. It is projected that headline inflation in advanced economies could decline further as inflation pressures continue to ease.

5. In Sub-Saharan Africa, especially in East Africa, observed regional trends of disinflation prompted by base effects from 2011 are expected to persist. The moderate outlook for crude oil prices provides additional support for lower inflationary pressures in developing countries.

1. 6.?? On the commodities market, gold prices are projected to increase to about US$2,000 per ounce in 2013 from US$1,700 in the fourth quarter of 2012. However, cocoa prices are expected to stay broadly stable at around US$2,450 per tonne.

Domestic Economic Conditions

Growth and Inflation

1. 7.?? The September update of the CIEA showed that growth has slowed down in year-on-year terms to 5.4 percent compared with 7.7 percent in June and 21.7 percent recorded a year earlier. The major contributory components to the slowdown in growth were cement sales, contribution to SSNIT and exports. However, these were mitigated by growth in private sector credit, industrial electricity consumption and port activities.

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1. 8.?? Provisional estimates of real GDP growth, from Ghana Statistical Service, for the second quarter was 2.5 percent compared to 20.6 percent for the same period of 2011, mainly due to base effects from the addition of oil. Industry recorded the highest growth of 4.5 percent,

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followed by Services with 1.6 percent. Despite a 15 percent growth in the crop subsector, sharp declines in forestry, fishing and livestock resulted in the Agriculture sector contracting by 0.1 percent.

9. In September, headline inflation declined to 9.4 percent, from 9.5 percent in August. Food inflation remained stable at 4.4 percent, while non-food inflation dipped slightly to 12.4 percent from 12.5 percent in August.

10. The Consumer Confidence Index improved to 101.1 in September 2012, from 96.5 in July and was driven primarily by improved sentiments on the economy. The Business Confidence Index however softened marginally to 94.3 in September from 95.1 in June 2012.

Government Fiscal Operations

11. Preliminary data, from the Ministry of Finance, indicate that revenue and grants totaled GH?11.1 billion for the first three quarters of 2012. This was 21.3 per cent higher than the outturn for the corresponding period in 2011.

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12. Tax revenue for the period amounted to GH?8.6 billion, representing a year-on-year growth of 26.1 per cent. Non-tax revenue was GH?1.3 billion, and grants disbursements amounted to GH?955.4 million.

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13. Total expenditures (including payments for the clearance of arrears and outstanding commitments) was GH?16.2 billion due to higher recurrent spending which totaled GH?10.8 billion, indicating a 52.8 percent increase over the outturn for the same period in 2011. The high growth in recurrent spending was on account of higher levels of personal emoluments which went up by 65.8 per cent on a year-on-year

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basis mainly as a result of the implementation of the single spine salary structure (SSSS).

1. 14.? Interest payments amounted to GH?1.6 billion, representing a 35 percent growth over the same period in 2011. This was mainly the result of high domestic borrowing and associated high cost of debt servicing.

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1. 15.? Capital expenditure for the period totaled GH?2.8 billion, compared with GH?2.2 billion a year earlier, and a target of GH?4.1 billion. This was on account of slow disbursement of project loans and grants.

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1. 16.? The execution of the budget for the first three quarters of the year therefore resulted in an overall budget deficit of GH?5.1 billion (7.3% of GDP), against a target of GH?4.3 billion (6.2% of GDP). The excess was mainly accounted for by the implementation of the SSSS and arrears clearance which amounted to 1.1 percent of GDP. During the corresponding period in 2011, the overall budget deficit was equivalent to 1.9 percent of GDP.

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1. 17.? Net Domestic Financing of the budget amounted to GH?4.8 billion, compared to GH?1.3 billion for the same period last year.

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1. 18.? At the end of September 2012, the stock of public debt stood at GH?29.6 billion (44.7% of GDP), compared with a stock of GH?23.9 billion (42.6% of GDP) in December 2011. The domestic component of the total public debt was GH?17.8 billion compared with GH?11.8 billion at the end of 2011, while the stock of external debt was US$7.8 billion compared with US$7.6 billion in December 2011.

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Monetary and Banking Sector Developments

19. The banking system continued to show steady asset growth and profitability in the year to September 2012. Total assets increased to GH?25.1 billion from GH?20.3 billion in September 2011. The growth in assets was largely funded by domestic deposits.

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20. The quality of the loan portfolio in the banking industry continued to improve over the period under review. The non-performing loans ratio declined further to 13.1 percent in September 2012 from 13.4 percent in July 2012 and 15.7 percent a year ago. Bank solvency, measured by the Capital Adequacy Ratio (CAR), remained strong, although it declined to 16.3 percent in September 2012 from 17 per cent in September 2011. Other profitability indicators such as Return on Equity, Return on Assets and Return on Earning Assets all improved in the period.

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21. The credit conditions survey conducted in October 2012 indicated that credit stance for SMEs and credit to households for mortgages were tightened due to low cashflow, unsatisfactory account operation and poor credit history. However, credit stance for large enterprises and consumers eased reflecting improved economic expectation.

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22. Private sector credit continued to expand in the year. In nominal terms, credit grew by 43.8 percent on an annual basis in September 2012, compared to 25.5 percent a year ago. In real terms, credit to the private sector recorded an annual growth of 31.4 percent against 15.8 percent in September 2011.

