IS THE CENTARAL BANK'S SHINE DIMMING?

As Recent Actions Leaves the Market in Uncertainty The recent upward review of the prime rate by the monetary policy committee by the bank of Ghana has thrown up some major doubt about the direction and the monetary policy posture. Apparently the aggressive inflation targeting policies of the Bank at the expense of growth has failed to arrest the inflation to rate below the double digit. the bank has been so obsessed with a single digit inflation over the last decade that it was prepared to sacrifice all other policies to achieve it. buoyed on by the Bretton Woods institutions and a government obsessed with achieving "macro-economic stability".

Bank of Ghana Set Prime Rates

Prime Rate Reviewed Upward as Inflationary Pressures Mount The bank of Ghana's (BOG) Monetary Policy Committee on its first quarter meeting on Monday 17 March announced a new prime rate of 14 % which is the second consecutive quarter of upward adjustment. The previous rate was 13% which indicates a 1 percentage point increase in th prime rate. Giving reasons for the upward adjustment the Chairman of the MPC and the Governor of BoG made it clear that the decision to was a reaction to the persistent failure of the bank to bring inflationary pressures downwards. The underpinning strategy of the bank has been to bring inflation down to a single digit.however inflation has stubbornly stayed in the double figures zone and over the last 3 quarters has actually spiraled upwards towards dangerous levels.The gap between the nominal interest rate and real interest rate has widened. Real and Market Interest rates in this country has always diverged wildly from the prime rate and this will give the banks a carte Blanche to charge even higher interest in an environment of already higher interest. this will definitely push the market interest rates to over 35% from the current 28%.this will have major effects on growth in especially the already faltering manufacturing sector. The inflation that this hike in the rate was to fight will even continue to increase. Below is the full text of the MPC Press release 1. Ladies and Gentlemen, you are all welcome to this MPC press briefing. I am pleased to share with you and the general public the MPC’s assessment on the economy and the outlook. 2. Let me say from the outset that this briefing is taking place against the backdrop of extraordinary developments in the global economic environment. I should note the subprime mortgage crisis in the United States; the credit-crunch in financial markets and investment flows, declining valuation of equities; the recession fears in the US economy and uncertainty about its international repercussions; and not least, the sharp re-alignment of exchange rates of major currencies with the dollar at the weak side. And, of course there is the threat of resurgence of global inflation, against the prospects of record high crude oil prices and food inflation, driven by rising demand especially in the fastgrowing emerging market economies. 3. As our economy is truly open to the global market, highly open to international trade and capital flows, these developments cannot but affect the outlook in a way BANK OF GHANA Press Release Monetary Policy Committee March 17, 2008 BANK OF GHANA EST. 1957 2 dependent upon our policies and circumstances, especially where changes in commodity prices are concerned. 4. You would like to know that available information and indicators continue to point to a fairly resilient economic activity and both business and consumer expectations continue to be positive about economic prospects for 2008. 5. The Bank’s Composite Index of Economic Activity grew by 27.5 percent in year-on-year terms at the end of January 2008, above the trend growth of 21.2 percent. This compares with 22.5 percent recorded in the same period of 2007. The increase in economic activity in the first month of the year was broad-based with all the sub-components showing strong growth, except the pace of domestic VAT collections which recorded some slowdown in the month, consistent with seasonal patterns. 6. The Bank’s survey of Business and Consumer Confidence early into the year point to positive expectations for 2008, with household and industry showing more optimism in their assessment of economic conditions and prospects. Consumer Confidence remained generally high and Business Confidence strengthened relative to the preceding quarter. 3 7. The latest inflation numbers released by the Ghana Statistical Service (GSS) show that the upturn in headline inflation which began in October 2007 continued into the first two months of 2008. Consumer price inflation increased from 12.7 percent in December 2007 to 12.8 percent in January and further to 13.2 percent in February 2008. Much of this rise in inflation has been the result of pass-through of crude oil prices on the domestic market, and rising food prices and utility price adjustments. Also core inflation (defined to exclude energy and utility items) has increased consistently for the past five (5) months along with increases in similar indicators tracking underlying inflationary pressures. 8. Developments on the foreign exchange market show that exchange market conditions remained stable and continued to grow in depth. Purchases and Sales by banks and forex bureaux in the foreign exchange market for the first two months of 2008 amounted to US$1.59 billion, 38.8 percent higher than US$1.2 billion for the same period in 2007, and 54.4 percent above US$1.0 billion recorded for November and December 2007. 