Monetary Policy Committee Press Statement

1. It is a privilege to welcome you all to today’s press briefing of the MPC, which is the first in this Golden Jubilee year. For the Bank of Ghana this is also our Jubilee year as the Bank opened for operations as the nation’s Central Bank in 1957. So in a way, this meeting has a touch of history. And we welcome your participation. Thank you for coming.

2. Ladies and Gentlemen, the economy entered the year 2007 with robust GDP growth estimated at 6.2 percent, inflation on a downward trend (at 10.5 percent in December 2006), and core inflation measures remaining within single-digit levels. The external payments showed a reduced current account deficit and another overall balance of payments surplus.

3. Available data since our last MPC meeting suggests that real sector economic activity remains robust and has continued to increase in the face of on-going load management programme in the energy sector. The Bank’s Composite Index of Economic Activity indicates a pick up of growth in the fourth quarter to 11.7 percent in real terms, with year-on-year real growth of 17.5 percent above the trend growth of 10.2 percent. All the sub-components of the index recorded significant increases except for the notable declines of cement sales and industrial consumption of electricity, which have strong links with the on-going electricity load management.

4. The Bank’s surveys of Business and Consumer Confidence in the first two months of 2007 continued to underscore higher business expectations as regards capital expenditure, sales and profits in 2007, and strong consumer confidence and prospects for improved macroeconomic conditions in 2007.

5. Reflecting improved macroeconomic conditions, the extension of banking system credit to economic operators has continued to increase and the financial sector has continued to deepen.

• Bank credit to private and public institutions increased by ¢7,156.4 billion (37.6 percent) to ¢26,177.4 billion in the 12-months to January 2007.

• The manufacturing sector absorbed 23.6 percent, followed by services (21.0), Commerce (18.4 percent), Construction (13.6 percent) and mining and quarrying (5.7 percent).

• In real terms, credit to the private sector increased by 32.6 percent, significantly higher than 14.9 percent recorded for the same period in 2006, and the highest in 35 months.

6. The financial sector is also seeing increased growth as banks take advantage of opportunities to diversify their portfolios and grow their assets. Based on the latest data available, total assets of the banking industry grew by 41.1 percent to ¢51,837.2 billion (45.1 percent of GDP) at the end of 2006, compared with 17.5 percent in 2005 (37.9 percent of GDP). This development continued into January 2007 with annual growth of 38.1 percent. This is driven mainly increases in gross loans & advances.

7. The growth in the financial sector is also taking place against the background of improved financial sector soundness indicators. The banking system is well capitalised, profitable, efficient, and fairly liquid.

• Banks’ solvency remained strong as the industry recorded Capital Adequacy Ratio (CAR) of 17.0 per cent as of January 2007 compared with 16.1 per cent same period in January 2006 and against a required CAR of 10 percent.

• The ratio of Non-Performing Loans (NPLs) in total loan portfolio continued to decline. It fell from 11 percent in October 2006 to 7.9 percent in December 2006 and further to 7.5 percent at the end of January 2007. Similarly, NPLs net of provision fell from 5.9 percent in October 2006 to 2.0 percent in December 2006 and to a low of 1.3 percent in January 2007.

• All measures of operational efficiency and profitability of the banking industry (deposits to total assets, cost to income, deposits per employee, assets per employee, net income, operating profits) with the exception of cost to income and cost to total assets, improved during the period.

8. On the external accounts, provisional balance of payments data shows a strengthened external payments position. The overall balance of payments position improved from a surplus of US$84.34 million in 2005 to US$415.12 million in 2006.

• Total exports recorded an increase of 33.0 percent during the year 2006 over the 2005 level to US$3,726.67 million. Growth in exports during the third quarter of 2006 was sustained into the fourth quarter with a marginal (1.1 percent) increase to US$932.10 million. The fourth quarter export growth was driven by growth in non-traditional exports (34.5 percent) and gold exports (1.2 percent).

• Total imports in 2006 rose by 22.0 percent to US$6,753.68 million. Capital and intermediate goods accounted for 73 percent of total imports. The relatively high import growth in the third quarter of 2006 slowed down by 2.2 percent in the fourth quarter, driven mainly by a relatively smaller oil imports in the fourth quarter of 2006.

