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OPINIONS & ANALYSIS - Inflation and monetary policy contradictions in Ghana (with notes on GDP, public debt and exchange rates)

Apr 20, 11 - Comments

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Successive press releases about inflation have been released by the Bank of Ghana (BoG) and other official sources since the beginning of 2010 conveyed the same message: inflation is down like never and it is big news for Ghana.

In May 2010, the inflation rate went below the 10% mark, exactly at 9.52% compared to 10.98% in April. With an overall rate of 10.9%, 2010 marked the end of years of very high inflation. 2009 was double that rate at nearly 20%, not mentioning 71% in 1995 and 142% in 1983!

But how does this translate for us? Does it reflect on interest rates (see ‘Monetary Policy’ below) and most of all, in our daily life budget? No.

Indeed, this lowest-ever inflation rates that we keep hearing about means nothing to me when, in the past 12 months:
- my favourite yoghurt went from GHS 3.30 to 4.00,
- filling my gas tank now costs GHS 95.00 when it was GHS 70.00 before,
- my favourite sandwich was GHS 4.00, then GHS 5.00 and is now GHS 6.00, 
- the airport tax on my ticket home is now US$100 from US$75,
- after disappearing from shelves for a couple of weeks, my favourite orange juice is back at GHS 3.46 instead of GHS 2.62,
- the house’s electricity bill is up one-third for the same consumption (it is said that ShopRite is now spending more on power than on rent),
- etc.
Not mentioning weed, which I heard, is now GHS 1.00 a stick, double what is was last year – but that is still a great deal for all the happy-smoking expats of Ghana!

Anyway, the substantial gains on inflation may be short-lived as the figure released by the Ghana Statistical Service (GSS) in February 2011 shows that Ghana’s inflation edged higher to 9.16 per cent from 9.08 per cent for the previous month. The effects of expansionary government spending and oil-related liquidity are expected to keep inflation in 2011 at 10.3%, a level that is still considered as high. Tighter fiscal and monetary policy in 2012 should allow inflation to decline to 8.7%.

Now, let’s look at a direct benefit that much lower inflation should bring: a significant reduction of interest rates to support consumption and give a boost to the private sector through lower credit costs.

Monetary policy

Indeed, in parallel to lower inflation, the Bank of Ghana announced successive reductions of its base rate throughout 2010. The most significant was in February when it lowered it from 18% to 16%, a whole 2%, something that had not been seen in eight years. That followed previous reductions and preceded further ones to 15% in April and then to 13.5%, the current rate that was confirmed by the BoG in February 2011.

Whether these cuts would translate into a stimulation of growth was unclear, especially as lending rates at the commercial banks have been slow to follow the BoG’s lead so far, owing to structural constraints in the sector such as a poor legal infrastructure.

Indeed, the obvious goal is to incite commercial banks to reduce their interest rates which were 29.9% in April 2010 on average, the highest in the sub-region and the subject of heated debates. But, there too, how has the important reduction of the base rate translated in reality? Well, a significant answer came in March 2011 by phone when Barclays Bank called to offer me a loan at a promotional interest rate of… 27.5%, double the base rate.

Considering this situation of high borrowing costs, one may wonder about the repeated statements made that economic policy in 2011 will continue to focus on extending credit and support for the private sector.

However, with lower inflation rates now stabilizing, banks are finally starting to act: Ghana Commercial Bank (GCB), UT Bank and Stanbic Bank have very recently decided to lower their interest rates, GCB having the lowest at 20.5%. Stimulating competition, these decreases should lead to a general trend in the commercial banking sector to finally bring lower and more acceptable credit costs to consumers and corporations.

In any case, although the credit situation in Ghana may affect my business, I can always borrow for personal reasons at home at 7% APR.

Parallel to this, access to credit happens to be the best performing indicator, among nine, in Ghana’s rise from 77th to 67th rank in the World Bank’s Doing Business Survey 2011. However, that is due to better credit information availability and not to lower interest rates.


NOTE ON GDP
Released by the GSS in November 2010, the recalculation of GDP for the 2006-2010 period showed Ghana's economy to be healthier than was previously thought. The oil production should help to diversify the economy further and boost economic growth in 2011 up to 8.9% (proj.). Continued expansion of the oil sector and robust growth elsewhere should support growth of 7.3% (proj.) in 2012.


NOTE ON BONDS AND PUBLIC DEBT
Ghana was in the spotlight when it became the first SSA country to issue a Eurobond in September 2007 for the relatively large amount of US$750 million. Such event was renewed in June 2010 for the smaller amount of US$175 million. As per sources from the Ministry of Finance, the government is now considering using this mean of financing again for an amount up to US$700 million and Ghana is well placed to secure investors’ interest again, with or without collateralising oil revenue. Such move will however not help easing Ghana’s public debt which was close to two-third of GDP at the end of 2010. This represents a 20 points raise over four years.


NOTE ON EXCHANGE RATES
Many expatriates have been affected by recent variations on the currency front, positively or negatively, depending if their earnings are local in Ghana Cedis or in a hard currency. While exchange rates were fairly stable in 2010, the Ghana Cedi has been losing ground since the fall. Between December 2010 and March 2011, the euro went from GHS 1.88 to 2.18 (16%). For the US$, a similar percentage applies when you look the low of 1.38 on October 25 and the peak of 1.59 on February 3 but for that same four-month period, the overall dollar’s gain was much less than the euro’s: from 1.43 to 1.50 (less than 5%). On February 21, 2011, the Bank of Ghana’s Governor declared that a slight depreciation of the Ghana Cedi was tolerable to protect exporters. The US$ is expected to stabilize between 1.40 and 1.45 in 2011 and 2012.
See details of past and current rates at this website here 
I remind readers that daily exchange rates of major currencies against the Ghana Cedi are available on the home page of accraexpat.com


GENERAL OUTLOOK
In addition of lingering problems affecting Ghana, uncertainty about the management of the oil windfall and political tensions related to the upcoming presidential elections are two factors of concern for the coming quarters but neither Ghana’s stability nor its strong economic growth are at risk.


The Editor


Some information in this write-up has been sourced from various Medias and Institutions. accraexpat.com does not accept responsibility for any loss arising from reliance on it.



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