CEPA wants interest rates cut

The Centre for Policy Analysis (CEPA) says the Bank of Ghana (BoG) should consider cutting interest rates, given the downward trend in inflation and the projected steep declines in real economic activity.

Consistent with a strategy of growth with macroeconomic stability, CEPA has suggested that the BoG’s prime rate should be cut by 0.25 percentage points.

The BoG prime rate was maintained at 18.5 percent in September, the third consecutive time in the year after it gained one percentage point in February to a five-year high.

However, the stabilisation effect of government’s new Poverty Reduction and Growth Facility (PRGF) arrangement with the International Monetary Fund (IMF) and the World Bank became quite significant after September, working through channels such as deceleration in the rate of inflation and currency depreciation.

Inflation has been stubbornly high since the beginning of the year, registering its highest rate of 20.7 percent in June. Inflation since then has been on the downward trend, reaching 18.37 percent in September.

CEPA believes that with the current broad macroeconomic framework, the monetary policy committee’s projections in May 2009 that inflation will fall to the range of 12.6 to 16.6 percent at the end of the year and then to a range of 6.7 to 12.7 percent by the end of June 2010 is attainable.

“It now looks likely that the target rate of 14.5 percent at the end December 2009 is achievable,” Mr. Samuel Ashong, a Research Fellow at CEPA, noted at the launch of the Ghana Economic Review and Outlook 2009 in Accra.

In spite of the decreasing trend in inflation in the last quarter, lending rates in the economy remained unchanged or rather went up in some respects.

The average lending rate of the 26 banks in the country rose in September to 37.3 percent, and was held in the range 21.0 percent - 50.8 percent. Finance houses charged between 61 and 95 percent, leasing companies between 33.5 and 66 percent, while savings and loans companies charged between 50.3 and 83.3 percent.

Analysts attribute the downward rigidity in the lending rates to the rigidity in the BoG’s prime rate, because the banks respond to the prime rate and not necessarily inflation rate.
A tightening of the macro-economy was signalled with the approval of the 2009 Budget in March, but a conclusion of the 3-year PRGF arrangement with the Bretton Wood Institutions in June converted government’s economic policy programme into a comprehensive stabilisation programme.

Based on CEPA’s projection, government’s total expenditures by the end of the year will be GH¢9,846.8 million (including repayment of external debt, outstanding commitments and clearance of arrears).

This translates to the equivalent of 45.5 percent of gross domestic product (GDP), lower than the budget estimate of 46.4 percent of GDP and the 2008 provisional outcome of 49.3 percent of GDP.

On the revenue side of the budget, domestic revenue has been projected at GH¢5,732.6 million, equivalent to 26.5 percent of GDP. It comprises GH¢5,047.0 million of tax revenue and GH¢685.6 million non-tax revenue - of which GH¢332.0 million is expected to be lodged into government accounts by the collecting ministries departments and agencies (MDAs).
The remaining GH¢353.7 million will be retained by the MDAs for their use.

The forecast shows domestic revenue ending the year 7.1 percent below its budgetary target of GH¢6,172.1 million or 28.5 percent of GDP.

CEPA’s assessments show that disbursement rates for project grants and programme grants are not encouraging, representing only 55.8 percent and 63.9 percent of the yearly commitments respectively.

HIPC and multilateral debt-relief initiative (MDRI) assistance were equally behind schedule, and accounted for 56.9 percent and 50.6 percent of the annual estimate respectively.

Based on the above projections of revenues and expenditures, a broad fiscal deficit of GH¢2,274.2 million, equivalent to 10.5 percent of GDP, has been projected for end-year 2009. This is 11.8 percent higher than the official estimate of GH¢2,033.4 million, or 9.4 percent of GDP, contained in the revised 2009 budget and the IMF-PRGF arrangement.

Based on these developments, CEPA has estimated 2009 economic growth to be 3.8 percent - down from the high 7.3 percent growth rate recorded in 2008.

The official growth rate projection by the government at the onset of the year was however 5.9 percent.

The Minister of Finance and Economic Planning, Mr. Kwabena Duffuor, is expected to officially present the 2010 budget statement to Parliament on Wednesday - when he will also announce the official position on estimated growth rate for the year.