GDP to slow down

growth forecast (fin)
Story: Boahene Asamoah

ECONOMIC analysts expect the government growth projections of 7 per cent Gross Domestic Product (GDP) for the 2008 year to miss its target narrowly on account of slow growth during the last quarter.
According to Databank research though economic expansion during the first quarter of 2008, as measured by the Composite Index of Economic Activity [CIEA], improved by 3.0%; business and consumers expectations went
down on accounts of higher inflationary expectations.
‘We expect the higher outturn of inflation in the first half of the year to slow growth. Consequently, we project real GDP growth at 6.8% this
year; which is marginally below the budgetary target of 7%’.

Inflation deteriorated during the first half of the year, as the global
food and energy price hikes intensified. The pass through effects of
crude oil price increases on the international market was severe for
Ghana. Inflation for May was 16.9%, compared to 12.7% in
December 2007; and we project inflation for June at 18.4%.
A relatively loose fiscal policy, lower gross international reserves,
and a sharp depreciation of the local currency made the economy
less resilient to external shocks. Given that external volatility still
persists in the global economy, we do not expect the goal of single
digit inflation to be achieved by the end of the year. Our end year
forecast for inflation is within the band of 17.5% and 18.49%.

Inflation could rise above 21% by September if the current fiscal
mitigating package is not sustained and transport fares remained
stable. The domestic harvest season is likely to ease food inflation
in the last quarter, and we expect this to soften overall inflation
during the period. This could facilitate a disinflation process in the
last quarter, though the extent is expected to be marginal.
We, however, expect the fiscal mitigation package to strain
government budget. Essentially, in the absence of expenditure
shifts in favour of the package, additional spending in support of the
package could worsen underlying inflation.
National elections are due in December this year, and we expect
a keen contest between the ruling New Patriotic Party and the
main opposition party, the National Democratic Congress.
Events leading to the election date indicate that the democratic
structure of the country is deepening. The Institute of Economic
Affairs, an economic and governance think tank in the country
has conducted its first round of fora for the main candidates to
interact with the public on policy issues.
While it may be difficult to predict the outcome of the elections,
we are confident that there will be a peaceful transfer of power
after the elections irrespective of the political party that wins.
POLITICAL RISK OUTLOOK
Leadership
INFLATION RATE OUTLOOK
GROWTH OUTLOOK
We expect real GDP growth to accelerate to 6.8% in 2008, from
the 6.3% registered in 2007; mainly on account of favorable
export prices and strong domestic demand.

conti
The first half of the year witnessed more fiscal expansion compared to
the same period in 2007. Government’s fiscal deficit as a percentage of
gross domestic output (GDP) stood at 2.94% by March compared to
0.91% for the same period in 2007.
The fiscal slippage occurred as a result of interest payments on the
US$750 million euro bond issued in September 2007, expenditure on the
CAN 2008 tournament, higher than expected expenditure on crude oil
imports, increased expenditure on wages and salaries, and increased
capital expenditure, among others.
Government borrowing increased during the first half of the year, which
combined with the inflation rate hikes during the period led to higher
treasury market yields during the period. The higher fiscal deficit was
mainly financed through increased borrowing on the domestic treasury
auction market.
The 91-day Treasury bill reached 16.84% in July from a low of 10.6% at
the end of December, 2007. The 182-day and the 1-year note increased
from 10.8% and 12.3% at the beginning of the year to 17.76% and
17.00% respectively by July 2008; while the 2-year note increased from
12.8% to 16.5% during the same period.
The introduction of the communications service tax in June, the
government of Germany’s £39 million concessional loan and grant, as
well as, the renewed inflow of financial assistance from the World Bank
may improve government tax revenue in the second half of the year. The
inflow of divestiture receipts, especially from the sale of Ghana Telecom
will also enhance fiscal stability.
Government expenditure cut during the second half of the year is,
however, not likely due to the impending presidential and parliamentary
elections. Growth in fiscal expenditure is likely to further outpace
domestic revenue mobilization in the second half of the year; and we
expect government fiscal balance to close the year at a deficit of 14.5%
of gross domestic product.
FISCAL POLICY OUTLOOK
Databank
Leadership
EXCHANGE RATE OUTLOOK
The local currency depreciated sharply this year compared to
2007. By the end of the first half of the year, the cedi posted a
year-to-date depreciation of 6.01%, which is significantly
higher, compared to 0.59% for the same period in 2007.
The sharp depreciation of the local currency was induced by a
significant reduction in the gross international reserves position
of the economy by December, 2007. The reserve position of
the country was weak due to the energy crisis even before the
global food and energy price hikes intensified. Crude oil price
has increased from US$85 per barrel in the last quarter of
2007 to above US$140 by the end of June, 2008.

