BOG Monetary Policy Committee Press Release

1. Ladies and Gentlemen, I would like to share with you available data on key economic indicators and detailed information on financial policies and other developments since the last MPC meeting in January this year. And then I will communicate for the benefit of the general public the decision of the MPC on the Bank of Ghana Prime Rate.

2. First, as you are aware, headline consumer price Inflation fell further from 11.8 percent in December to 11.6 percent in January on a year-on-year basis. Inflation moved up to 14.0 percent in February with the recent 50.0 percent increase in petroleum prices as part of the industry deregulation. (The Consumer Price Index rose by 4.8 percent, compared with 0.9 percent in January 2005 and with 2.5 percent in February 2004. The non-food index increased by 6.8 percent compared with 1.9 percent in the same month last year.) The major sources of pressures on the consumer price index in February emanate from the non-food sector; transport and communication, housing and utilities, medical care, and recreational and entertainment sectors. Year-on-year non-food price inflation increased from 7.9 percent in January to 13.1 percent in February. The food price index rose by 2.9 percent, compared with 1.2 percent in January 2005 and 3.1 percent in February 2004. Helped by an improved food supply situation, the year-on-year food price inflation eased from 15.2 percent to 14.9 percent. The Bank of Ghana?s measures of core inflation continue to be stable within a narrow range, with three of the five measures in the single digit range.

3. The latest numbers show that the growth of the monetary aggregates have continued the slow down from the levels observed in the fourth quarter 2004. At the end of February 2005, year-on-year growth of reserve money stood at 19.7 percent, down from 34.3 percent in February 2004. Broad money M2 growth had similarly declined from 50.1 percent in January 2004 to 14.9 percent by January 2005 (the latest data available). M2+ growth has also slowed significantly from 39.3 percent in January 2004 to 20.5 percent by January 2005.

4. Interest rates on the money market, have continued to remain stable showing very little volatility within a narrow band.

? The benchmark 91-day Treasury bill rate edged up slightly from 17.1 percent in January 2005 to 17.17 percent by March and compares with 18.3 percent in March 2004.

? Similarly, interbank overnight money market, rates have remained stable at 16.21 percent by March 2005 and compares with a rate of 16.1 percent in March 2004.

? Commercial bank base rates, have also followed the pattern, declining from an average of 29.0 percent in December 2003 to 25.0 percent by December 2004, but with rigidly large common average interest rate spreads maintained by the financial institutions.

? The two-year and three year Government floating rate notes and bonds have also remained stable at 20.0 percent and 21.5 percent respectively since they were introduced in September 2004.

? The emergent structure of interest rates on the various money market and government debt instruments has resulted in a positively sloped yield curve from the very short-end of the market (28-day bills) to the medium term (3-year instruments).

5. The annual growth of credit extended to the private sector and public institutions by the deposit money banks stood at 26.5 percent at the end of January 2005 compared with 28.3 percent at the end of January 2004. While the public sector recorded a negative growth of 10.1 percent, credit to the private sector as a percentage of GDP increased from 10.0 percent in January 2004 to 13.9 percent in January 2005, the highest in the last five years. Credit flow to the private sector over the January 2004 to January 2005 period was concentrated in four sectors: services, manufacturing, cocoa marketing and import trade, which accounted for over 70.0 percent of the total.

6. The Bank of Ghana Survey of business confidence indicates that business sentiments remain optimistic about their own prospects and those of the economy in 2005. The Bank?s Composite indicator of economic activity rose by 12.1 points (6.6 percent) over the September 2004 level, indicating a continued increase in the level of economic activity in the fourth quarter of 2004. In the communications sector for example, mobile phone subscription in the country (for two main providers for which data is available) increased by 78.0 percent (from around 631,000 to 1.1 subscribers million) between 2003 and 2004.

7. The banking system as a whole continues to remain well capitalized, profitable, fairly liquid and stable. The provision for bad and doubtful loans by the banking system which peaked at 22.7 percent in 2002, declined further to 16.1 percent at the end of December 2004, from 18.3 percent in December 2003. The Non-Bank Financial Intermediaries sector registered strong asset growth (31.8 percent) in 2004 with improved liquidity and also remains relatively sound.

8. The cedi exchange rate was relatively stable. It moved within a narrow range, appreciating in nominal terms over the two-month period to February 2005 against the Euro (2.6 per cent) and British Pound (0.7 percent) while it was virtually unchanged against the US dollar. For the same period (January-February) in 2004 the cedi depreciated against all three currencies by 3.0, 7.9, and 0.8 percent respectively. The trade-weighted real effective exchange rate for the cedi shows a real appreciation of the cedi by 1.12 percent in the first two months of 2005.

