Ghana: Bank of Ghana Maintains Policy Rate at 21%

In line with our expectation, the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) maintained the policy rate at 21%, continuing the tight monetary stance. Inflation for Jan-15 eased for the first time in 16 months by 60bps to 16.4%, weighed down by the declining crude oil price and a relative stability in exchange rate and utility prices. Despite the downward pressure from the low crude oil price and improved inflation expectations, the upward pressure from food inflation ahead of the lean season (May – August) and rising depreciation pressures pose an upside risk to the inflation outlook.

Given that, the downside risks (from the low crude oil price) is deemed to be balanced by the upside risks (from the rising food inflation and energy crisis), we consider the decision to maintain the policy rate at 21% as prudent. Whiles we view the tight monetary stance as necessary for sustaining a downward trend in inflation, we expect that:

• The high interest rates regime would consequently persist for the significant
  part of 2015, sustaining investor demand for the relatively high yielding short
  term securities at the expense of capital market investments.
• As noted by the BoG, access to credit by SMEs has been tightened. This
  posture of the lending banks coupled with the tight monetary policy (together
  with the power supply constraints) would continue to undermine Ghana’s GDP
  growth as SMEs account for nearly 70% of Ghana’s GDP.
• The extension of public debt (GH¢76.1 billion) to 67.1% of GDP at FY-14
  compared to 55.3% at FY-13, makes securing the IMF program paramount as it would support the fiscal consolidation measures and restructure the public debt to a
  sustainable level.
• The increase in Ghana’s external debt stock from 26.9% of GDP at FY-13 to
  6% at FY-14 would exert pressure on the gross reserves due to the high
  external debt service cost.
• The year-on-year increase in trade deficit by 11% to $257.4 million at the
  end of Jan-15 would exert further depreciation pressures on the Ghana Cedi if
  this trend continues as gross reserves has declined to $4.9 billion at the end
  of Jan-15 (equivalent to 2.9 months of import cover) from $5.5 billion (3.2
  months) at FY-14.
• The decline in gross reserves below 3 months of import cover makes the
  Balance of payment support from the IMF program very critical to sustaining the Cedi’s value as the BoG intervention capacity is constrained.

Overall, we view the outlook for inflation as positive (despite the recent rally in crude oil price). The outlook would however require that the starting date for the IMF program does not extend beyond Q2-15 in order to support the government’s fiscal consolidation measures and sustain the low inflation.