‘Eurobond, IMF crucial despite cedi relief’

Dr. Henry Kofi Wampah, Governor of the Bank of Ghana has noted that proceeds from the recent auctioning of the country’s third Eurobond, cocoa syndicated loan, as well as ongoing government-IMF talks, remain crucial to prospects for the economy’s well-being despite relative stability in the local currency over recent weeks.

According to figures from the forex market, the cedi over the past week gained about 6% against the US dollar.

“The latest numbers suggest some stability in the foreign exchange market as the earlier policy measures -- including the cumulative 300 basis points increase in the monetary policy rate, the 200 basis points increase in the cash reserve ratio as well as the narrowing of the net open positions of banks --work through the system.

“In addition, the expected inflows from the Eurobond and the cocoa syndicated loan will provide liquidity on the foreign exchange market. Also, the government’s fiscal consolidation efforts are expected to be strengthened under the IMF programme, which will also provide additional balance of payments support,” Dr. Wampah told the media after the 61st Monetary Policy Committee (MPC) meeting in Accra.

But the central bank says regardless of the new-found cedi stability, the imminent arrival of the US$1billion Eurobond and the US$1.7billion cocoa syndicated loan to provide additional liquidity on the foreign exchange market remains crucial.

The local currency has for the first eight months of the year depreciated by 29.8 percent against the dollar on the interbank market, compared to 3.9 percent in the same period last year.

Attempts to contain the overall budget deficit within the 2014 budget target appear elusive as fiscal performance for the January-July period points to a budget deficit estimated at 5.3 percent of GDP against a target of 5.1.

Ongoing talks between government and the IMF are expected to strengthen government’s fiscal consolidation efforts, and Dr. Wampah believes that an IMF programme will also provide additional support for balance of payments, which is in deficit.

The overall balance of payments recorded a deficit of US$1.5billion compared to a deficit of US$677million in the same period last year. The current account deficit narrowed to US$2billion from US$2.3billion in the same period of 2013.

This, according to the BoG Governor, was the result of improvement in the trade deficit and net private transfers. The capital and financial accounts registered lower net inflows of US$479million compared with US$1.5billion recorded same period last year.

There was also a dip in the gross international reserves from US$billion, equivalent to 3.1 months of imports cover, to US$4.2billion -- 2.4 months of imports cover.

Inflationary pressures

Notwithstanding immediate benefits the Eurobond, Cocoa Syndicated Loan and the IMF stimuli present to the economy, the MPC expects inflation -- which reached a four-year high of 15.9 percent last month -- to peak in the near-term.

“The latest forecast shows that inflation is likely to stay slightly above the upper band of the revised target of 13±2 percent by end 2014. However, inflation is expected to move within that band in the second half of 2015 barring any adverse shocks,” Dr. Wampah said.

‘Mixed sentiments’ A BoG survey of consumer and business confidence reflected mixed sentiments. Whereas the confidence index improved marginally during the August survey, as the index moved to 77.5 from 76.1 in May 2014, the business confidence index on the other hand dipped from 82.8 in March to 78.6 in June.

Reasons cited for the decrease in index include: low prospects for improved capital outlay, sales and revenues, negative sentiments on industrial growth and heightened inflation expectations.

Nevertheless, credit to the private sector remained strong. Credit to the sector grew by 46.2 percent in July 2014, compared to 28.1 percent in the same period last year. Real credit growth was 26.8 percent compared to 14.6 percent a year ago.

“The central bank’s Composite Index of Economic Activity (CIEA) showed strong growth on the back of real private sector credit growth, with modest improvement in consumer confidence.”

The MPC, which maintained its policy rate at 19 percent, said the growth outlook is generally positive based on expected higher cocoa and oil output. In addition, the gas production that is expected to come on-stream from the latter part of the year will help address some of the challenges in the energy sector.