GHANA CENTRAL BANK'S HALF YEAR 2005 ANAYSIS OF THE

UNCLAS SECTION 01 OF 02 ACCRA 001516

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN ECON GH
SUBJECT: GHANA CENTRAL BANK'S HALF YEAR 2005 ANAYSIS OF THE
ECONOMY


Summary
--------------

1. The Bank of Ghana (BoG) issued its half year economic
review and analysis of financial and monetary policies.
Inflation declined to 15.7% in June, monetary growth slowed,
interest rates and commercial lending rates are falling,
remittances are almost 60% higher than in 2004, reserves are
steady, and the cedi is stable. Tax revenue was above
target, but the GoG missed budget targets due to delayed
donor flows. Despite lower cocoa prices and higher oil
prices, the BoG's outlook is positive. End Summary

Monetary and Financial Developments
--------------

2. The BoG noted that inflation continued to decline in the
second quarter following the spike in February due to the 50%
increase in fuel prices. Consumer price inflation fell for
the third consecutive month from 16.7% in March to 15.7% in
June on a year-on-year basis. The BoG's measure of core
inflation (not including food or petroleum products) is in
single digits.


3. The growth of monetary aggregates slowed in the second
quarter, with reserve money and broad money (M2) both
increasing as significantly lower rates than in the first
quarter. Interest rates are broadly lower, following the BoG
Monetary Policy Committee's (MPC) May 2005 decision to cut
the Prime Rate from 18.5% to 16.5%. This decision has
resulted in a realignment of rates. While the benchmark
91-day T-bill also declined by 2% to 15.5% in mid-July, the
two and three year T-bills remained stable at 20% and 21.5%
respectively and gained market share. This resulted in the
lengthening of the average maturity of treasury bills,
reducing the turnover rate of GoG securities to 1.9
times/year from 5 times/year in August 2004.


4. Commercial lending rates also fell to an average of 22.5%
and credit to the private sector increased almost 16% from
May 2004 to May 2005 (from 11.3% to 12.7% of GDP). (Note:
Post's contacts in the banking sector say they often lend at
much lower rates, especially to blue chip clients. End Note)
Five sectors -- manufacturing, commerce, import financing,
services, and transport, are falling, and credit to the
private sector is up, accounted for 82% of credit flow. The
BoG's July 1 decision to lower secondary reserve requirements
on deposits from 35% to 15% should increase banks' liquidity
and should result in more private sector lending.

Fiscal Developments
--------------

5. The GoG followed generally prudent fiscal policies for the
first half, with total expenditures 14% below the budgeted
level (although 25% above 2004 levels). However, delays in
donor disbursements due to the late IMF third review of the
Poverty Reduction and Growth Facility (PRGF),caused higher
than expected domestic borrowing and the GoG missed its
budget and net domestic financing targets. Tax revenue was
26% higher for the first half of 2005 compared to the similar
period in 2004, and was the equivalent of about 20% of GDP.
However, total grants amounted to under half of the expected
245 million. Overall the GoG's budget deficit was 1.56% of
GDP, compared to an expected deficit of about 0.7%. Net
domestic financing was approximately 1% of GDP, compared to
the programmed net domestic repayment of about .2%.

External Sector Developments
--------------

6. Ghana is experiencing deteriorating terms of trade due to
slightly lower cocoa prices and much higher oil prices.
Also, the cedi has appreciated against the three core
currencies -- Dollar, Pound, and Euro -- in nominal and real
terms. Provisional Balance of Payments figures show that the
balance on Ghana's merchandise trade for the half year
worsened by over 60%. The overall BoP balance also showed a
deficit ($285 million),which was financed by drawing down
reserves. Gross international reserves declined from the
end-2004 peak of $1.7 billion to $1.47 billion in June.
However, this should rebound with expected donor flows and
pending cocoa sales proceeds.


7. Total merchandise exports for the first half were 20%
above the level for 2004. However, cocoa export proceeds
were significantly lower. The cocoa crop topped 700,000 tons
for 2003/2004, but the expected 2004/2005 crop is 550,000
tons, and the average price is lower than in the previous
season. (Note: 550,000 tons is still large in historical
terms; much of the decrease is probably due to the GoG
cracking down on smuggling from and trading with Cote
d'Ivoire. End Note)


8. Ghana's merchandise imports increased over 30% over the
first half, with oil imports increasing by 20%. (Note: BoG
officials have commented that Ghana's oil bill is $500
million higher than when oil prices started there current
rise several years ago -- or near total donor assistance.
End Note) Private inward remittances (including individuals,
NGOs, Embassies, religious groups) for January-May 2004
increased by 58.7% over the same period in 2004, totaling
$1.6 billion.
Comment
--------------

9. Despite slightly deteriorating terms of trade due to lower
cocoa prices and higher oil prices, relatively prudent fiscal
and monetary policies support the BoG's positive outlook for
the economy, with declining inflation, stable exchange rate,
and opportunities for increased GDP growth. BoG sources
acknowledge that continued high world oil prices are the main
downside risk going forward, as they would restrain both
Ghana's and the world's economic growth. Also, the GoG has
yet to implement fully its petroleum deregulation scheme,
which would allow retail prices to fluctuate in response to
world price changes, thus ensuring full cost recovery. Until
Ghana implements this plan, which is an important IMF
condition, the government will continue subsidizing the
petroleum sector, undermining fiscal policy. End Comment
YATES