The Monetary Policy Committee of the Bank of Ghana has increased the Policy Rate for the third successive time.
It raised the benchmark lending rate to 15 percent from 14.5 percent.
Governor of the Bank of Ghana Kwesi Amissah-Arthur explained the rate was increased because of risk to government fiscal operations, inflation and growth.
Below is the full statement of the committee:
1. Let me welcome you to the Press briefing of the 51st meeting of the Monetary Policy Committee and present the highlights of the discussion that formed the basis for the decision taken by the Committee.
Global Developments
2. The Committee notes that challenges in the Eurozone continue to pose threats to the global economic outlook. There are substantial downside risks to growth due to the austerity measures being implemented in parts of the zone. These are contributing to political and social tensions and creating uncertainties in global financial markets.
3. Global inflation eased to 2.5 per cent in April 2012, a result of persistent capacity underutilisation and high unemployment rates in major economies which continue to have a moderating effect on inflation. In response to the slowdown in economic growth of the major advanced countries, crude oil prices in the international market have settled below US$100 per barrel. Other commodity prices have also suffered declines.
4. In a report issued this week, the World Bank says it expects a long period of volatility in the global economy as the Eurozone debt crisis escalates. It warns developing nations to expect weak growth and tough times and urges countries to take adequate long-term measures to ensure that economic growth can be sustained.
5. There is real concern that the Eurozone debt crisis will spread to other economies, threatening the prospects of emerging economies, especially in Asia, which rely heavily on demand from the Eurozone for their exports. Developing countries are therefore to expect a period of low growth in Europe.
6. In addition to these fears, growth in China, the world’s second largest economy and one of the biggest consumers of commodities, has also slowed. This is expected to spill-over in the form of reduced demand for exports from commodity dependent countries, such as Ghana.
Domestic Inflation and Growth Indicators
7. Like other countries which rely on the export of primary commodities, Ghana’s economic prospects will be determined by the restoration of growth in the advanced and emerging economies, especially the Eurozone and China.
8. However, in the short-term, the domestic economy continues to expand. The Composite Index of Economic Activity (CIEA) recorded a real growth of 13.7 per cent in March 2012 against 23.7 per cent in the corresponding period of 2011.
9. Headline inflation for May, as announced this morning by the Ghana Statistical Service, increased to 9.3 per cent from 9.1 per cent in April 2012. This was attributed to increases in both food and non-food inflation.
10. The Consumer Confidence Index, constructed from surveys conducted by the Bank, declined to 99.5 in May, from 102.8 in March 2012, driven by weaknesses in welfare sentiments though macro confidence and expectations sub-indices remained positive. Similarly, the Business Confidence Index decreased to 96.4 in March 2012, from 102.7 in December 2011. The weakening of business sentiments was influenced by inflationary expectations and exchange rate depreciation.
Government Fiscal Operations (narrow coverage)
11. Provisional data from Bank of Ghana for the first five months of 2012 showed that total revenue and grants recorded a year-on-year growth of 34.5 per cent, amounting to GH¢5.1 billion. Total tax revenue was GH¢4.4 billion, 46.3 percent higher than the outturn of GH¢3 billion recorded during the corresponding period in 2011. During the period, disbursements of grants amounted to GH¢293.8 million.
12. Total expenditure for the same period amounted to GH¢7.5 billion, representing a year-on-year growth of 44.9 per cent. Of this, statutory payments amounted to GH¢5.4 billion, comprising mainly of wage-related payments of GH¢4 billion and discretionary payments of GH¢2.1 billion, representing 38.9 per cent of total payments.
13. These developments resulted in a narrow budget deficit of GH¢2.4 billion. The deficit together with a net foreign loan repayment of GH¢119.7 million created a resource gap of GH¢2.5 billion which was financed from domestic sources. The banking sector financed 58.9 per cent of the deficit, with the non-bank sector financing the remaining 41.1 per cent.
14. The stock of public debt was GH¢25.8 billion at the end of April 2012, increasing from the GH¢24 billion recorded at the end of 2011. In relation to GDP, the total public debt increased from 42.6 per cent at the end of December 2011 to 42.7 per cent at end April 2012 The domestic component of the public debt was GH¢12.6 billion in April 2012 while the external component was US$7.8 billion.
