Bank of Ghana

Monetary Policy Committee

Press Release

November 28, 2022

Good morning, Ladies and Gentlemen of the Media and welcome to the press briefing
after the 109th Monetary Policy Committee (MPC) meetings which took place last
week. The Committee deliberated on recent macroeconomic developments and
assessed risks to the inflation and growth outlook. A summary of the assessment and
key considerations that informed the Committee’s decision on the stance of monetary
policy is provided below:

1. Global growth slackened in the third quarter of 2022 and is projected to weaken
further amid tight financing conditions, rising cost of living and a squeeze on real
incomes, alongside recession fears in advanced economies. Furthermore,
Purchasing Managers Index releases for manufacturing and services activity point
to weakened momentum in the last quarter of the year. The current phase of the
business cycle, coupled with elevated macroeconomic, geopolitical and policy
uncertainty concerns, has led to downward revisions of global growth projections.
The International Monetary Fund has revised significantly downwards, global
growth to 3.2 percent in 2022, nearly half of the 6.0 percent growth recorded in
2021.

2. Global headline inflation remains elevated and has broadened beyond food and
energy prices, with several other factors adding to inflationary pressures. These
include tighter labour market conditions, the pass-through effects of currency
depreciations to inflation, and supply chain cost pressures. The International
Monetary Fund projects global inflation to reach 8.8 percent by the end of 2022,
before gradually declining to 4.1 percent in 2024. The projected ease in global
inflation is conditioned on easing supply chain constraints, slowing global
economic growth, declining global food prices, and lower crude oil prices.

3. Global financing conditions have tightened further, reflecting in large part the
aggressive policy rate increases across several Advanced Economies to re-
anchor the persistent rise in inflation. The US dollar has strengthened, and longer-
term bond yields have risen sharply because of sustained policy tightening in
response to high inflation concerns. This has triggered currency pressures and
volatility in equity markets across Emerging Markets and Developing Economies.
Meanwhile, stock prices remained subdued amid rising interest rates and growing
uncertainty about near-term global growth prospects. In a similar policy direction,
central banks in several Emerging Market and Developing Economies have
tightened monetary policy in response to rising inflation and currency pressures.
4. On the domestic front, inflation has remained elevated, with strong underlying
inflationary pressures. Price developments suggest that the upturn of headline
inflation in October 2022 was driven largely by food price pressures and to some
extent additional pressures from the currency depreciation. Since the last MPC
meeting, headline inflation has increased further to 40.4 percent in October 2022,
from 37.5 percent in September. Food inflation increased by 4.9 percentage points
to 43.7 percent in October 2022 from 38.8 percent in September, while non-food
inflation increased by 1.3 percentage points to 37.8 percent from 36.5 percent.

5. Underlying inflationary pressures have also heightened further. The Bank’s

measure of core inflation, defined to exclude energy and utility prices, increased
from 36.2 percent in September 2022 to 39.7 percent in October 2022, an
indication of broad-based inflationary pressures. At the same time, consumer,
business, and financial sector inflation expectations went up.

6. Domestic economic activity have moderated somewhat. High frequency indicators

monitored by the Bank signalled some moderation in economic activity in the third
quarter, relative to the first two quarters of the year. The Bank’s Composite Index
of Economic Activity (CIEA) contracted by 1.2 percent in September 2022,
compared with 11.1 percent growth, a year earlier. The main indicators that
dragged down the Index were domestic VAT, ports activity, and cement sales.

7. The Bank’s survey of Business and Consumer confidence conducted in October

2022 continue to point to softening economic sentiments. Consumer confidence
dipped on account of rising inflation and uncertainty about future economic
conditions. Business sentiments also deteriorated on concerns about rising
operational costs, sharp currency depreciation, and weak consumer demand.
These survey findings were aligned with the decline in Ghana’s Purchasing
Managers’ Index (PMI), which eased further to 44.0 in October 2022 from 45.6, a
month earlier.

8. The pace of expansion in monetary aggregates accelerated in October 2022, on

the back of increased Net Domestic Assets of the depository corporation sector,
while Net Foreign Assets declined sharply. Broad money supply, including foreign
currency deposits (M2+) grew by 45.2 percent year-on-year in October 2022,
compared with 14.5 percent in the same month of 2021. Reserve Money recorded
an annual growth of 62.7 percent in October 2022, compared with 25.9 percent,
over the same month a year earlier.

9. The latest credit conditions survey conducted in October 2022 pointed to expected
continued tightening of credit stance to corporates and households by the
commercial banks over the next six months. This is expected to reflect in a steady
increase in average lending rates and marginal decline in credit demand by
enterprises and households.

10. New advances over the first ten months of 2022 amounted to GH¢45.3 billion,
reflecting a year-to-date growth of 59.1 percent, compared with GH¢28.5 billion
for same period in 2021. As a result, private sector credit grew by 57.3 percent in
October 2022, relative to 10.1 percent in the corresponding period in 2021. The
observed increase in new advances and private sector credit partly reflected

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 banks’ portfolio rebalancing behaviour and revaluation effects from foreign
currency denominated credit. In real terms, private sector credit increased by 12.0
percent, compared with a 0.8 percent contraction over the same comparative
period.