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23. The pace of growth in broad money supply slowed to 28.8 percent in September 2012 from 41.9 percent in September 2011. The slowdown

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was driven largely by a decline in Net Foreign Assets (NFA) of the banking system.

24. Interest rate trends stabilized between July and September 2012. During this period, rates on

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• 91-day treasury bills rose to 23.1 percent from 22.8 percent, while 182-day bills rates remained at 22.9 percent.

• 1-year fixed note increased from 22 percent to 22.5 percent. The 2-year fixed note stayed put at 23 percent.

• 3-year fixed note was also stable at 24 percent, while 5-year bonds declined to 23 percent from 26 percent.

25. The interbank weighted average rate increased to 17.8 percent in September from 17.2 percent in July 2012.

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26. The average 3-month deposit rate moved up to 11.95 percent in September from 10 percent in July 2012, while average lending rates edged up slightly to 25.7 percent from 24.7 percent recorded in July 2012. On a year to date basis, therefore, the lending deposit spread narrowed to 13.8 percent in September, from 14.7 percent in July 2012.

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27. Banks? base rate quotations ranged between 12.7 percent and 26.5 percent in October 2012. On the average, base rates inched up to 21.8 percent in October, from 21.1 percent in July 2012.

External Sector Developments

28. Total merchandise exports in the first three quarters of 2012 recorded an annual growth of 3 percent to US$10.1 billion, compared to US$9.8 billion in the same period of 2011. The components were

• Gold – US$4.1 billion

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• Cocoa beans – US$1.9 billion

• Crude oil – US$2.1 billion and

• Other exports – US$2 billion.

1. 30.? Total merchandise imports amounted to US$13.2 billion for the first three quarters of 2012 compared with US$11.5 billion in the same period of 2011. Oil imports, including crude, gas and refined products, amounted to US$2.5 billion, against US$2.2 billion recorded in 2011. Crude oil imports amounted to US$681.9 million while imports of refined oil products were US$1.7 billion. Gas imports through the West African Gas Pipeline amounted to US$128.7 million.

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1. 31.? Total non-oil imports grew by 15.1 per cent to US$10.7 billion in the three quarters of 2012. Of this, capital imports were estimated at US$2.4 billion (22% of total imports), intermediate imports amounted to US$5.2 billion (48.3%), consumption imports, US$2.4 billion (22%) and other imports US$873.4 million.

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1. 32.? From January to September 2012, the current account deficit was US$4 billion, as against US$1.7 billion recorded in the same period of 2011. This outturn was mainly attributed to a trade deficit of US$3.2 billion, a net services and income outflows of US$2.7 billion, and a net inflow from transfers of US$1.8 billion during the period.

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1. 33.? The capital and financial account improved to US$1.6 billion in the first three quarters of 2012, compared with US$1.3 billion in the same period of 2011. This was accounted for by increased net portfolio investments and Foreign Direct Investments. The impact of these inflows was however, moderated by increased short-term capital and

net official capital outflows.

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33. The overall balance of payments resulted in a deficit of US$2.3 billion during the period, compared to a deficit of US$288 million for the corresponding period of 2011.

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34. Gross International Reserves stood at US$5.2 billion at the end of October 2012, compared to US$5.3 billion in October 2011. This was equivalent to 2.9 months of import cover.

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35. Total foreign exchange inflows, from January to September 2012, through the banks amounted to US$13.4 billion compared with US$13 billion in the same period of 2011. Of this, US$1.3 billion accrued to individuals.

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36. From January to October 2012, the Ghana cedi recorded a cumulative depreciation of 17.5 percent against the US dollar compared with 3.9 percent recorded in the same period of 2011. On monthly basis however, the currency has made some gains as the Bank?s policy measures continued to impact positively on the foreign exchange market. In September, the Ghana cedi appreciated by 0.1 percent against the US dollar, and again appreciated by 0.5 percent in October.

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37. In trade weighted terms, the real effective exchange rate depreciated by 5.4 percent from January to October 2012 compared to a depreciation of 2.6 percent in the same period of 2011.

Summary and Outlook

38. In summary, the Committee noted that since its last meeting, global economic conditions have worsened leading to the lowering of growth projections. The sovereign debt crisis in the euro area has persisted

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despite the implementation of austerity measures and refinancing packages to calm financial markets. The US ?fiscal cliff? also poses a downside risk to the global economic outlook in the coming months. If prolonged, these global uncertainties could adversely affect the domestic economy through the trade and finance channels.

39. On the domestic economy, the Committee observed some improvement in economic trends in the third quarter of 2012, contrasting trends in the first half of the year. Price developments suggest diminished inflationary expectations as reflected in the latest surveys. The Bank?s inflation forecast indicates that inflation has been well anchored within the projected band of 8.5 ? 2 percent and is likely to end the year in single digit.

40.Exchange rate pressures, which threatened macroeconomic stability and heightened inflationary pressures during the first half of the year, have eased largely as a result of the policy measures implemented. In the past two months, we have observed some marginal appreciation of the cedi relative to the US dollar. The reduced volatility in the foreign exchange market has helped to lower inflation expectations in the near term.

41. The latest credit conditions survey points to easing of credit stance to households and large enterprises. The business and consumer confidence indices suggest improved sentiments on exchange rate and inflation expectations. Credit to the private sector continued to expand providing additional impetus to economic growth. The updated CIEA reflected increased economic activity although at a moderate pace relative to last year.

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