• Total oil imports for 2006 increased by 45.7 percent to US$1,646.1 million, significantly above the US$1,129.4 million recorded in 2005, reflecting an increase in realised unit price and 2.3 percent increase in volume over 2005.

• The trade balance increased from a deficit of US$2,543.14 million in 2005 to US$2,788.51 million in 2006.

• The current account recorded a deficit of US$810.2 million compared to US$773.4 million in 2005. However, the overall balance recorded a surplus on the strength of debt cancellation, private capital flows, and unrequited transfers raising gross international reserves to US$2.05 billion at the end of February 2007.

• Private inward transfers – received by NGOs, embassies, service providers, individuals etc. - through the banks and finance companies for January – December 2006 amounted to US$5.78 billion, which represents 21.5 percent increase over those for 2005, which were in turn 58.3 percent increase over the transfers through banks and finance companies in 2004.

9. The foreign exchange market remained buoyant in 2006 with purchases and sales of foreign exchange by the banks and forex bureaux increasing by 16.6 percent over the 2005 level to US$6.8 billion.

• Cumulative purchases and sales for the first two months amounted to US$1,140.87 million, compared with US$1,086.43 million recorded for the same period in 2006.

10. Developments in the nominal bilateral exchange rates of the cedi against the three major currencies – the US dollar, the pound sterling and the euro – show that for January-February 2007, the cedi depreciated cumulatively against all three currencies by 0.2, 0.5 and 0.6 percent respectively. This compares with an appreciation of 0.01 percent against the US dollar and depreciation of 0.9 and 0.7 percent against the pound sterling and the euro respectively over the same period in 2006. The result was an effective depreciation of 0.2 percent in trade-weighted terms.

11. Provisional data on the execution of 2006 budget indicate that total revenue and grants (including the supplementary budget) amounted to ¢31,917.7 billion against an end year target of ¢34,135.4 billion (a shortfall of 6.9 percent).

• Total government expenditure for 2006 (including the supplementary budget) amounted to ¢39,828.6 billion, exceeding the budgetary ceiling by 2.4 percent.

• The overall budgetary deficit (including the supplementary budget) for 2006 resulted in a net domestic financing of ¢4,765.2 billion (4.2 percent of GDP). The financing of this deficit caused a bounce in the public debt/GDP ratio from 10.8 per cent to 13.5 per cent; accompanied by a significant lengthening of the maturity structure of the stock of public domestic debt.

• The fiscal deficit is explained mainly by revenue shortfalls and unrealised resources under the supplementary budget, which contributed about 3.7 percent of GDP to the total fiscal deficit. In addition, public sector wage settlements which were about 13 percent in excess of programme, and unexpected transfers to manage the energy crisis overstretched the expenditure under the budget.

12. Provisional banking sector data for the implementation of the 2007 budget indicates that total receipts for January and February 2007 was lower than the expenditure outlays for the period, resulting in an increase in net domestic borrowing.

• Total revenue including grants for January and February 2007 amounted ¢6,944.7 billion (of which ¢145.0 billion were grants).

• Total payments for January and February in 2007 amounted to ¢7,413.3 billion resulting in a deficit of ¢468.6 billion.

13. Broad money (M2+) to GDP ratio rose to 31.1 percent in January 2007 from 26.7 percent during the same month in 2006. Underlying the growth in broad money are significant increases in Time and Savings deposits and foreign currency deposits which grew by 55.9 and 35.2 percent at annual rates respectively at the end of January 2007, compared with 27.1 and 12.7 percent respectively for January 2006.

• Provisional data available through February 2007 indicate that on end-period basis reserve money seasonally unwounded by 9.1 percent to 23.4 percent from the December 2006 level. This compares with an annual growth of 19.1 percent recorded for February 2006.

