Domestic growth conditions fairly strong despite signs of weakening consumer, business sentiments – BoG

Governor of the Bank of Ghana (BoG) Dr Ernest Addison has said that domestic growth conditions are fairly strong despite signs of weakening consumer and business sentiments.

This comes at a time the country is witnessing rising fuel prices in Ghana, exacerbated by the geopolitical tension between Russia and Ukraine.

The local currency, the Cedi has also been falling against the major trading currencies. The cedi is currently trading beyond 7 cedis to the dollar. Analysts have predicted it is most likely to cross 8.

Dr Addison explained that the banking sector performance remains strong, with sustained growth in total assets, investments and deposits.

Key financial soundness indicators such as profitability, liquidity and solvency remain healthy, he said, adding that asset quality improved slightly, although there are upside risks to the outlook, requiring continued monitoring to address early signs of stress within the sector.

Speaking at the Monetary Policy Committee (MPC) press conferefnce in Accra on Monday Marc 21, Dr Addison said “The Sovereign credit rating downgrades of Ghana by Fitch and Moody’s led to widened yield spreads on both cedi-denominated Government of Ghana bonds and the country’s Eurobonds.

“These downgrades reflect market and investor concerns about fiscal and debt sustainability. Consequently, the Ghana Cedi has come under severe pressure as offshore investors exited positions in domestic securities at a time when domestic demand for forex has increased, reflecting both real and speculative demand. This has caused the exchange rate to overshoot its long-term trend. The strengthening of the US dollar, liquidity pressures, uncertainties regarding budget implementation, portfolio reversals by nonresidents and some speculative pressures are key contributory factors.

“At this MPC meeting, the combination of tighter global financing conditions, sharp pressures on the exchange rate, and elevated inflation pose some policy challenges. Headline inflation has risen sharply to 15.7 percent in February 2022, and both headline and core inflation are significantly above the upper limit of medium-term target band.

“The uncertainty surrounding price developments and its impact on economic activity is weighing down business and consumer confidence. The risks in the outlook for inflation are on the upside and include
petroleum price adjustments and transportation costs, and exchange rate depreciation. The Bank’s latest forecast still depicts an elevated inflation profile in the near term, with inflation falling within the medium-term target band within a year.

“Fiscal policy implementation has come under strain, reflecting embedded rigidities in the fiscal framework which will require extensive structural reforms to free fiscal space to restore both fiscal and debt sustainability. Revenue performance has been slow to align with projections, while expenditure remains rigid downwards despite the strong efforts to cut expenditure by 20 percent as announced by the
Government. The above have resulted in financing constraints which would have to be resolved very swiftly to ensure the announced fiscal consolidation path is achieved.

“The MPC is however confident that ongoing discussions will lead to very decisive policy reforms that will address underlying fiscal mismatches and restore some calm in the markets. This, together with the monetary policy decision and additional measures, should help re-anchor inflation expectations.

“Under these circumstances, the Committee has decided to increase the policy rate by 250 basis points to 17 percent,” Dr Addison said.

Source: 3news.com|Ghana