…despite inflation and exchange rate pressures
At the weekend the Bank of Ghana released its latest economic figures which were used last week by the central bank’s Monetary Policy Committee to deliberate on what to do with the benchmark Monetary Policy Rate. The latest data had been highly anticipated even though most economists were expecting that the MPR would be left unchanged at 13.5 percent for another two months. What was so eagerly expected though was the economic performance data as Ghana is enjoying a strong economic rebound out of COVID 19, but possibly at a palpable cost to macroeconomic stability.
In the run up to the latest MPC meeting, two issues had emerged as central to Ghana’s economic trajectory. One was the economic growth rate; the other was the effect of that economic growth on price levels in the economy and the exchange rate of the cedi to the United States dollar. Under the prevailing circumstances, even the public debt, which is usually the first target for attention by economic management analysts and commentators took a back seat to the issue of the degree to which the economic rebound was threatening macro-economic stability.
Even the economic growth rate itself had generated major scrutiny, as President Nana Akufo-Addo had announced a second quarter growth rate of 8.9 percent to the international investment community before the Ghana Statistical Service has come up with a much more sedate growth rate of 3.9 percent. The huge discrepancy has been swept under the carpet – the BoG as expected is using GSS figures – but this has left a feeling of disappointment. After all it was the BoG’s promising early data in the form of a year on year 33.1 percent rise in its Composite Index of Economic Activity for May that had raised expectations of sharp economic growth in the first place, which had left the President’s hugely exaggerated growth statistic to go unchallenged when he had made it.
However even a 3.9 percent growth rate for the second quarter, coming on the back of the first quarter’s 3.1 percent is impressive under the circumstances imposed by COVID 19; sub Saharan Africa as a whole is expected to grow by a significantly slower 3 percent.
On the downside though, the 2nd quarter performance lowers the expectations that government will achieve its full year growth target of 5.1 percent (revised upwards marginally from 5.0 percent at the mid-year budget review) indeed the BoG’s CIEA, after peaking at 39.4 percent growth, has been declining since mid-year, to 20.2 percent for June and 20.0 percent for July, creating the possibility the economic growth rate may not accelerate further – or even decline.
Ironically this might not be an altogether bad thing since Ghana’s economic rebound has fuelled signs of macroeconomic instability over the past few months. Consumer price inflation has risen successively from a post COVID 19 trough of 7.5 percent in May, to 9.7 percent by August, which is worryingly close to the upper end of the BoG’s target band of between 6 percent and 10 percent.
But the public’s concern over this is overshadowed by the recent resumption of significant cedi depreciation which underpins it. After minor flunctuations between depreciation and appreciation of the cedi against the United States dollar had cancelled themselves out during the first six months of the year, the cedi has fallen by 1.6 percent over the subsequent two months. By historical standards this is minor but after several years of cedi stability, this is being incorrectly seen in some quarters as a sign of a return to the bad old days.
However the exchange rate price discovery resulting from the latest edition of the BoG’s fortnightly forward auctions suggests otherwise. The latest forward foreign exchange auction, conducted last week by the Bank of Ghana suggests that despite the recent significant depreciation of the cedi against the United States dollar, a sustained fall in the national currency’s exchange rate is not being expected by forex users and the banks that bid on their behalf. The central bank uses its fortnightly forward auctions for purposes of price discovery with regards to expected trends in the exchange rate.
At the latest auction US$50 million was put up for sale but the intensity of Ghana’s ongoing economic rebound reflected in cumulative demand which at US$113;750 million was 2,68 times the amount put on sale.
Despite the strong excess of demand over supply however, bids remained close to spot market rates; instructively no bids reached the important psychological level of GHc6 to US$1. Indeed the highest bids were for delivery in 30 days’ time, suggesting that forex traders and users expect the cedi to regain some of its ongoing losses thereafter. Bids for delivery in 30 days’ time reached an upper limit of GHc5.9550 which is above the highest bids for 45 days delivery and 60 days delivery of GHc5.9450 and GHc5.9400 respectively indicating expectations of marginal cedi appreciation during the second month after this week’s auction.
However, forex bidders are not fully confident of the cedi’s trajectory going forward. There were no bids at all for delivery of forex for the longest tenor on offer, of 75 days.
The shortest delivery periods of seven days and 15 days respectively attracted bids slightly above the current spot market rate – the highest bid for 15 days delivery was GHc5.9600 – suggesting that forex market participants feel the cedi’s ongoing depreciation bout has not quite run its full course but what is left will only ben a shallow fall in value before picking up beyond the 30 days mark.
As usual most of the bids made, and accepted by the BoG were for the shortest future delivery tenor of seven days with US$76.6 million being requested but only US$25.5 million in bids for the shortest tenor being accepted by the central bank.
This reflects the uncertainties being felt by business owners/managers and households alike. The BoG’s business confidence index has fallen from 101.1 at the turn of the year to 93.2 by August, according to its latest poll. Similarly its consumer confidence index has fallen from 102.8 to 91.8.
