2017 Budget... ‘Sowing the seeds for growth and jobs’ (Pt 5)
The key monetary aggregates recorded slower growth in 2016 in line with the tight monetary policy stance. The broad money supply growth, including foreign currency deposits (“M2+”), declined in year-on-year terms.
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At the end of December 2016, M2+ recorded an annual growth of 22.0 per cent compared with 26.1 per cent in the same period of 2015. This was mainly driven by a moderate growth of 19.5 per cent in Net Domestic Assets (“NDA”), against 25.5 per cent growth recorded at the end of December 2015.
The moderate pace of growth in the NDA offset the higher NFA growth of 29.8 per cent recorded in December 2016, as against 28.1 per cent in December 2015. Broad money supply, excluding foreign currency deposits (“M2”), grew by 24.6 per cent in December 2016, slightly lower than the growth of 26.6 per cent recorded in December 2015.
The moderate growth recorded in NDA reflects the effects of declines in Treasury bill (T-bill) rates in 2016. In particular, the 91-Day and 182-Day T-bill rates declined from 23.1 per cent and 24.4 per cent at the end of December 2015 to 16.8 per cent and 18.5 per cent at the end of December 2016 respectively. This made investments in T-bills and GoG bonds less attractive, resulting in government’s inability to significantly increase NDA through the issuing of T-bills and local currency-denominated bonds.
On the other hand, the significant growth in the NFA has resulted mainly from the tight monetary policy stance adopted by the government in an attempt to tackle inflationary pressures. BoG should balance its commitment to bring down inflation with business pressure to lower interest rates in order to accelerate economic growth.
Credit to the private sector
Private sector credit growth was 14.4 per cent year-on-year, against 24.5 per cent recorded in 2015. In real terms, private sector credit contracted by 0.8 per cent in December 2016, compared with a growth of 5.8 per cent recorded in December 2015. Total outstanding credit stood at GH¢35,409 million at the end of December 2016, of which the private sector accounted for 84.7 per cent.
A number of factors account for the decline in growth of credit to the private sector. Among them are the excessive borrowings from the domestic market by government, which resulted in high average lending rates, and the general low economic activities in the year. Also important is the increase in Non Performing Loans (“NPLs) in 2016 (as reported in BoG’s Financial Stability Report (“FSR”), September 2016) which led to a further rise in lending rates, and the banks’ unwillingness to increase credits to the private sector.
Inflation
Headline inflation continued to ease in the last quarter of 2016, slowing down from 19.2 per cent in the first quarter of 2016 (17.7% in December 2015) to 15.4 per cent in December 2016, although it missed the revised target of 13.5 per cent for 2016. The ease in the headline inflation was driven mainly by a combination of monetary policy tightening over the past years and relative stability of the exchange rate.
The slowdown in inflation was influenced mainly by movement in the prices of non-food items. Non-food inflation improved from 23.3 per cent in December 2015 to 18.2 per cent in December 2016, supported by stability in the domestic currency and favourable base effects arising from the upward revision in petroleum products prices a year earlier. In contrast, food inflation worsened from 8.0 per cent in December 2015 to 9.7 per cent in December 2016, driven largely by domestic food components.
Government projects average inflation to decline to about 12.4 per cent in 2017 and further decline to 8.0 per cent in 2018. There is the need to proceed cautiously as the planned tax incentives or removal/reduction in taxes could also lead to further increase in import-related inflation through demand pressure on foreign exchange for imports.
A more sustainable way of dealing with inflation is for government to focus on measures targeted at increasing the productive capacity of the economy within the short to medium term, thereby increasing the supply of goods and services which consequently eases inflation. Government-planned policies such as the ‘One District, One Factory’, ‘One Village, One Dam’, and the various tax reliefs aimed at increasing productivity are a step in the right direction.
Interest rate
Yields on short-term government securities decreased, while those of medium to long-term GoG bonds increased. This is consistent with government’s policy to properly align the yield curve and extend the maturity profile. The yield on short-dated treasury securities declined significantly in December 2016.
BoG decreased the Monetary Policy Rate (“MPR”) from 26.0 per cent in December 2015 to 25.5 per cent in December 2016. However, the average lending rate moved up to 31.2 per cent in December 2016 from 27.5 per cent in December 2015.
In order to reduce the high lending rates in Ghana, government intends to cut down on borrowings, particularly from the domestic market, as this usually leads to a crowding-out effect on the private sector through increased lending rates. However, government’s intention of borrowing more than GH¢13 billion domestically to finance its budget deficit does not lend itself to realising this objective this year.
Although government has resolved to cut down on borrowings to correct the large
fiscal deficit that has been recorded in 2016 and the first quarter of 2017, the rapid depreciation of the domestic currency presents risk of the interest rate declining further. These two developments have the potential to increase inflationary pressures which will call for further monetary policy tightening by increasing the MPR. This could have an upsurge effect on average lending rates and defeat the purpose of government’s resolve to cut down on borrowings.
Financial institutions continue to increase their lending rates, despite the relatively stable trend in government treasury rates and the BoG Prime rate. Whilst this appears to stem from the high NPLs, it could be an indication of declining confidence in the creditworthiness of the private sector. Government should be committed to its plans of significantly cutting back on its domestic borrowings in order to decrease the pressure on interest rates.
Exchange rates
The Ghana Cedi remained relatively stable against the major currencies, on account of tighter monetary policy and improved foreign exchange inflows. However, the foreign exchange market witnessed some volatility in the run-up to the December 2016 election as demand pressures mounted.
The Ghana Cedi recorded a cumulative depreciation of 9.6 per cent and 5.3 per cent against the US Dollar and the euro respectively but appreciated by 10.0 per cent against the pound sterling in the interbank market in 2016. The rate of depreciation was lower in comparison with cumulative depreciation of 15.7 per cent, 6.2 per cent and 11.5 per cent against the dollar, euro and the GB pound sterling respectively, in 2015.
Although exchange rates appeared to have been largely stabilised in the second half of 2016 largely due to inflows from the Eurobond (US$750 million), COCOBOD syndicated loan (US$1,800 million) and the IMF ECF programme (US$116.2 million) in the third quarter of 2016, the first quarter of 2017 has so far seen further depreciation of the local currency against the major trading currencies, particularly the USD. The depreciation of the local currency in the first quarter reflects the ripple effects of expenditure overruns in the last quarter of 2016 and uncertainties surrounding the elections, thereby increasing demand pressures.
Short to medium-term macroeconomic outlook
(2017-2019)
Macroeconomic targets for 2017:
• Overall real GDP (including oil) growth of 6.3 per cent;
• Non-oil real GDP growth of 4.6 per cent;
• End-year inflation target of 11.2 per cent;
• Average inflation rate of 12.4 per cent;
• Overall fiscal deficit of 6.5 per cent of GDP;
• Primary surplus of 0.4 per cent of GDP; and
• Gross Foreign Assets to cover at least three months of imports of goods and services.
Government intends to more than double GDP growth from 3.6 per cent in 2016 to 7.4 per cent over the medium term (2017-2019).
Also, inflation is to decline from 15.4 per cent at the end of 2016 to an average of eight per cent while overall fiscal deficit is expected to reduce from 10.3 per cent in 2016 to 3.0 per cent by the end of 2019.