Banking Sector Developments
15. Total assets of the banking industry increased by almost 21 per cent, on year-on-year basis, to GH¢23.2 billion in April 2012. The growth in assets was funded mainly by deposits (which went up by 29.1 per cent to GH¢16.9 billion) and net worth which recorded a 20.8 per cent growth to GH¢3.1 billion. Of the total net worth, GH¢206 million was from bank recapitalization.
16. The financial soundness indicators of the banking industry remained strong. The Capital Adequacy Ratio (CAR) was well above the 10 per cent threshold but declined to 16.8 per cent at the end of April 2012, compared to 18.1 per cent in April 2011. The asset quality of the banking system improved as the Non-Performing Loan (NPL) ratio declined to 14.1 per cent in April 2012, from 17.4 per cent in April 2011. Earnings performance also improved.
17. The Credit Conditions survey conducted by the Bank of Ghana in May 2012 reflected a tightening of credit stance for both enterprises and households. This was as a result of an increase in cost of funds, strict collateral requirements and inflation expectations.
18. Total private sector credit expanded by 37.4 per cent on an annual basis to GH¢9.3 billion in April 2012, compared to a growth of 17.3 per cent in the same period of 2011. In real terms, private sector credit growth was 25.9 per cent.
19. Growth in broad money supply (M2+) slowed to 30.1 per cent in April 2012 compared to 41.5 per cent a year ago. The source of change in M2+ was a 51.5 per cent growth in the Net Domestic Assets (NDA) of the banking system.
Interest Rate Trends
20. Interest rates continued to trend upwards in the year to May 2012. Cumulatively over the first five months:
• The 91-day Treasury bill rates increased to 19.4 per cent while the 182-day Treasury bill rates went up to 20.2 per cent.
• The average rates on the 1-year note went to 20.5 per cent and the 2-year fixed notes to 21.2 per cent.
• The rate on the 3-year fixed bond increased to 24 per cent, while the 5-year fixed bond rate was unchanged at 14.3 per cent.
21. The average savings deposit rates increased by 45 basis points to 5.5 per cent in May 2012, while average base rates of banks declined to 20.6 per cent from 22.4 per cent in the same period. The average lending rate declined to 25.9 per cent in May 2012, from 27.5 per cent a year earlier. Similarly, the Annual Percentage Rates (APR) of banks declined by 47 basis points to 28 per cent in May 2012, relative to a year earlier.
22. The interbank overnight rate rose to 13.3 per cent in May, from 8.1 per cent in January 2012.
Balance of Payments and Exchange Rate Developments
23. Total merchandise exports were US$6.6 billion over the first five months of 2012, representing a year-on-year growth of 24.6 per cent. There were higher receipts from gold, cocoa beans and crude oil exports as commodity prices increased during the period.
24. Export receipts from gold amounted to US$2.7 billion, cocoa beans were US$1.6 billion, while crude oil was US$1.2 billion during the period. Other exports, including non-traditional, amounted to US$768.2 million.
25. Total merchandise imports were US$7.5 billion during the five months, indicating a growth of 27.9 per cent on a year-on-year basis. Oil imports were US$1.5 billion, compared with US$1.2 billion in the same period of 2011. Of this, crude oil amounted to US$483.4 million while refined oil products were US$967.9 million. Gas imports through the West Africa Gas Pipeline are estimated at US$73.5 million.
26. Total non-oil imports, categorized by the Broad Economic Classification (BEC), amounted to US$6 billion, compared with US$4.7 billion recorded in the corresponding period in 2011. Of this, capital imports was estimated at US$1.3 billion, intermediate imports US$2.9 billion, consumption goods US$1.3 billion and other imports US$439 million.
27. The balance on the trade account therefore registered a deficit of US$937.3 million by end May 2012, compared with a deficit of US$597.2 million recorded in the same period a year ago.
28. For the first quarter of 2012, the Balance of Payments recorded a deficit of US$1.3 billion, compared to a deficit of only US$154.2 million in the same period of 2011. The widening balance of payments is attributable to the deterioration in both the current account and the financial and capital accounts.
29. The Gross International Reserves of the Bank of Ghana declined to US$4.3 billion as at June 8, 2012, from U$5.4 billion in December 2011. This is equivalent to 2.5 months imports cover of goods and services.