But the data from the BoG indicates economic performance that should restore confidence sooner than later. Indeed the only blip is that same old albatross – the public debt. By the end of July this year Ghana’s public debt stood at GHc335.9 billion, up from GHc263.4 million a year earlier and GHc291.6 million at the start of this year. This is equivalent to US$57.9 billion. It also amounts to 76.4 percent of Gross Domestic Product, up from 68.7 percent a year earlier and 76.0 percent at the turn of the year.
This again confirms the unsustainability of Ghana’s public debt trajectory, even without COVID 19 having added considerably to the problem. With government considering a Green Bond issuance of some US$1.5 billion this year, this statistic could worsen significantly before the end of the year.
On the upside though the debt owed on the issuance of Financial Sector Resolution Bonds has declined to below GHc15 billion for the first time since the 4th quarter of 2020, standing at GHc14.9 billion as at July this year.
The strategy of the incumbent government in this regard is basically the same as its predecessors; refinance maturities through new borrowing while taking enough to finance the inevitable yearly budget deficit. There is no end game in place for reducing the debt – and debt servicing requirements which now take up half of the state’s annual public expenditure. The closest to that is the ploy used in the road shows government embarks on when seeking subscribers to new bond issuances: that new oilfields will be discovered and developed which will ultimately generate the revenues needed to pay down the state’s indebtedness.
International bond investors have seen through this for years; having noticed that Ghana’s debt is expanding even faster than its oil revenues. However they are not overly concerned knowing that Ghana is a responsible debtor and that it generates more than enough to pay the interest and other fees which means it can go on refinancing its debts for a long time to come without stress to the investors.
Besides, Ghana’s economic fortunes are indeed improving in strategic terms. Even with the trade disruptions imposed by COVID 19, Ghana continues to generate merchandise trade surpluses, although the country’s heavy dependence on imports continues to drain part of the benefits of economic growth. The trade balance for the first half of 2021 at US$874.8 million was far smaller than the US$1,358.1 million achieved during the corresponding period of 2020 as imports for both domestic production and consumption rose sharply in line with increased economic activity. Total imports for the first half of this year rose to US$8,982.4 million from US$8,271.6 million during the first half of last year. This was the result of both petroleum product imports which rise from US$1204.0 million to US$1647.6 million and non-oil imports which climbed from US$7,067.6 million to US$7,334.8 million.
On the other hand export growth was much smaller, from US$9,629.7 million to US$9,857.2 million. Sluggish export growth was the result of the retreat in the price of gold from its all time high of nearly US$2,000 per ounce at the height of the initial COVID 19 outbreak in 2020. Ghana’s export revenues from gold consequently fell to US$3,427.3 million during the first half of 2021 from US$4,332.5 million during the first half of 2020.
Conversely though, the increase in oil prices as the global economic rebound generated rising demand, enabled Ghana’s export revenues from oil sales to rise to US$2,435.7 million, up from US$1,928.6 million. Cocoa revenues rose significantly too, due to increased production and the application of the US$400 per tonne Living Income Differential. For the first six months of this year they amounted to US$2,103.4 million, up from US$1,720.0 in the previous year.
Despite this the current account deficit worsened substantially, from US$548.2 million to US$926.1 million. But the situation was salvaged from continued strong inward remittances of US$2,150.6 million (1st half of 2020: US$2,177.9 million).
The capital and financial account balance doubled to US$3333.2 million from US$1613.9 million last year. This was further enhanced by an increase in foreign direct investment inflows to US$954.2 million, up from US$557.2 million last year.
The ultimate result of all this was a more than doubling of Ghana’s overall balance of payments of payments position to US$2369.7 million, up from US$1,009.9 million. Even more importantly this helped facilitate the rise of Ghana’s Gross International Reserve to a new record high of US$11,442.5 million by the August this year, up from US$8,561.9 million a year earlier. This translates to 5.2 months import cover, up from 4.0 months a year earlier.
As Ghana’s external position holds firm, government’s finances have begun recovering from the dire effects of COVID 19 as well. For the first seven months of 2021, the fiscal deficit was 6.1 percent, well below the 7.4 percent deficit incurred during the corresponding period of 2020. Even more impressively the primary balance deficit was halved for the period January to July 2021 at 1.9 percent, from 3.7 percent during the corresponding period of 2020.
This has eased government’s domestic financing needs on local financial markets and this, combined with its deliberate efforts to lower its debt servicing costs has pushed interest rates downward. Although the Monetary Policy Rate has been retained at 13.50 percent since late May, the Ghana Reference Rate which serves as the base lending rate for all the 23 commercial banks has dropped to 13.51 percent from 14.77 percent at the beginning of the year. Similarly the interbank weighted average rate has declined to 12.61 percent from 13.56 percent at the start of this year.
Instructively the coupon rates on 91 day, 182 day, and 364 day have all fallen since the beginning of the year as have those for two year treasury notes and both three and five year treasury bonds. On the secondary market yields have similarly fallen on all long term bond with tenors ranging from six years to 20 years.
Thus, despite the temporary blips with regards to inflation and the cedi’s exchange rate – and the more fundamental one concerning the public debt – Ghana’s economic rebound is on course.