The recent depreciation in the cedi against some major currencies may be due to official bias towards a weak cedi to counter the effects of a potential Dutch Disease. According to a report by Renaisance Capital, titled 'Ghana's 2011 Economic Outlook', copied exclusively to the GRAPHIC BUSINESS "the drop in the value of the cedi over the past two months is attributed to a shortage of dollars due to the Bank of Ghana's absence in the foreign exchange market as a seller of dollars since late December 2010." The Dutch Disease is a form of resource curse experienced in the Netherlands in the 1960s. Discoveries of oil can cause the value of a country's currency to rise, thus hurting its balance of trade with other nations and potentially crippling non-energy related sectors of the industrial economy. According to the firm, the gap since the last bond auction, in October 2010, has also been longer than usual, which implies that Ghana has not had an injection of portfolio inflows in a few months. The cedi has, over the past two months, been depreciating to the major currencies, causing some concern in business circles in the country, especially the manufacturing sector which mostly imports its raw materials. These developments, which coincide with the commencement of oil production in the country, are in accordance with some officials' bias for a weak cedi to counter the potential Dutch Disease effects of a commodity exporter. "Ghana's uncompetitive manufacturing sector is especially at risk from a strong cedi," the investment firm stated in its report. According to Renaissance Capital, a smaller current account deficit in 2011, owing to the projected 40-50 per cent increase in export earnings and fall-off in some big-ticket capital equipment imports which are required for the commencement of oil production, suggests that the cedi will retrace some of its value in 2011. "However, the bias towards a weak cedi is likely to counter any strengthening tendencies" the report noted. We thus project a moderate depreciation of the cedi to an average of US$1 to GH¢1.45 in 2011, from US$1 to GH¢1.43 in 2010. Oil to propel growth With 2011 being the first full year of oil production in Ghana following its commencement on 15 December 2010 production is expected to reach 120,000 barrels per day (bpd) in 2011. Compared with 2.5 million bpd in Nigeria, Ghana's oil production may be low, but it promises to be an important export (8-10 per cent of GDP) and new source of tax revenue that is om per cent of GDP. Projections put oil production at 17 per cent of non-oil GDP. Moreover, the sector will boost the demand for services Ahead of the commencement of oil production, the business services sector, including ICT, financial services and commerce, and the hospitality sector exhibited strong growth in 2010. "This is expected to continue in 2011, with the striking of first oil expected to propel real GDP growth to 10.5 per cent in 2011, from 6.6 per cent in 2010, before moderating to 7.1 per cent in 2012. Credit growth to strengthen Analysts say the recovery of credit growth is expected to continue in 2011 on the back of lower interest rates, a decrease in the non-performing loans (NPL) ratio and strengthening economic activity. The average lending rate decreased to 27.6 per cent in November 2010, from 32.8 per cent a year earlier, thus easing the cost of capital. According to the report, the government had cleared some of its arrears, which partly helped lower NPLs to 18.1 per cent in September 2010 from 20 per cent in February 2010. "The improvement in credit growth at began in mid-2010 stemmed from this recovery of international trade and industrial production. In particular, credit extended to exporters and importers grew by 77 per cent year-on-year and 30 per cent year-on-year respectively. "The construction sector, which was the worst hit by unpaid government contracts, is expected to stage a recovery in 2011. This is positive for lenders because pre-crisis almost 10 per cent of credit went to construction," it said. Double-digit inflation Analysts project that inflationary pressures mainly stemming from non-food inflation, particularly energy prices are expected to push inflation back to double digits. "We expect inflation to fall back into the double-digit realm and end 2011 at 11.5-12.0 per cent YoY. If inflation proves stronger than our projection, monetary policy will be tightened," the report stated. Inflation has been on an almost two-year decline on the back of good levels of rainfall, tighter fiscal policy, softer commodity prices and a stable cedi. However, it has hit bottom and is set to increase in 2011, after coming down nicely to a two-decade low of 8.6 per cent year-on-year in December 2010. In early January 2011, the government announced a 30 per cent increase in fuel prices, in accordance with the higher international oil price. A stronger oil price will translate into higher transport and distribution costs. Moreover, the surge in global food prices will feed into local food inflation. Up to 80 per cent of the rice consumed in Ghana is imported. Source: Graphic Business