The rate at which commercial banks borrow from the Bank of Ghana has gone up by 200 basis points, as the central bank increased police rate from 16 to 18 percent.

This is the latest adjustment by the Bank of Ghana after two days of deliberations by the Monetary Policy Committee (MPC).

The MPC has been meeting to discuss the health of the economy; top on the agenda is the depreciation of the cedi against the major trading currencies.

“Based on the valuation, the Committee is of the view that the risks to inflation and exchange rate stability are highly elevated and therefore decided to increase the policy rate by 200 basis points to 18 percent,” the Governor of the Bank of Ghana, Dr Henry Kofi Wampah explained on Thursday.

The increase in the Policy rate from 16 to 18 percent is expected to have implications for businesses and individual who borrow from the bank.

BELOW IS BOG'S STATEMENT

You are welcome to this Press briefing. The Monetary Policy Committee (MPC) held an Emergency meeting to review recent global and domestic economic developments and assess risks to the outlook. Based on the evaluation, the Committee is of the view that the risks to inflation and exchange rate stability are highly elevated and therefore decided to increase the policy rate by 200 basis points to 18 percent. I present to you the highlights of the discussions.

Global Developments

The commencement of tapering in asset purchases in the US, alongside weakening economic conditions in some economies, have spurred reversal of capital flows and volatility in currency and equity markets across many emerging and developing countries. The fallouts have been most severe in countries such as Turkey, Argentina, Indonesia, India, Malaysia, and South Africa.
For the month of January, the Turkish Lira depreciated by 7.2 percent against the dollar, the Argentina Peso fell by 10.4 percent and the South African Rand lost 4.7 per cent of its value.
This has prompted large policy rate hikes of between 50 and 425 basis points to stem the inflationary consequences of rapidly depreciating currencies in these countries. The responses by the Central banks have restored some stability to those economies.
The latest IMF World Economic Outlook (WEO) indicated that global growth is expected to increase in 2014 to an average of 3.7 percent, up from 3 percent in 2013. However, the new developments in emerging markets have raised concerns about contagion risks which could impact on commodity markets as well as prospects for global growth.
The commodity markets have also been affected by the developments in the US economy and other advanced countries. Gold prices are projected at $1,292 an ounce in 2014 lower than the $1,411 an ounce in 2013. Brent crude oil prices are also expected to average about $104 in 2014, down from the 2013 average of $108.4 per barrel. Cocoa prices could pick up in 2014 after the decline in most of 2013. These developments have significant implications for the domestic economy.

Domestic Economic Developments

The domestic economy continued to experience fiscal pressures, exchange rate depreciation and cost-push effects from higher petroleum and utility prices. Inflation expectations have heightened and headline inflation ended 2013 at 13.5 percent, above the target band of 9±2 percent.
Fiscal consolidation for 2013 was slower than anticipated. The overall budget deficit was provisionally estimated at 10.2 percent of GDP against a target of 9.0 percent, following a deficit of 11.8 percent in 2012. Expenditures were broadly on target; however revenues were significantly below target, resulting in the fiscal slippages.
The fiscal imbalances and the external pressures resulted in a current account deficit of 12.3 percent of GDP up from 12.1 percent in 2012. This was on account of a worsened terms of trade, and a significant decline in net current transfer receipts. In particular, individual remittances declined by 4.3 per cent year-on- year to US$1.7 billion. It may be useful to note that cocoa and gold export receipts declined by $1.3 billion in the year. The overall balance of payments deficit of $1.2 billion thus remained the same as in 2012.
Gross international reserves as at the end of 2013 amounted to US$5.6 billion (3.1 months of imports) compared with US$5.3 billion (3 months of imports) at the end of 2012.
These developments in the fiscal and external sector together with the global pressures resulted in a depreciation of the Cedi by 14.6 percent against the US Dollar in 2013 compared to 17.5 percent in 2012. However, we have observed a much faster pace of depreciation since end-December 2013. As at the end of January 2014, the Cedi had depreciated by 7.8 percent against the US Dollar compared to 0.2 percent in the corresponding period in 2013.

Summary and Outlook

Developments in the advanced countries, especially the US have resulted in foreign exchange market pressures in emerging market economies. These together with the domestic pressures noted above have increased the risks to inflation and exchange rate. As a result, we have seen a decline in the real yield on Cedi assets, relative to foreign assets. The development has also heightened inflation expectations. Similar developments were observed in the first half of 2012, which warranted policy responses by the Central bank that restored stability.
The uncertainties in the outlook and weakened domestic fundamentals underscore the need for continued tight fiscal and monetary policies and measures that would reduce the country's vulnerability to shocks, re-anchor inflation expectations and sustain macroeconomic stability. These informed the decision to increase the policy rate by 200 basis points.

Additional Measures

To support the monetary policy decision, the Bank of Ghana has issued a new set of foreign exchange regulations and code of conduct to guide operations in the foreign exchange market.
The new measures consist of revisions on the rules for operation of foreign exchange and foreign currency accounts, restrictions on foreign currency- denominated loans, repatriation of export proceeds, margin accounts for import bills, and revised operating procedures for forex bureaux. This is to ensure transparency, streamline activity and reduce leakages in the foreign exchange markets, address anti-money laundering issues and promote the use of the Cedi as the sole legal tender.
All these must be re-enforced by ensuring that all the budgetary targets are strictly adhered to, for fiscal consolidation. The Committee acknowledges the on-going reforms to improve revenue mobilization whilst containing expenditures. However, a lot more is required in rationalizing the high wage bill.

Medium to long-term measures

In the medium to long term, government must seek to broaden the tax base further, diversify and broaden the export base, reduce imports especially of consumption goods that have local substitutes, and intensify efforts to block foreign exchange leakages, such as transfer pricing. We are aware of efforts by Government in this direction.
There is also the need to consider renegotiating existing stability agreements with exporters to ensure that all retention accounts are maintained with domestic banks as pertains in other countries such as Angola, Guinea, and Nigeria among others.

 

 

The Committee will continue to monitor developments in the economy and take appropriate measures as needed.