BOG Boss Expects Drop in Interest Rate

The governor of the Bank of Ghana (BOG), Dr. Paul Acquah, has expressed optimism, that the banking system would respond favourably to the reduction of the prime rate from 27.5% to 26% by reducing interest and lending rates.

Dr. Acquah, who is also the Chairman of the Monetary Policy Committee (MPC), explained that from past experiences, a reduction in the prime rate had always led to a decline in the interest and lending rates.

Governor Acquah said this at a news conference in Accra last Friday when the Monetary Policy Committee of the Bank undertook a review of the macro-economic performance for the first half of the year and the outlook for inflation and growth for the second half.

Dr. Acquah attributed the reduction of the prime rate to the improving economic conditions prevailing in the country and the better outlook of the economy.

He stated that interest rates on the money market moved upwards, with the 91-day Treasury Bill increasing from 26.5% in December last year to 32.0% by the end of June this year.

The average three-month time deposit rate moved up by 25 basis points to 14.0% whilst the average lending rate also went up by 50 basis points to 36.50% although the base rate of most banks remained unchanged.

The governor spoke about the conflict and insufficient coordination between the BOG and the Ministry of Finance (MOF) over the creation of a Treasury Department (TD) at the Ministry to take over the management of government debts from the BOG.

He said the development of such a unit would not conflict with the work of the bank, as these two institutions are mature enough and would rather help in the efficient management of government borrowings.

According to the governor, government debts instruments are the liabilities of the government so having a department to manage it by her is a great idea.

"The creation of the treasury department at the MOF would ultimately mean BOG's monetary policy operations would focus more on the entire capital market without changing the way we do business. It would also mean off-loading some of the debt government owes through auctioning."

He said that the domestic market expectations built around the large fuel price increases that were necessary to correct pricing misalignment and distortion in the industry have stabilized.

"Headline inflation stayed within tight range of 29% to 30% though easing marginally downward, following the inflation jump by 12.8 percentage points to 29.4% in February this year," Dr. Acquah said.

He said the vigorous revenue growth during the period up to May resulted in a reduction in the public sector domestic borrowing from 3.50% of GDP in June last year to 1.1% of GDP.

Total government revenue amounted to ?7,601.3 billion exceeding budgetary mark of ?7,045.5 billion for the half resulting in a 63.5% increase over last year's value for the same period. In contrast, total expenditure was ?7,716.0 billion, below the target level of ?8,249 billion for the same period.

A domestic primary surplus of ?213.0 billion and an overall deficit of ?114.6 billion was registered under the fiscal account compared to the projected deficit of ?1,204.2 billion.

Net domestic financing of the budget at the end of June was -?42.7 billion compared with a budgeted figure of ?1,202.9 billion.

The governor said that foreign currency deposits in the banking system increased by 10.0% from US$418 million at the end of 2002 to US$462 million by the end of May this year.

He said, "The business confidence survey suggests continued generally positive assessment of activity in enterprises especially in agricultural, industrial, real estate and the service sector".

Oil imports for the first half of the year amounted to $304.0 million representing 14% and 22% swell in volume and value respectively over the same period last year.

Tourism arrivals and spending in the country shot up by 10% and 16% respectively between 2001 and 2002. On the performance of the Ghana Stock Exchange (GSE), Dr. Acquah said during the first half of the year, the GSE All-Share Index gained 49.41-percentage point by the end of June 2003, the best half-year performance since 1999.

"Exports of the major commodities of cocoa, gold and other minerals have recorded increases beyond their projected levels for the first half", he said.

Cocoa purchases for 2002/2003 main crop season of 442,000 tonnes were above the projected 350,000 tonnes.

Gross International Reserve position of the country covers 2.5 months of imports compared with a projected 2.3 months of import cover at the end of 2002.

Purchases and sale of foreign exchange by the private sector increased by some 46.0% to $1,305 million in the first half of the year reflecting increasing depth of the foreign exchange market.

Dr. Acquah said foreign remittances through depository money banks went up 50% over last year's value to $953.4 million.

He said the cedi depreciated by 3.0%against the US dollar on the inter bank market during the first half of the year.

With global economic uncertainty associated with the Iraq war over although recovery in the industrialized countries is sluggish, expected stabilization in crude oil prices and the surge in the prices of cocoa and gold, the MPC viewed the outlook for the economy to be very bright.

He noted that the external payment position would be strengthened if the current pace of foreign exchange inflows from private sector and the pooling of donor resources under the multi donor budget support arrangement were continued.