Ghana’s inflation to remain stable in spite of election pressure – EIU

The Economist Intelligence Unit (EIU) of the United Kingdom on Monday said in spite of the financial pressure expected on Ghana’s economy this year due to its general elections, inflation is expected to remain stable.

The stability is however premised on the avoidance of weather-related shocks to food production, the EIU states in its March Country report made available to the Ghana News Agency in Accra, which noted however that some fiscal slippages ahead of the elections would represent an upside risk factor.

It noted that commodity prices were expected to moderate in 2012, although a recent cut in fuel subsidies and an increase to the minimum wage would offset that.

According to EIU report, inflation in 2012 is expected to average 8.6 per cent with fiscal policy expected to improve in 2013 and 2014 and international commodity prices remaining relatively flat, inflation should edge down, albeit limited by a weakening currency and strong consumption growth levels.

The cedi is expected to depreciate in 2012 as the current account and fiscal deficit increase and the global environment deteriorates, prompting some investors to switch from emerging markets back to safe-haven assets.

The EIU report indicates that election related uncertainty might well hit the exchange rate later in the year.

The cedi is therefore expected to depreciate to an average of GH¢1.73: US$1 in 2012, but the fall in value could be larger if global economic performance is worse than expected. The cedi depreciated by 25 per cent during the troubles of 2008 to 2009.

“While a continued downward trend in the cedi is expected during the remainder of the forecast period, the rate of depreciation will slow owing to the strong domestic economic performance, especially as oil revenue increases,” the report indicated.

The EIU report forecasts that increases in oil production and gold prices should maintain export growth in 2012, although lower oil and cocoa prices amid weaker global trade conditions will restrict this growth.

Export receipts in the remainder of the forecast period will be hit by a protracted decline in gold prices.

However, this will be increasingly offset by gains in the oil and cocoa sectors where prices and production are expected to increase. Imports will continue to grow throughout the forecast period, owing to solid public and private demand, including capital imports for the development of infrastructure and the oil sector.

Lower international prices for many of Ghana’s imports will partly offset this, but not by enough to prevent the trade deficit from increasing as a share of GDP throughout 2012-14.

The EIU noted that services import and profit remittances would maintain a large invisibles deficit, especially as tourism receipts are likely to suffer in 2012 given weak global conditions.

The report said the current transfers would stay strongly positive as donors remained engaged, but the growth in workers’ remittances was expected to be tempered by economic uncertainty in the West, where many Ghanaians work.

Overall, although Ghana’s establishment as an oil producer will be a boon for the external accounts, the mitigating factors (including strong import growth and the slowdown and then reversal of export growth) will mean that the current account deficit increases from 8.2 per cent of GDP in 2012 to 10 per cent of GDP in 2014.