The Bank of Ghana has once again reduced its policy rate which is indicative of the rate at which commercial banks can borrow from the Central Bank. The rate according to the Monetary Policy Committee is now 13.5 percent, down from 15 percent. This is the third cut in the rate since February and comes on the back of the lowest inflation rate in three years. Though such reductions are supposed to reflect in lower interest charges on loans, not much has changed. Businesses have not been happy with the current lending rate of about 30 percent and have been pressuring government to do something about it. Full MPC statement below [1 The 40th press briefing of the Monetary Policy Committee. [2] The Committee has undertaken a review of macroeconomic performance for the first half of 2010 and the economic outlook for the rest of the year. We covered trends in the global outlook, inflation and the factors underlying it, the execution of the 2010 budget, growth prospects, assessment of business and consumer confidence, the stability of the financial system and developments in the external sector. Global Economic Developments [3] Global economic growth, which began to pick up in the last quarter of 2009 continued in the first half of 2010. However given the uncertainty in Europe’s financial markets, the weak US growth and employment prospects and slower than expected output growth in Asia, concerns have been raised over the sustainability of the global economic recovery. In its latest assessment, the IMF has noted that uncertainties surrounding sovereign and financial sector risks in parts of the EURO zone could spread, posing difficulties for both financial stability and global growth. [4] The uncertainty characterizing growth prospects of the advanced economies has had a downward impact on crude oil prices, which peaked at around US$85 per barrel in the first week of April 2010. This has since declined to around US$77 per barrel. Continued slow pace in the recovery of the global economy is likely to reduce the pressure on crude oil prices in the second half of this year. Inflation and Output [5] The CPI for June 2010 which was released this week by the Ghana Statistical Service (GSS) shows that year on year CPI inflation for June 2010 was 9.5 per cent, down significantly from the 20.7 percent recorded in June 2009. With respect to the year-on-year changes observed, the decline in the food component of the CPI was greater than the non-food component. Food inflation declined from 15.4 percent in June 2009 to 6.1 percent in June 2010 while non-food inflation dropped from 24.7 percent a year earlier to 11.9 percent in June 2010. [6] Core inflation, derived by excluding volatile energy and utility price changes from the CPI basket, declined from 21.7 percent in June 2009 to 8.4 percent in June 2010. [7] The Bank of Ghana’s Composite Index of Economic Activity (CIEA) show an annual growth (in real terms) of 7.2 percent compared to 2.8 percent for the same period last year. Factors that contributed to the growth of the index are exports, industrial consumption of electricity, sales by some key manufacturing concerns and consumer spending. Construction and Port & Harbour activity weighed down on the index. [8] The June 2010 survey conducted by the Bank of Ghana to gauge the sentiments of businesses and consumers provided mixed signals. While overall business confidence rose by 1.2 points in June 2010, overall consumer confidence declined by 5.2 points. Business sentiments were driven by their assessment of the performance of the economy, direction of interest rate, exchange rate stability, price trends and prospects for economic growth in 2010. The deterioration in consumer sentiments reflected pessimistic assessment of changes in household finances, possibly due to the increase in utility tariffs that had been recently announced. Governments Fiscal Operations [9] Fiscal data from the Bank of Ghana showed that for the first six-months of the year, Government fiscal operations resulted in a narrow deficit, on a cash basis, of GH¢821.8 million (3.2 per cent of GDP) compared with GH¢812.7 million (3.1 per cent of GDP) projected. [10] Total receipts up to June 2010 amounted to GH¢3.3 billion comprising GH¢2.7 billion in tax revenue, and GH¢500.8 million in non-tax receipts. Due to lower collections of import duties and import VAT, CEPS collections were below target, recording GH¢1.0 billion. Income and Property taxes collected by IRS amounted to GH¢1.1 billion. In addition, domestic VAT and Excise Duty collected by VAT service was GH¢445.9 million. Non- tax revenue receipts made up of non- tax revenue and Grants contributed GH¢141.5 million and GH¢394.8 million respectively to the total collections for the period. [11] Total Government expenditure up to June amounted to GH¢3.8 billion (14.7% of GDP) out of which GH¢688.9 million was for interest expenditure and GH¢3.1 billion for non-interest expenditure. [12] Therefore, for the first half of 2010, the budget recorded an overall cash deficit of GH¢821.8 million (3.2% of GDP). This deficit was in addition to the Tema Oil Refinery (TOR) debt settlement of GH¢445.0 million financed by a combination of net domestic borrowing of GH¢1.1 billion and net foreign inflows of GH¢119.7 million. The net domestic financing (NDF) of the budget was therefore within the mid-year target of GH¢1.2 billion. Interest Rate Structure [13]Since the last MPC meeting, money market developments continue to reflect strong investor demand with a significant easing of inflation expectations and