The Governor of the Bank of Ghana (BoG), Dr Henry Kofi Wampah, says in spite of exchange rate pressures and a decline in major commodity prices, mid-term economic prospects are strong.
He said the bank expected inflows of more than US$3 billion from the sale of a third Eurobond this year and receipts from the annual cocoa syndication loan to shore up its reserves in a bid to stem the persistent fiscal and exchange rate pressures.
At a news conference in Accra yesterday, Dr Wampah said the US$1.5 billion Eurobond to be issued this year was expected to lower debt costs, while the seasonal cocoa inflows would steady the cedi that had fallen more than 26.7 per cent this year.
The government is expected to announce a third incursion into the international bond market to raise US$1.5 billion to consolidate its fiscal programmes and pay for some maturing debts.
More losses for the cedi
But as the BoG news conference was underway, the cedi incurred a loss of as much as 1.1 per cent.
At the Interbank rate, the currency was 0.4 per cent lower at GH¢3.35 per dollar in Accra as of 12:17 p.m.
“Persisting fiscal and exchange rate pressures have provided additional impetus for the worsening inflation outlook,” Dr Wampah said.
International reserves
Already, the country’s gross international reserves, which measure its ability to make payment for its imports, have dipped from the US$5.6 billion at the end of December 2013 to US$4.5 billion at the end of June 2014.
The reserves can cover 2.5 months of imports.
Dr Wampah said the US$3 billion would provide some significant support for the market in the second half of the year.
“These developments are expected to help restore gross international reserves to a minimum of three months of import cover,” he added.
The government budget gap in the five months from January to May this year was 3.9 per cent of GDP, as revenue and grants were below target, he said.
Gold exports, the largest source of foreign income, fell to US$1.8 billon during the period from a year earlier, while oil dropped to US$1.6 billion, he said, adding that the central bank financed the government’s entire fiscal deficit in the first quarter.
Moody’s downgrade
Moody’s Investors Service last month reduced Ghana’s credit rating by one step to B2, five levels below investment grade, citing a budget gap it estimated to exceed 10 per cent of GDP for a third year in 2014.
Rising bond yields, mounting inflation and a weakening currency have taken the shine off Ghana, a country until recently hailed as a model for African growth.
Raising interest rate policy
In a bid to contain the declining cedi and rising inflation, the central bank also hiked its benchmark interest rate to the highest since 2004.
The bank increased the key rate by one percentage point from 18 per cent to 19 per cent yesterday.
Interest rate as of December 2013 was 25.6 per cent.
Prospects ahead
An oil boom helped fuel five years of GDP growth above eight per cent, making Ghana an emerging market star, a stable democracy whose population of 25 million was moving steadily into middle-income status.
It is now, however, paying a steep price for not coming through with a new tranche of fiscal reforms. The public is dismayed by rising costs and the dream of new wealth is on hold.
In May, faced with worsening economic indicators and rising calls for action, the government said it would adopt a “home-grown” stabilisation policy, instead of resorting to an International Monetary Fund (IMF) financial assistance programme.
Such a policy would necessarily include spending cuts, steps for increasing revenue and an answer to costly public sector wages, the single biggest contributor to the rise of the deficit in 2012 to 11.8 per cent.
Analysts put the immediate difficulty down to a delay in announcing reforms, saying it makes it harder for the government to meet its 2014 economic targets and has increased the chance it will eventually need a bailout from the IMF.