Duffuor addresses media on financial situation

Accra, April 17, GNA - The introduction of the new cedi and the liberalization of the capital market to allow foreigners to acquire significant share of the government's 3-year and 5-year securities are the main driving force behind the depreciation of the cedi, Finance Minister Dr. Kwabena Duffuor said on Friday.

Speaking at a ministerial meet-the-press encounter on the 100 days in office of the government of President John Evans Atta Mills, Dr Duffuor said foreign investors' withdrawal from government securities market and very weak economic fundamentals at the time of the introduction of the new currency had put pressure on the value of the cedi. The Minister said the new Ghana cedi was introduced at a time when there were high levels of money supply, inflation and high government spending and the trade balance deficit as well as deterioration in the overall balance of payments.

The new Ghana cedi was introduced at GH¢ 0.9200 to a dollar. The Minister said the Central Bank tried to hold the currency from serious depreciation by intervening in the foreign exchange market to sell the country's hard earned dollars to support it. He said despite the Central Bank's huge spending of over $1.2 billion to prop up the Ghana cedi between July 2007 and December 2008, the currency lost some 31 per cent of its value.

Besides, the offloading of a total of US$ 145 million by foreign investors of their bonds to local investors since the beginning of the global financial crisis in October last year compounded the pressure on the value of the cedi.

As at December 2008, foreign investors held 46 percent of government of Ghana 3-year fixed bond and 87 percent of 5-year fixed bonds. "The risk associated with foreign investors participating in the capital market is that when they sell bonds to local participants, it has serious foreign exchange obligations for the local investor, which tend to put pressure on the value of the domestic currency," the Minister said.

"All these were inherited by the NDC government and therefore one cannot attribute the cedi depreciation to a government that has been in power for only 100 days," he added.

Dr Duffuor described as disaster, the inflation targeting framework of the Central Bank, which has a medium term target of five percent. He said, while the Central Bank and government were to coordinate monetary and fiscal policy to help anchor long term inflation expectations, high government expenditure combined with sharp growth in money supply worked to undermine the effectiveness of the inflation targeting framework.

"The implication of this is that strong inflationary pressures have been built in the economy before we assumed power in January this year," Dr Duffuor said, adding that, this explained the rise in inflation this year.

Other factors for inflation are weakened domestic currency and the widening budget and current account deficits inherited by the administration.

He said despite the challenges, government was carefully managing the economy and this had resulted in a slowdown in the growth of money supply and domestic credit. He said preliminary information on the budget execution indicated an overall narrow budget deficit of 0.9 percent of GDP in the first quarter of the year, compared to the 1.7 percent recorded for the first quarter of 2008.

On enhancing confidence in the Ghanaian economy, Dr Duffuor said confidence in the economy was being restored and that the initial desire of foreign investors to dispose off their investment in the government's short term securities had been pulled off.

"We are discovering that there is an increasing desire on the part of foreign investors to hold the government securities. Given these developments, I firmly believe that foreign investors do hold a positive outlook for the country's medium term," he said.

The Minister said the renewed confidence stemmed from government's management of the economy, especially in the area of fiscal discipline. He said government would focus on weeding out wasteful and fruitless public spending and enhancing government revenue through significant improvement in tax policy and administration. The government, he said, was also working towards adopting a comprehensive debt management framework and utilizing the country's concessional financing possibilities as means to contain the rapid rise in domestic debt.

"It is our firm believe that the fiscal adjustment measures we are currently implementing will help to restore macroeconomic stability, debt sustainability and create further room for sustained private sector growth. These outcomes together with the fundamentals of the economy will combine to strengthen the confidence and credibility in the economy," he added.