30. Cumulative inward remittances through the banking system were US$5.9 billion at the end of April 2012, representing a year-on-year growth of 7.5 per cent. Of this, US$622.3 million accrued to individuals, recording a growth of 6.6 per cent over the same period in 2011.
31. During the first five months, the cedi depreciated cumulatively by 15.1 per cent against the US dollar, compared to 1.9 per cent depreciation in the same period of 2011. In recent weeks however, the pace of depreciation of the cedi has moderated as a result of the measures introduced to restore stability. The real effective exchange rate depreciated by 6.8 per cent in January – April 2012, compared with a real appreciation of 5.9 per cent in the same period of 2011.
Summary and Outlook
32. The major issue that dominated discussions at our meeting was the exchange rate pressure and the threat it posed to macro-economic stability. The Bank has implemented a number of measures to mop up excess liquidity in the system. These have contributed to stabilizing the exchange rate. As you may recall the policy measures included a review of the currency composition of reserve requirements of banks, the re-introduction of BoG instruments, the maintenance of banks’ Vostro balances in the Central Bank, and stepped-up sterilization efforts.
33. The Committee notes that the measures have begun to take effect. Increases in the policy rate have led to upward adjustments in rates of money market instruments and improved the attractiveness of cedi assets compared to foreign currency assets.
34. The MPC noted some weakening of the indices of business and consumer confidence, with the composite index of economic activity expanding at a slower pace. Private sector credit increased moderately and the banking industry remained stable, sound and profitable.
35. On the external sector, exports receipts increased. However, developments in the global economy with regards to the Euro zone and weak global growth prospects may have a dampening effect on commodity prices and can lead to further balance of payments challenges.
36. The fiscal performance showed that risks to the fiscal outlook have intensified. On the revenue side, tax revenues improved but the tax effort remained weak compared to the size and level of sophistication of our economy. The underlying pressures in Government expenditures were linked to outstanding payments, large and growing energy subsidies, higher than budgeted spending on wages and related expenses and rising interest costs.
Dollarization of the economy
37. In the last week, there has been speculation and public interest about the result of consultation between the Bank of Ghana and stakeholders in the banking community about ways to stabilize the exchange rates. A central aspect of our discussion has related to ways of restraining the growing trend of dollarization in the economy.
38. Dollarization is characterized by a tendency for providers of goods and services to price in foreign exchange and, in many instances, receive payment in foreign currency. Examples are the purchase of cars, payment of school fees, mortgage loans, rental payments, airline tickets etc. The service providers quote exchange rates that are significantly off-market. The fringe exchange rates trickle down into the market and become benchmark rates, unduly influencing market rates.
39. Our laws allow both residents and non-residents to operate foreign exchange accounts. Any individual or corporate body that operates such an account can easily convert cedis to dollars and pay these monies into the foreign account. Many people have built huge dollar deposits in bank accounts. The share of foreign currency deposits to total deposits in our banking system has increased from 27.9 per cent in April 2010 to 28.2 per cent in April 2011 and further to 31.8 per cent in April this year. Some banks have more foreign currency deposits than domestic currency in their total deposit.
40. The response of the banks to this trend is to import huge volumes of foreign currency to service the need of their clients. The easy availability of foreign cash fuels dollarization. The Bank of Ghana has decided to initiate a process of reclaiming the primacy of the domestic currency in trading activity.
41. The effort to restore the pre-eminence of the cedi in domestic transactions require strict adherence to the provisions of the Foreign Exchange Act 2006 (Act 723) and the accompanying regulations. It is our view that this will contribute to restoring confidence in the cedi. The Bank will issue the necessary notices to this effect in due course. However let me assure you that it has not been our intention to abolish the maintenance of foreign exchange accounts by citizens.
Conclusion
42. On the assessment of the risks in the economy, the Committee was of the view that risks to the inflation outlook were on the upside. These were underscored by exchange rate depreciation, domestic financing of the fiscal deficit and energy subsidies. On the other hand, the weakening of both business and consumer confidence and tightening of credit stance on households and enterprises could pose downside risks to the growth outlook.
43. Given these considerations, the MPC noted that the upside risks to inflation outweigh the downside risks to growth and has therefore decided to increase the policy rate from 14.5 per cent to 15 per cent.