9. Private inward transfers – received by NGOs, embassies, service providers, individuals etc. - through the banks and finance companies for the first two months of 4 2008 amounted to US$1,380.2 million, which represents 48.7 percent increase over the amount of US$927.9 million recorded for the corresponding period in 2007 • Of the total transfers at the end of February 2008, US$275.5 million (or 20 percent) accrued to individuals, compared with US$202.3 million (21 percent) in February 2007. 10. Gross International Reserves (GIR) at the end of February 2008 stood at US$2.45 billion, and translates on average into goods and services import cover of 2.9 months. 11. Cumulatively, for the first two months of 2008, the Ghana Cedi depreciated against all the three major currencies -- 0.8 percent against the US dollar, 0.9 percent against the Pound Sterling, and 3.6 percent against the Euro. This compares with 0.2, 0.5, and 0.6 percent respective depreciations recorded in the corresponding period of 2007. In trade weighted terms, the cedi depreciated by 0.6 percentage points, compared with a depreciation of 0.4 percentage points for the same period in 2007. 5 12. On the external payments front, volatility in commodity prices continued in the first two months of 2008 as crude oil and gold prices hit historical highs. 13. After hitting a historical peak of close to US$100 at the beginning of January 2008, oil prices decreased noticeably with the price of Brent crude oil at US$89.2 per barrel on 6 February 2008. It however, crossed the US$100.00 mark by March 8 2008 recording US$110 per barrel on Thursday, March 11, 2008. 14. The price of cocoa which was US$2,049.0 per tonne at the end of December 2007 increased by 24.6 percent to US$2,554.0 per tonne at the end of February 2008. Gold prices also increased by 13.6 percent from US$830.9 per ounce at the end of December 2007 to US$944.3 per ounce at the end of February 2008. 15. The overall effect of these price movements is that the economy’s core terms of trade improved somewhat compared with a deterioration for the same period in 2007. The index increased on the average by 5.2 points in January and February 2008 to 36.58 at the end of February 2008 but still remained 5.50 points below its level a year earlier. 6 16. Initial estimates of trade statistics show that total merchandised exports for the first two months of 2008 amounted to US$868 million, compared with US$690.3 million for the same period in 2007. • Exports of Cocoa beans and products amounted to US$227.4 million, lower than US$247.4 million recorded for the same period in 2007. However, cocoa purchases through the end of February totalled some 530,000 tonnes, against a target of 618,000 tonnes for the crop season, and 615,000 tonnes purchased for the 2006/2007 crop. • Gold export was US$404.4 million as against US$263.71 million recorded for the same period in 2007. • Non traditional exports amounted to US$179.4 million, compared with US$140.8 million for the corresponding period in 2007. 17. Total merchandise imports for January and February 2008 amounted to US$1,434.7 million, higher than US$1,007.7 million for the same period in 2007. Of this amount, oil imports accounted for US$268.7 million, and 7 non-oil imports US$1,166.0 million. These were higher than US$246.8 million and US$760.9 million recorded for oil and non-oil imports respectively for the same period in 2007. 18. The first two months of 2008 consequently recorded a trade deficit of US$566.7 million, compared with a deficit of US$317.4 million a year earlier. 19. The domestic industry and the private sector benefited from a rapid expansion in credit with continued strong asset and credit growth through January 2008. Total assets of the banking industry recorded an annual growth of 46.2 percent to GH¢7,807.1 million at the end of January 2008, compared with 38.1 percent (GH¢5,341.7 million in January 2007). 20. Credit to the private sector increased by 1.2 percent in the first month of 2008 to GH¢3,336.9 million, following an increase of 14.4 percent in the fourth quarter of 2007. On year on year basis, banks’ credit to the private sector grew by 60.4 percent (GH¢1,256.9 million) to GH¢3,336.9 million in January 2008, compared with 46.9 percent (GH¢664.3 million) in the year to January 2007. 21. The Services sector accounted for 32.1 percent of the increase in credit with some 45 percent of the amount 8 channeled into personal loans. This sector is followed by Commerce (19.0 percent), Miscellaneous (15.6 percent), Construction (10.6 percent) and transport, storage and communication (5.4 percent), and Agriculture (3.4 percent).This increase in credit was financed by deposits; and the credit to deposit ratio has increased from 1.7 in January 2007 to 2.2 in January 2008. 22. Rapid expansion in the asset portfolio of the banking system was accompanied by continued improvement in all financial soundness indicators. Generally, the industry showed improved profitability, asset quality and operational efficiency. 23. The Non-Performing Loans (NPL) ratio declined further to 6.8 percent at the end of January 2008 compared with the 7.5 percent during the same period in 2007. Banks’ loan loss provision to gross loans ratio also followed the same path, declining to 5.9 percent in January 2008, from 7.2 percent a year earlier. However, slower growth in banks’ capital continues to push the NPL net of provisions to capital on an upward trend; it was estimated at 4.2 percent at the end of January 2008, compared with 1.3 percent for the same period in 2007. On the whole, banks’ solvency remains strong, the industry’s capital adequacy ratio 9 remains well above the mandatory threshold of 10 percent (15.3 percent at the end of January 2008). 24. Interest rates on the auction market have somewhat firmed up on both ends of the market in the first two months of the year. • The benchmark 91-day and 182-day Treasury bill rates went up by 15 basis points and 30 basis points respectively to 10.77 percent and 11.10 percent respectively at the end of February 2008. • The 3-year fixed bond rate edged up from 13.95 percent in December 2007 to 14.0 percent in early March 2008. • Other maturities including the 5-year bond rates remained unchanged during the same period. 