a lengthening of the average maturity of Government securities. The share of the short-dated government securities declined to 57.7 per cent in May 2010 from 60.0 per cent in December 2009. • For the first half of 2010, the 91-day and 182-day Treasury bill rates eased downward from 22.6 percent and 25.3 percent to 12.9 per cent and 13.4 per cent respectively. • The rates on the 1-year note and the 2-year fixed rate note fell from 20 percent and 23.5 percent to 13.8 per cent and 13.9 per cent respectively. • The 3-year fixed rate which was 19 per cent in January 2010, declined to 15.7 per cent in June 2010. • Over the same period, the interbank overnight rate fell from 16.3 percent to 13.2 per cent. • The average base and lending rates of the commercial banks declined slowly. Average base rate quotations of the banks went down by less than 3 percent in the first six months of 2010 to 28.7 per cent, ranging between 24.7 – 29.5 per cent. Average lending rates also declined by less than 1 percent to 31.8 per cent in the range 23.5 – 35.0 per cent over the same period. • The effect of this developments is that commercial banks widened their spreads, defined as the difference between the Annual Percentage Rates (APR) on Loan facilities and Annual Deposit Interest Rates (ADI). The spread thus increased by 2.3 percentage points during the review period. One commercial bank, however bucked this trend and its spread reduced, consistent with the expectations of the Bank of Ghana. Banking Sector Developments [14] Overall developments in the banking system through May 2010 show strong asset growth and improvement in financial soundness indicators. The total assets of the banking industry grew by 27.1 percent to GH ¢14.6 billion at the end of May 2010 from GH¢11.5 in May 2009. [15] The Capital Adequacy Ratio (which measures the banking system’s capacity to withstand unexpected losses) increased from 14.5 per cent in May 2009 to 19.2 per cent in May 2010. The Non Performing Loans (NPL) which is the ratio of loan losses to gross advances declined from 20 percent in February 2010 to 18.7 percent in May 2010 but still higher than the recorded NPL ratio of 11 percent in May 2009. [16] The credit conditions survey conducted by the Bank of Ghana in June 2010 shows a general net tightening of credit to small and medium sized enterprises and households for mortgages. Loans to small and medium sized enterprises and households were however tightened through increases in margin for riskier loans and security and collateral requirements. Large enterprises however benefited from a marginal ease in banks’ credit stance. Decreases in margins on average loans and maximum size of loan/credit lines were the main contributing factors for the easing of the credit stance for large enterprises. [17] Commercial Banks credit to the private sector and public institutions over the 12-month period to May 2010 increased by GH¢214.4 million (3.2 per cent), the lowest since May 2003. [18] Outstanding bank credit to the private sector in May 2010 was GH¢5,873 million (22.7 per cent of GDP). Of this amount, the services sector’s share was 23.4 per cent, manufacturing 13.9 per cent, commerce and finance 13.9 per cent and construction 9.9 per cent. [19] In real terms commercial bank credit to the private sector fell by 3.4 percent at end-May 2010 compared with a growth of 19.1 per cent at end-May 2009. External Sector Developments [20] The MPC did not have full complement of data on the Balance of payments (BOP) for the half year, because this is generated with a 2-month lag. However data on the Balance of trade indicate that total merchandise exports for the first half of 2010 amounted to US$3.9 billion, a growth of 22.8 per cent on year–on-year basis. Cocoa beans and products amounted to US$1.3 billion compared with US$1.1 billion for the same period in 2009. Gold exports receipts amounted to US$1.8 billion compared with US$1.3 billion in 2009. By the end of the 2009/2010 main cocoa season, cumulative purchases was 587,166 tons compared to the crop size at the close of the 2008/2009 season of 634,256 tonnes. [21] Total merchandise imports in the first half of 2010 amounted to US$5.14 billion, 28.1 per cent higher than the level recorded in the first quarter of 2009. Oil imports for the first six-month period amounted to US$1.1 billion or 94.9 per cent above the US$581.624 million recorded a year ago. The increase is mainly due to a price effect, as the average realized price recorded for crude oil imports was 64.1 per cent above the US$47.9 per barrel realized a year ago. The volume of crude and oil products imported in the economy increased by 15.5 per cent to 1.5 million metric tonnes from 1.3 metric tonnes a year ago. [22] Non-oil imports for the period amounted to US$4.0 billion compared to US$3.4 billion in the first half of 2009. Capital and intermediate goods together accounted for 79.9 per cent of total non-oil imports at the end of the first quarter of 2010, compared with 69.5 per cent recorded in a similar period of 2009. [23] The trade deficit for the first half of the year widened to US$1.2 billion compared to US$1 billion in the same period in 2009. [24] Private inward transfers (including receipts by NGOs, embassies and individuals, through the banks) amounted to US$4.2 billion in the first five months of 2010, representing 22.2 per cent increase over the US$3.5 billion for the corresponding period in 2009. Of the total transfers in January – May 2010, US$ 626.2 million (14.8 per cent) accrued to individuals, compared with