The Monetary Policy Committee (MPC) of the Bank of Ghana has kept the policy rate unchanged at 13.5 per cent, saying the risk to inflation and growth were broadly balanced.
“Given these considerations, and the fairly balanced risks to inflation and growth in the outlook, the Committee decided to keep the policy rate at 13.5 per cent,” Dr Ernest Addison, the Governor of the Bank of Ghana, said at a news conference on Monday.
Inflation has risen sharply over the last couple of months, driven mainly by sustained food price increases.
Dr Addison said the Committee was of the view that the increase in inflation was mainly due to food inflation which is expected to abate with the onset of the harvest season.
“This notwithstanding, the latest forecast indicates that inflation will remain within the medium-term target band, but closer to the upper limit in the near-term, in the absence of further unexpected shocks,” he said.
Dr Addison added that monitoring of the inflation situation would be needed to respond swiftly to prevent potential effects on headline inflation from the rising food inflation.
He said the economy continued to recover from the impact of the pandemic as high-frequency economic indicators pointed to continued recovery in economic activity, even though below pre-pandemic levels.
Dr Addison said although consumer confidence picked up, weakening business sentiments, stemming from supply disruptions, was adversely impacting input costs, driving down short-term company prospects.
While credit to the private sector saw a marginal pickup, the trends remain below expectations largely on account of pandemic-related risk aversion.
Dr Addison said the Bank’s update of the Composite Index of Economic Activity (CIEA) for July 2021 reflected a continued recovery in domestic economic activity.
The real CIEA recorded a 20.0 per cent year-on-year growth in July 2021, compared with 20.2 per cent in June 2021, and 3.9 per cent growth in July 2020. The growth in the indicators were somewhat broad-based with port activity, imports, domestic VAT, and air-passenger arrivals accounting for the increase.
GPMI falls
However, the Ghana Purchasing Managers Index (GPMI) fell in August 2021 mainly on the back of rising input costs.
The decline in the Purchasing Managers Index was consistent with the results of the Bank’s latest confidence surveys, conducted in August 2021, and which indicated some softening of business sentiments.
The survey results revealed the inability of businesses to meet their short-term company targets driven by high input costs, unavailability of raw materials, weak consumer demand, and rising labour costs.
Consumer confidence, on the other hand, improved, reflecting optimism about current and future economic conditions.
COVID-19 response measures
Dr Addison said the COVID-19 related macro-prudential measures, put in place by the Bank of Ghana, will be maintained for the time being to support a full recovery in economic activity.
In the banking sector, Dr Addison said balance sheet performance remained strong with sustained growth in total assets, investments and deposits.
Profitability levels remain high, with profit growth driven by increased income growth.
Financial soundness indicators remain broadly sound, although credit risk appears elevated and needs to be carefully monitored.
Bolstered by strong capital and liquidity buffers, banks are expected to withstand mild to moderate credit risk shocks emanating from deterioration in asset quality.
Investments
Banks continue to increase their investments in high-yielding Government securities to improve their earnings while moderating their credit risk due to uncertainties in the business environment.
The Committee also took note of the fact that the trend of increased domestic financing of the deficit (driven by high-yielding Govt paper held largely by banks) was crowding out credit to the private sector.
The external payments position remained strong despite the decline in the trade surplus due to a stronger import growth and a widening current account deficit which has been adequately financed with external inflows from portfolio and foreign direct investments.
Performance of Ghana cedi
Dr Addison said the Ghana Cedi had performed strongly with a year-to-date depreciation of 1.8 per cent.
He said the country’s higher sovereign spread had not shifted foreign investor behaviour as net monthly purchases of securities on both the debt and equity markets remain relatively favourable.
“In the outlook, rising interest rates in advanced economies on account of tapering may pose some risks. However, the strong reserve build-up and foreign exchange inflows from the recent SDR allocation and the expected syndicated cocoa loan proceeds should help to cushion currency pressures in the near-term,” he added.
On fiscal consolidation, Dr Addison said efforts appeared to be on track, but with some inherent risks associated with wage settlements and energy sector payments, amid low revenue mobilization.
Debt sustainability
In addition, debt sustainability concerns remain, which warrants additional fiscal consolidation efforts, carefully balanced with sustainable growth strategies and efficient debt management strategies.
The expectation on fiscal policy implementation in the remaining months of the year will be shaped by revenue collection efforts and strict alignment of expenditures with revenue inflows to ensure attainment of the fiscal deficit target for the year.
During the period, the stock of public debt increased to 76.4 per cent of GDP (GH¢335.9 billion) at the end of July 2021, compared with 76.0 per cent of GDP (GH¢291.6 billion) at the end of December 2020.
Of the total debt stock, domestic debt was GH¢173.4 billion (39.5 per cent of GDP) while the external debt was GH¢162.5 billion (37.0 per cent of GDP).
Export receipts
Total export receipts increased by 2.4 per cent on a year-on-year basis to US$9.9 billion supported by higher prices realised from gold (up by 6.2 per cent), cocoa (up by 4.2 per cent), and crude oil prices (up by 58.1 per cent).
Total imports, on the other hand, increased by 8.6 per cent to US$8.98 billion, driven mainly by a 58.5 per cent increase in the value of refined petroleum products imports arising from increased demand as the economy returned to normalcy from last year’s lockdown period.
The higher import bill relative to export receipts resulted in a lower trade surplus of US$874.8 million in the year to August 2021, compared with a surplus of US$1.4 billion recorded in the same period of 2020.
Import cover
Gross International Reserves stood at US$11.4 billion (equivalent to 5.2 months of import cover), at the end of August 2021. The strong reserves build-up over the review period provided some buffer to the local currency, which came under some demand pressures from commerce, manufacturing, and energy sectors as economic activity picked up in the third quarter.
Cumulatively, available data as of September 22, 2021, shows that the Ghana Cedi recorded a depreciation of 1.8 per cent against the US dollar, compared with a depreciation of 3.0 per cent for the same period of 2020. The Ghana cedi also depreciated by 1.6 per cent against the Pound Sterling but appreciated by 2.7 per cent against the Euro over the same period.