25. The interbank market interest rates moved within a narrow band in the money market ranging between 11.5 percent and 13.5 percent during the period. 26. Evidence from the Bank’s survey of credit conditions point to a further improvement in credit conditions into the 10 early months of 2008, following similar developments in the last quarter of 2007. In general, banks have improved access to credit by enterprises (SMEs) and households particularly in the areas of consumer credit. Mortgage loans conditions are increasingly constrained by balance sheets. 27. Provisional data on monetary aggregates show that broad money (M2+) fell marginally in January 2008 to GH¢5,755.9 million. For the twelve-month period to January 2008, M2+ grew by 34.6 percent compared with 39.4 percent for the same period in 2007. M2+ grew by an estimated 37 percent to GH¢5,798.0 million over the year to February 2008, compared with 34.8 percent for the same period in 2007. 28. The growth in total liquidity has been underpinned by a strong growth in deposits over the same period. Demand Deposits grew by 24.6 percent to GH¢1,507.0 million at the end of January 2008, compared with a growth of 42.9 percent for the same period in 2007. Savings & Time deposits stood at GH¢1,890.0 million at the end of January 2008, representing an annual growth of 49.9 percent, compared with a growth of 55.9 percent for the same period in 2007. Foreign currency deposits at the end of January 2008 stood at GH¢1,128.0 million, an annual growth of 26.3 11 percent, compared with 35.3 percent for the same period in 2007. 29. On the Government budget for 2008, the initial banking data on implementation indicate a robust revenue effort, but also indications of strong growth in expenditures. • Total revenue at the end of February 2008 amounted to GH¢619.9 million (3.8 percent of GDP) compared with GH¢497.1 million (3.6 percent of GDP) a year earlier. Total tax revenue for January and February 2008 was GH¢548.6 million (3.4 percent of GDP), compared with GH¢468.1 million (3.3 percent of GDP) for the same period in 2007. • Non-tax revenue for the period was GH¢30.5 million, compared with GH¢7.8 million for same period in 2007. • Total revenue and grants (excluding project grants) for the first two months of the year amounted to GH¢679.1 million (4.2 percent of projected GDP), of which the grant component was GH¢59.1 million. This compares with GH¢707.6 million (5.1 percent of GDP) recorded for the same period in 2007, with GH¢210.5 million in the form of grants. 12 • Total Government expenditure (excluding foreign financed capital expenditure) for the months of January and February 2008 was GH¢985.9 million (6.1 percent of GDP). This compares with GH¢717.9 million (5.1percent of GDP) for the same period in 2007. • The preliminary estimates of the budget deficit (excluding foreign financed capital expenditure) amounted to GH¢291.5 million (1.8 percent of GDP), compared with a deficit of GH¢27.3 million (0.2 percent of GDP) for the same period in 2007. • The deficit resulted in a total public sector borrowing of GH¢396.4 million (2.4 percent of GDP) for the first two months of 2008, financed in part on the domestic market, mainly in the form of short term securities, which increased by GH¢183.6 million. 30. To conclude, the latest numbers and macroeconomic data indicate that economic activity continues to be robust, and the economy has been resilient to the cost-price and balance of payments pressures emanating especially from the oil markets; and significant re-alignments in the major international currencies. The fundamentals are robust and 13 economic activity is at an increasing pace, and with relative stability in the exchange markets. 31. Headline inflation turned in much higher, drifting away from the steady disinflation path, for the fifth consecutive month. The oil price increases and rising food prices continue to feed through the inflation numbers and the underlying price pressures in the economy. 32. Strong domestic demand has been underpinned by considerable fiscal stimulus, the easing of credit conditions, and rapid growth in bank loan portfolio including consumer loans which has increasingly become sectorally broadbased. 33. Looking ahead, the potential risks to the outlook for inflation and real economic activity are concerned with uncertainties about oil prices, and food inflation, and the extent of build-up or unwinding of domestic demand pressures. The balance of risks is on the upside; and this makes it necessary that monetary policy stance continues to be tuned to ensure that expectations remain anchored to stability and consistent with a process of disinflation to secure the environment for steady expansion of output. 14 34. In the circumstances, the Monetary Policy Committee has decided to increase the Bank of Ghana Prime Rate from 13.5 percent to 14.25 percent. Thank you for your attention.

Global Financial meltdown Threatens Ghana's Growth

We here in Ghana are far more removed from the frenzy and incessant finacial engineering and activities of the high powered finacial centres of our heavily lopsided world. However the implications of the turmoil will definetely have serouis cosequencies for us here in Ghana. last year we failed to achive our modest growth target due to both local and international developments that hindered our economic growth. This year it is even more acute as the global econmy faces a slowdown and a looming reccession in the US -which is the largest economy in the world. We seem not to be well prepared for any hard times and a lot of issues are in way.