BoG Policies Taking Effect

… says Renaissance Capital
By Tommy Ekpe
A combination of policies implemented by the Bank of Ghana (BoG) has begun taking effect with a retracement of the cedi to 1.94 per dollar from mid-August, Renaissance Capital, a leading independent investment bank of the Renaissance Group, has observed.
According to a report authored by the group and released on august 20, 2012, in order to stem what the BoG viewed as speculative activity in the interbank forex (FX) market that was exacerbating the cedi’s weakness, the Bank implemented measures that would ultimately stem cedi weakness, including hiking the policy rate by 250 bpts YtD, reducing the limits on net open FX positions of banks, reintroducing BoG bills to provide additional avenues of cedi investment, revising the application of the statutory reserve requirement so that banks would need to maintain the mandatory nine percent reserve requirement on domestic and foreign liabilities in cedis only, and requiring all banks to provide 100% cedi cover for their offshore account balances – to be maintained at the BoG.
“We have noted the retracement of the cedi to 1.94/$1 from mid-August, suggesting that a combination of the aforementioned policies may be taking effect. However, as it is still a few months to elections, we project some further weakness to GHS2.0/$1 at year-end 2012 (YE12)”, it said, adding that “we are of the view that financial outflows increased significantly during this period, particularly short-term money”. It further said while it had expected an increase in financial outflows as the December elections approached, it had not anticipated them to begin so early in the year.
The report noted that the BoG’s 250-bpt hike of the policy rate in the first half of 2012 (1H12) to 15% was largely intended to stem cedi weakness, adding that although the cedi may have stabilized and retraced since August 8, ‘we still think the risk of a weakening cedi is significant as we approach the year-end 2012 (YE12) elections’.
It said along with inflationary pressures from an increase in government spending in the order of two percent of GDP and strong credit growth of 39.4% YoY in May, compared to 18.5% YoY a year earlier, this implies that the risk to inflation is definitely to the upside.
“We think these factors will compel the BoG’s monetary policy committee to tighten by 50 bpts to 15.5% when it next meets on September12”, it said.
The report further stated that Ghana’s economy expanded by a sizeable 14.4% in 2011, its first full year of oil production, and continued to exhibit strong growth in the first quarter of 2012 (1Q12) when it grew by 8.7% year on year (YoY), up from 3.0% YoY a year earlier.
It said the double-digit growth in 2011 largely reflects the strong performance of the industrial sector, which grew by 41% in 2011, adding that aside from the extractive sector (mining and oil production) that propelled growth to over 200% in 2011, manufacturing and construction also demonstrated strong growth of 13% and 20%, respectively.
The report however observed that the industrial sector’s performance is masking the underperformance of some significant non-oil sectors, ‘in our view’.
“Agriculture, for instance, grew by a weak 0.8% in 2011, and contracted by 2.9% YoY in 1Q12, compared to growth of 5.3% in 2010 and zero growth in 1Q11. Ghana’s statistics office largely attributes agriculture’s underperformance in 2011 to the contraction of the forestry and fishing sectors, and a slowdown in crop production’s growth to 3.7% in 2011, from 5.0% in 2010. This was despite the strong expansion in cocoa production of 14.0%”.
It said reviewing the performance of agriculture’s four subsectors in 1Q12, ‘we note that only the fishing sector declined and that crops production, which makes up over 75% of agricultural output, grew by 5% YoY’.
The monetary and fiscal policies at play were the last undertaken by the Monetary Policy Committee (MPC) of the Bank of Ghana, under the leadership of the former Governor, Mr. K. B. Amissah-Arthur, before he became Vice-President of the Republic of Ghana on the demise of former President John Evans Atta Mills.
This article was originally published in The Business Analyst of Wednesday, 29th August – Tuesday, 4th September, 2012. E-mail: thebusinessanalystgh@gmail.com