Monday, November 23, 2009

Hopes of economic expansion in 2010

The economy next year promises to witness more economic activity than this year, accompanied by easing inflation and generally stable currency, B&FT’s assessment shows.

This will be driven by the relatively flexible fiscal policy of government captured in the 2010 budget, working through to complement the gains that can be made from the disinflation journey that the economy embarked on from the beginning of the third quarter this year.

The latest assessment by the Bank of Ghana (BoG) shows that the path of disinflation began this year and will continue into the larger parts of next year - barring risks of inflation associated with the recovery of global demand and the extent to which crude oil prices might rebound.

Based on the positive signs of the Bank’s assessment, the Monetary Policy Committee (MPC) of the Bank last Friday cut the BoG prime rate by 0.5 percentage points down to 18.0 percent, with the view to providing the needed monetary policy support to consolidate the expected gains for economic growth.

A total government spending of GHË10.8 billion is earmarked in 2010, which is 23 percent higher than the projected outturn for 2009 and 11.3 percent higher than the target made in 2009.

While this amount is earmarked for investment in five main high growth inducing areas of oil and gas industry, agriculture modernisation, private sector development, provision of key infrastructure, and information and communication technology, it is based on a flexible budget deficit target of 7.5 percent of gross domestic product (GDP).

Even though the 2010 deficit target stands lower compared to the 10.2 percent of GDP projected by the end of 2009, it represents a slower decline of 2.7 percentage points over 2009 compared to the steep decline of 12.2 percentage points from 2008 to 2009.

Consequently, far more government spending is expected in 2010 compared to this year - and this will be well complemented by BoG’s flexible monetary policy as further cuts in the prime rate are expected next year.

Briefing the media last week at the fifth bi-monthly review of the MPC in the year, Chairman of the MPC and Governor of the BoG, Mr. Kwasi Amissah-Arthur, stated that there are signs of stabilisation in prices and in the foreign exchange market with inflation trending downwards including consumer price inflation.

“Indications are that inflation will continue to ease and fall within the upper part of the target range of 14.5 – 17.5 percent by the end of-December 2009. Looking ahead, inflation is likely to return to the target range of 7-11 percent by the end of December 2010,” the Governor said, hinting about the future path of monetary policy.

Given this outlook, the prime rate is expected to ease further while bringing down bank lending rates as well, thus making credit more affordable to the private sector for increased economic activity.

Real annual growth of banks’ credit to the private sector was 6.1 percent in September 2009, down from 32.7 percent recorded in September 2008; but this is expected to improve with the expected falling interest rates. Average lending rates remained unchanged at the second quarter level of 32.75 in October in the range of 25.75 – 40.0 percent, but lending rates are expected to ease in the coming months following the cut in BoG’s prime rate.

The high inflation and huge currency depreciations experienced last year up to the first half of this year hiked up banks’ non-performing loans from 7.6 percent in September last year to 13.2 percent in September this year. However, this trend is expected to change once interest rates begin taking nose-dives.

Economy grew 5.7% in 2009
The BoG’s assessments of economic activity, based on the first three quarters of the year have put provisional economic growth rate in 2009 at 5.7 percent, down from 7.3 percent in 2008 and overruling earlier estimates made based on first quarter data by the Ghana Statistical Service that the economy grew by 4.7 percent this year. This also indicates that an assessment based on the four quarters could see the economy notching up the 5.9 percent growth target that was set by government for the year.

The Bank of Ghana’s Composite Index of Economic Activity (CIEA), used in estimating the growth rate, showed that the first three quarters of the year recorded significant slowdowns in economic activity. In the first three quarters of the year, the index recorded declines of 4.32 percent, 0.91 percent and 0.94 percent respectively. In year-on-year terms, the index as at September 2009 had declined by 6.2 percent compared with a growth of 14.7 percent for the corresponding period of 2008.

Presenting the 2010 budget to Parliament last week, the Minister of Finance and Economic Planning, Dr. Kwabena Duffuor, disclosed a growth target of 6.0 percent.

From a growth rate of 3.7 percent in 2000, GDP shot up to 4.2 percent in 2001, 4.5 percent in 2002, and 5.2 percent in 2003.

The country’s economy further grew by 5.6 percent and 5.9 percent respectively in 2004 and 2005. The years of sustained growth peaked at 6.4 percent in 2006, after which an energy crisis slowed the country’s growth rate to 6.3 percent in 2007.

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