MONTHS
DEPRECIATION RATE (%)
Depreciation $ Depreciation £ Depreciation €
The local currency also depreciated against the pound and the
euro by 5.9% and 11.63% respectively by June 2008; and we
expect it to depreciate further during the year. Increased
domestic demand induced by fiscal and banking sector credit
expansion led to increased demand for imports, which has
furthered worsened the outturn of the cedi.
We expect further increases in the price of crude oil and an
easing in foreign private portfolio funds into the country during
the second half of the year to worsen the downward pressure
on the cedi. Overall, we expect the cedi to depreciate against
the dollar by 11.5% in December this year.


The Bank of Ghana’s decision to increase the prime rate to 16% in
May in response to the deterioration in inflation during the period
indicates that further upward adjustment in the prime rate should be
expected if inflation further increases in June and July.
The central bank has consistently increased its key policy rate since
November 2007, when upside risks to inflation started to emerge.
From 12.5% in August 2007, the prime rate was increased to 13.5% in
November 2007; but maintained at the same rate in January 2007. As
inflation picked up to 13.8% in March, the central bank responded by
increasing the prime rate to 14.25%. In May 2008, the prime rate was
further adjusted upwards to 16%, after inflation worsened to 15.2% in
the month of April.


We expect the prime rate to further increase in the second half of the
year amidst our inflation expectations and the fact that the central
bank is committed to an inflation targeting regime. Increasing the
prime rate further up will hurt industry, but we think that increasing the
prime rate is necessary since the current level does not reflect
economy wide risk and inflationary expectations.
We expect domestic liquidity to further increase in the second half of
the year, despite the recent increases in the prime rate. This is mainly
because of the huge spread between deposit and lending rates, which
currently averages 21% for commercial banks.
MONETARY POLICY OUTLOOK
Pressure from the global food and energy price hikes has
strained the external position of the country. The economy’s
reserve position slipped to 2.7 months of import by April this
year, which is lower than the year open level of 3.42 months of
import cover.
Despite the favourable commodity prices, windfall gains from
cocoa and gold exports still lag behind the growth in crude oil
import bills for the country. This higher import bill is likely to
worsen the terms of trade position of the economy. Remittance
inflows continue to remain strong, increasing by 35% over the
first quarter of 2007 outturn to US$2,008.
The inflow of private international portfolio funds into the
country is likely to moderate in the second half of the year due
to the impending presidential elections. Investors usually hold
back their portfolio funds from (developing) countries during
the period of elections, and we expect the country to be
exposed to this risk in the second half of the year.
Total merchandise imports for the first quarter of 2008 was
US$2,273.9 million, which indicates an increase of 33% over
the outturn for the same period in 2007. Oil imports accounted
for 23% of the total import bill for the first quarter of the year,
which is higher than the 21% outturn for the same period in
2007. Non-oil import’s share of total merchandise import was
77% in the first quarter of 2008.
We expect the current account deficit to further deteriorate in
the second half of 2008. This is likely to be induced mainly by
the continuing global price hikes and expected increases in
domestic liquidity. Inflation concerns have led both the
European Central Bank and the Federal Reserve Bank of the
United States to increase interest rates.
Databank
Leadership
EXTERNAL SECTOR OUTLOOK