US$604.84 million (17.5 per cent) recorded for the same period in 2009. [25] The Gross International Reserves (GIR) position of the Bank of Ghana which had increased to $3.3 billion in March grew further by 4.4 per cent in the second quarter of 2010 to US$3.5 billion, translating into over 3 months cover of imports of goods and services. This compares to gross reserves of US$1.7 billion in June 2009 (or 1.8 months of import cover). [26] The foreign exchange market continued to gain in depth, with relative stability. Total foreign exchange transactions (i.e. purchases plus sales) by banks and forex bureaux amounted to US$6.8 billion for the half year or 59.4 per cent above the level recorded over the same period in 2009. [27] The stability of the Ghana Cedi continued in the first half of the year. On year-on-year terms the exchange rate of the cedi against our three main trading currencies (the US dollar, the pound sterling and the euro) recorded respective appreciations of 3.3, 13.3 and 18.4 percent. This compares with depreciations of 29.8, 14.1 and 21.4 percent against the three currencies respectively in June 2009. In trade-weighted terms, the cedi, as at the end of June 2010, had appreciated cumulatively by 5.2 percent against the three currencies. Current Issues [28] Before I conclude, let me take time to provide a flavour of the topical issues discussed at the MPC this week, in addition to the review of the economy. There was considerable interest on how to sustain the disinflation process, how to maintain growth even as we pursue low inflation and how to reduce the transmission lags from the determination of the policy rate to the lending rates of the commercial banks. Sustainability of Low Inflation [29] The Monetary Policy Committee maintains the view that price stability is an important policy goal. The MPC recognizes that conditions exist for the maintenance of low inflation, noting that food prices will continue to be stable during the third quarter which is the traditional harvest season. Also favourable terms of trade will continue to support a stable exchange rate. The MPC is committed to react quickly to contain any emerging risks to inflation. Trade-Off Between Inflation and Growth [30] The Committee noted the public debate about the trade-off between inflation and growth, the pace of the disinflation process and its implications for growth. It is the view of the Committee that the benefits from the current disinflation far outweigh short term costs to growth. In the medium term, the low inflation environment would be growth enhancing. Transmission Lags from Policy Rate to Lending rates [31] The Committee also notes the concerns of the general public of the slow pass through of the lower policy rate to the lending rates of banks. Technical studies at the Bank of Ghana suggest that a near full pass through to lending rates operate with a substantial lag. The Bank is committed in working closely with the commercial banks in shortening this transmission lag. Summary and Outlook [32] To sum up, developments in the first half of the year suggest that uncertainty still clouds the extent of recovery in the world economy. The slow recovery implies that crude oil prices are likely to remain at current levels with favourable implications for domestic petroleum prices and reducing the pressures exerted on consumer prices. [33] The MPC does not expect a significantly altered path of inflation is the second half of 2010. The inflation outcome for June 2010 captured the first round impact of the utility price adjustments announced at the end of May 2010. The second round effect is expected to work its way through the consumer basket in the second half of the year. Looking ahead inflation is expected to remain broadly around the central target of 9.2 percent. This will be achieved in part by lower food and petroleum prices as well as fiscal consolidation. [34] For the first half of the year, central government’s budgetary operations show that the overall Net Domestic Financing (NDF) was in line with the program target. However, there are areas of concern with respect to the fiscal outlook. Firstly, revenues would have been more robust but for significant reductions in import duties and import VAT. The MPC noted that significant import exemptions were granted during the period. The import exemption regime will therefore have to be re-examined consistent with budgetary objectives. Secondly, there is uncertainty regarding the level of the public wage settlement. Third, is the problem of arrears accumulation especially with respect to statutory funds, with negative implications for capital spending, private sector growth, stability of the banking system and hence overall economic growth. [35] On the real sector of the economy, though real GDP growth slowed down in 2009, it is expected that economic growth will move back to trend in the second half of the year. Early indications suggest that the pace of economic activity may have bottomed out and has begun showing signs of picking up, an early indication of the restoration of the growth process. [36] The anticipated continued slowdown in inflation in the medium-term, together with the need to restore the growth process provides scope for monetary policy easing. In the circumstances, the Monetary Policy Committee has decided to reduce the Monetary Policy Rate (MPR) by 150 basis points. The MPR is therefore 13.5 percent. This brings the cumulative reduction in the MPR for the year so far to 450 basis points. Source: Joy Business/Myjoyonline.com/Ghana