14. Total government debt instruments outstanding at the end of January 2007 amounted to ¢22,126 billion (19.3 percent of GDP). There has been a significant shift in portfolio preferences on the money market away from the short-end to the long-end. The share of the 91-day and 182-day Treasury Bills declined from 56 percent at the end of 2005 to 34 percent in December 2006 and further to 31 percent in January 2007. The 2-year and 3-year fixed rate notes, and the recently issued 5-year GOG bond increased their shares from 14 percent to 34 percent and further to 36 percent over the same period to January 2007. The share of 2-year and 3-year floating notes and bonds also declined from 16 percent to 6 percent in January 2007.

• Interest rates have generally declined along the full spectrum of the yield curve; 63 basis points on the lower end and 200 basis points at the higher end, in line with diminishing inflation expectations in the economy.

• The maiden 5-year bond was issued at 14.47 percent in December 2006.

• The 1-year Treasury note rate fell by 300 basis points to 12.5 percent, while the 2-year and 3-year fixed rates similarly declined by 220 basis points and 200 basis points respectively to 13.5 percent and 13.8 percent at the end February 2007.

• Short-term rates inched downwards in line with the prime rate; the benchmark 91-day Treasury bill rate fell by 63 basis points to 9.72 percent while the 182-day Treasury bill rate fell by 30 basis points to 10.42 percent in February 2007.

• Base rate quotations of the banks were revised downwards with the range moving to 18.5 and 21.25 percent in January 2007 from 19.50 and 21.50 percent in December 2006. However, average lending rates remained unchanged within the range of 15.0 percent and 33.5 percent at the end of February 2007.

15. Price developments during the last quarter of 2006 showed signs of diminishing inflation expectations. Headline inflation measured by the consumer price index, which was 11.7 percent in September 2006, dropped to 10.9 percent by the end of December 2006. In the last quarter of 2006, non-food prices slowed down significantly from the 4.4 percent recorded in the third quarter to 1.6 percent in the fourth quarter. Food prices on the other hand, recorded an increase of 0.3 percent in the fourth quarter in line with established seasonal patterns, as against a decline of 0.9 percent recorded in the third quarter of 2006.

16. The Ghana Statistical Service (GSS) released a new measure of consumer prices, which looks at the classification of individual consumption items by purpose (COICOP) to replace the old Consumer Price Index (CPI) in January 2007. This also allowed a change in base year from September 1997 to January 2002 to reflect current consumption patterns based on the Ghana Living Standard Survey (GLSS4).

17. The new COICOP series indicates a continuous downward trend in inflation expectations at the end of February 2007. Headline inflation dropped by 0.5 percentage points to 10.4 percent at the end of February 2007. The drop in inflation was underlined by lower monthly increases in food prices by 2.3 percent and non-food prices by 0.4 percent, compared to same period levels in 2005.

18. The bank’s indices of core inflation dropped further in February 2007 and are all well within the single digit zone.

19. In summary, the economic fundamentals remain strong. Economic activity has been robust, with an acceleration in the fourth quarter of 2006, with the underlying demand growth driven in some measure by the fiscal expansion and stimulus imparted to the economy through the 2006 budget. Business and Consumer Confidence Indicators are at high levels and inflation expectations relatively subdued, with stability in the foreign exchange markets.

The banking industry is building up strong balance sheets and an increasing or diversified asset and private sector credit portfolio of improving quality that should support continued economic expansion. However, continued load shedding and unpredictable energy supply is constraining activity in especially the energy sensitive sectors with the risk of potential output losses and cost price pressures in the immediate horizon.

The external payment outlook remains favourably positive. Commodity prices for cocoa and gold are holding firm. Crude oil price volatility is reduced with the range of price adjustment uncertain but forecast to be within tolerable limits, thus reducing the downside risks connected with oil imports.

The economy is positioned firmly on the path of declining inflation, and towards the goal of single-digit. Fiscal policy over the past year has been a source of considerable stimulus, driven by exceptional expenditures mostly in the supplementary budget and the large public sector wage settlements. Implementation of a firm budgetary expenditure policy well aligned with budgetary resources in the current budget should support steady fiscal consolidation, put downward pressure on prices and sustain the progress toward achieving the single-digit inflation target with accelerated growth.

20. In the circumstances, the Monetary Policy Committee has decided to maintain the Prime Rate at 12.5 percent.

Thank you for your attenti