The foreign exchange market continued to grow in depth and with improved liquidity. Total purchases and sales of foreign exchange by deposit money banks amounted $873.8 million by February 2005 and this compares with $548.0 million which represents an increase of some 60.0 percent over the total for the same period in 2004.

9. To recall, the budget for 2005 approved by parliament this month, set higher targets for revenue ( 24.6 percent of GDP) and expenditure ( 31.9 percent of GDP). And in line with the fiscal objective to contain the domestic debt within sustainable levels, the 2005 budget envisages a reduction in the public domestic debt to GDP ratio from its level of 17.6 percent in 2004 to 13.5 percent in 2005. A net repayment of ?997.7 billion (1.04 percent of GDP) is projected. The overall budget deficit is expected to continue to decline from 3.2 percent of GDP in 2004 to 2.2 percent in 2005, with financing expected from donor inflows and debt relief secured under the HIPC initiative.

10. Provisional data for January-February 2005 indicates that revenue has been robust. Total tax revenue amounted to ?2,617.7 billion, a 24.0 percent increase over the same period in 2004. The increase in tax revenue was reflected in all the major revenue categories (CEPS, IRS, and VAT). Non-tax revenue amounted to ?961.9 billion, representing a three fold increase over the amount collected (?304 billion) over the same period in 2004. Government expenditure for January-February 2005 is provisionally estimated as ?2,789.0, about 2.6 percent below the outturn for the same period last year. These developments resulted in an improved position vis-?-vis the banking system, which compares with a significant net domestic borrowing for the same period in 2004.

11. The external current account position is underpinned by a higher level of cocoa export earnings (with output projected at 650,000 tons, after topping 700,000 tons in 2004 from 450,000 tons in 2001). And, inward private unrequited transfers are projected at about US$1,300 million, having increased from US$709.7 million in 2001 to US$1,287 million in 2004. These provide support to cover a higher level of imports. Total merchandise imports which reached US$4,297.3 million in 2004 is projected to be close to US$4600 million in 2005, with a significant increase in oil imports to some US$900 million reflecting higher prices. The external debt burden has also been significantly reduced through debt relief under the HIPC initiative. The projection is for a further build-up of gross resources to the equivalent of some 3.8 months of import cover by the end of the year.

? Cocoa prices have softened from their recent peak but remain relatively favourable at preliminary realised export prices of US$1600 per ton. This compares with an average price of US$1586 per ton for last year. Gold prices have held firm around US$440 per ounce compared with US$410 per ounce in 2004. But this should be set against the high level of oil prices prevailing on the international markets.

? Private inward remittances ? transfers received from NGOs, religious groups, individuals etc. ? channelled through the banks and finance companies amounted to $277.4 million for January 2005 compared to $197.8 million in January 2004. This is a 40.0 percent increase above last year?s level. Of the total remittances received in January 2005, 29.5 percent (i.e. $81.75 million) was from individuals.

? Gross International Reserves, which reached a level of $1,732 million at the end of December 2004 ( 3.8 months of imports) declined to $1,625 million (3.7 months of imports) by February 2005, a seasonal drop for the first quarter of the year.

12. The outlook, is for continued progress along the path toward low and stable inflation and increased GDP growth, with relative exchange rate stability, given prudent implementation of the fiscal and monetary framework and the supporting policies for 2005. ? The fiscal policy stance as set in the 2005 budget is a good balance between fiscal consolidation and growth. It provides stimulus through higher spending personal and corporate tax relief, with a public sector borrowing plan to reduce the domestic debt/GDP ratio to ease pressures on the domestic market for government debt instruments. Firm implementation of the budget within a context of fiscal and monetary prudence would strengthen the fiscal and external payments positions and other economic fundamentals, build the resilience of the economy, and serve to sustain domestic demand growth and economic activity at an accelerated pace. Of importance in the underlying fiscal and monetary dynamics will be a good alignment of public spending with resource flows, including timely disbursements under the Multi-Donor Budget Support Mechanism to maintain the projected levels of spending.

13. The pass-through effects of the corrective domestic petroleum price increases under deregulation and market-based pricing, are working through domestic cost and price and wage setting. Moderation and consideration for productivity especially in wage settlements would be needed to reduce upward pressures on the price level in the near term.

14. The surge in oil prices on the international oil markets, currently around $55 per barrel, if sustained, would be a significant source of imported inflation risk, increase in the oil import bill, and draw on the cushion of foreign reserves.

15. Overall, given the stance of policies, the balance of risk is tilting in favour of progress towards low and stable price inflation and relative exchange rate stability, with a liquid money and foreign exchange market. The risks to the outlook will be kept under review and reassessed in light of developments as they unfold. The Monetary Policy Committee has therefore decided to maintain the Bank of Ghana Prime Rate at 18.5 percent.