US embassy cable - 05ACCRA1516

UNCLAS SECTION 01 OF 02 ACCRA 001516 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, GH 
SUBJECT: GHANA CENTRAL BANK'S HALF YEAR 2005 ANAYSIS OF THE 
ECONOMY 
 
 
Summary 
------- 
1. The Bank of Ghana (BoG) issued its half year economic 
review and analysis of financial and monetary policies. 
Inflation declined to 15.7% in June, monetary growth slowed, 
interest rates and commercial lending rates are falling, 
remittances are almost 60% higher than in 2004, reserves are 
steady, and the cedi is stable.  Tax revenue was above 
target, but the GoG missed budget targets due to delayed 
donor flows.  Despite lower cocoa prices and higher oil 
prices, the BoG's outlook is positive.  End Summary 
 
Monetary and Financial Developments 
----------------------------------- 
2. The BoG noted that inflation continued to decline in the 
second quarter following the spike in February due to the 50% 
increase in fuel prices.  Consumer price inflation fell for 
the third consecutive month from 16.7% in March to 15.7% in 
June on a year-on-year basis.  The BoG's measure of core 
inflation (not including food or petroleum products) is in 
single digits. 
 
3. The growth of monetary aggregates slowed in the second 
quarter, with reserve money and broad money (M2) both 
increasing as significantly lower rates than in the first 
quarter.  Interest rates are broadly lower, following the BoG 
Monetary Policy Committee's (MPC) May 2005 decision to cut 
the Prime Rate from 18.5% to 16.5%.  This decision has 
resulted in a realignment of rates.  While the benchmark 
91-day T-bill also declined by 2% to 15.5% in mid-July, the 
two and three year T-bills remained stable at 20% and 21.5% 
respectively and gained market share.  This resulted in the 
lengthening of the average maturity of treasury bills, 
reducing the turnover rate of GoG securities to 1.9 
times/year from 5 times/year in August 2004. 
 
4. Commercial lending rates also fell to an average of 22.5% 
and credit to the private sector increased almost 16% from 
May 2004 to May 2005 (from 11.3% to 12.7% of GDP).  (Note: 
Post's contacts in the banking sector say they often lend at 
much lower rates, especially to blue chip clients.  End Note) 
 Five sectors -- manufacturing, commerce, import financing, 
services, and transport, are falling, and credit to the 
private sector is up, accounted for 82% of credit flow.  The 
BoG's July 1 decision to lower secondary reserve requirements 
on deposits from 35% to 15% should increase banks' liquidity 
and should result in more private sector lending. 
 
Fiscal Developments 
------------------- 
5. The GoG followed generally prudent fiscal policies for the 
first half, with total expenditures 14% below the budgeted 
level (although 25% above 2004 levels).  However, delays in 
donor disbursements due to the late IMF third review of the 
Poverty Reduction and Growth Facility (PRGF), caused higher 
than expected domestic borrowing and the GoG missed its 
budget and net domestic financing targets.  Tax revenue was 
26% higher for the first half of 2005 compared to the similar 
period in 2004, and was the equivalent of about 20% of GDP. 
However, total grants amounted to under half of the expected 
245 million.  Overall the GoG's budget deficit was 1.56% of 
GDP, compared to an expected deficit of about 0.7%.  Net 
domestic financing was approximately 1% of GDP, compared to 
the programmed net domestic repayment of about .2%. 
 
External Sector Developments 
---------------------------- 
6. Ghana is experiencing deteriorating terms of trade due to 
slightly lower cocoa prices and much higher oil prices. 
Also, the cedi has appreciated against the three core 
currencies -- Dollar, Pound, and Euro -- in nominal and real 
terms.  Provisional Balance of Payments figures show that the 
balance on Ghana's merchandise trade for the half year 
worsened by over 60%.  The overall BoP balance also showed a 
deficit ($285 million), which was financed by drawing down 
reserves.  Gross international reserves declined from the 
end-2004 peak of $1.7 billion to $1.47 billion in June. 
However, this should rebound with expected donor flows and 
pending cocoa sales proceeds. 
 
7. Total merchandise exports for the first half were 20% 
above the level for 2004.  However, cocoa export proceeds 
were significantly lower.  The cocoa crop topped 700,000 tons 
for 2003/2004, but the expected 2004/2005 crop is 550,000 
tons, and the average price is lower than in the previous 
season.  (Note:  550,000 tons is still large in historical 
terms; much of the decrease is probably due to the GoG 
cracking down on smuggling from and trading with Cote 
d'Ivoire.  End Note) 
 
8. Ghana's merchandise imports increased over 30% over the 
first half, with oil imports increasing by 20%.  (Note:  BoG 
officials have commented that Ghana's oil bill is $500 
million higher than when oil prices started there current 
rise several years ago -- or near total donor assistance. 
End Note)  Private inward remittances (including individuals, 
NGOs, Embassies, religious groups) for January-May 2004 
increased by 58.7% over the same period in 2004, totaling 
$1.6 billion. 
Comment 
------- 
9. Despite slightly deteriorating terms of trade due to lower 
cocoa prices and higher oil prices, relatively prudent fiscal 
and monetary policies support the BoG's positive outlook for 
the economy, with declining inflation, stable exchange rate, 
and opportunities for increased GDP growth.  BoG sources 
acknowledge that continued high world oil prices are the main 
downside risk going forward, as they would restrain both 
Ghana's and the world's economic growth.  Also, the GoG has 
yet to implement fully its petroleum deregulation scheme, 
which would allow retail prices to fluctuate in response to 
world price changes, thus ensuring full cost recovery.  Until 
Ghana implements this plan, which is an important IMF 
condition, the government will continue subsidizing the 
petroleum sector, undermining fiscal policy.  End Comment 
YATES