11. The banking sector recorded strong asset growth and improved profitability over
the review period, but there are strong signs of emerging spillover effects from the
recent macroeconomic challenges. Total assets of the banking industry amounted
to GH¢249.9 billion (an annual growth of 43.7 percent) at the end of October 2022.
Underpinning the growth in assets was sustained growth in deposits and
borrowings, as well as the revaluation effect of the foreign currency component of
key balance sheet indicators. Total deposits reached GH¢172.1 billion,
representing an annual growth of 46.5 percent, compared with 17.2 percent during
the same period in 2021. Borrowings also increased by 47.6 percent to GH¢30.4
billion from GH¢20.6 billion in October 2021. Total investments increased by 1.9
percent to GH¢85.0 billion in October 2022, compared with a growth of 25.5
percent during the same period last year. Gross advances, on the other hand,
increased sharply by 57.5 percent to GH¢81.2 billion, relative to GH¢51.6 billion
in October 2021.

12. Financial Soundness Indicators remain broadly positive. The industry’s Capital
Adequacy Ratio (CAR) was 14.2 percent as at October 2022, above the prudential
minimum of 13.0 percent, but shows a sharp decline from 19.8 percent recorded
a year earlier. The reduction in the CAR levels broadly reflects the impact of
ongoing macroeconomic developments, including the currency depreciation and
the mark-to-market investment losses by some banks, as well as the continued
growth in actual credit on the risk-weighted assets of banks. However, the Non-
Performing Loans (NPL) ratio improved from 16.4 percent in October 2021 to 14.0
percent in October 2022, on account of the higher growth in credit relative to the
increase in the NPL stock.

13. The banking sector remained profitable with profit-after-tax for the first ten months
of 2022 at GH¢4.4 billion, representing an increase of 17.2 percent, compared
with 10.0 percent growth during the same period last year. Net interest income
grew by 22.7 percent to GH¢12.8 billion, higher than the 15.2 percent growth. Net
fees and commissions also grew by 25.4 percent to GH¢2.9 billion, compared with
22.9 percent growth over the same comparative period. Operating income
accordingly rose by 27.0 percent, higher than the corresponding growth of 14.3
percent in 2021. The industry’s operating expenses increased by 28.1 percent in
October 2022, compared with 11.0 percent for same period in 2021, on the back
of the current challenging operating environment. Loan loss provisions also went
up significantly, reflecting the pickup in credit growth and elevated credit risks.

14. Interest rates on the money markets trended upwards across the spectrum of the
yield curve, in line with the tightening of monetary policy stance. At the short-end
of the market, the 91-day and 182-day Treasury bill rates increased to 31.53
percent and 32.61 percent respectively, in October 2022, from 12.46 percent and
13.16 percent respectively, in the same period of 2021. Similarly, the rate on the
364-day bill increased to 32.32 percent from 16.24 percent over the review period.
On the secondary market, rates on all bonds, from 2-year through to 20-years,
almost doubled over the one-year review period.

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15. The interbank weighted average rate increased to 23.98 percent in October 2022
from 12.66 percent in October 2021, consistent with the increases in the policy
rate and the incremental hikes in the Cash Reserve Ratio from 12 percent in
August 2022 to 14 percent in October. In tandem, the average lending rates of
banks rose to 31.40 percent in October 2022 from 20.34 percent in the same
period of 2021.

16. Provisional data on fiscal operations for January to September 2022 resulted in
an overall budget deficit of GH¢41.7 billion (7.0 percent of GDP), against a
programmed deficit target of GH¢36.7 billion (6.2 percent of GDP). The
corresponding primary balance was a deficit of 1.6 percent of GDP, against a
deficit target of 1.0 percent of GDP. The higher-than-projected deficit was on
account of revenue shortfalls alongside expenditure overruns. Total Revenue and
Grants amounted to GH¢65.4 billion (11.0 percent of GDP), compared with a
target of GH¢67.3 billion (11.4 percent of GDP), representing a shortfall of 2.8
percent compared to target and year-on-year growth of 33.2 percent. Total
Expenditure (including arrears clearance and discrepancy) for the period
amounted to GH¢109.4 billion (18.5 percent of GDP), above the target of
GH¢103.99 billion (17.6 percent of GDP) by 5.2 percent. The resulting overall
fiscal deficit of GH¢41.7 billion was financed mainly from domestic sources.

17. The public debt stock (excluding overdraft, SOEs and SPVs) was GH¢467.4 billion
(75.9 percent of GDP) as at end September 2022, compared with GH¢351.8 billion
(76.6 percent of GDP) at the end of December 2021. Of the total debt stock,
domestic debt was GH¢195.7 billion (31.8 percent of GDP), while the external debt
was GH¢271.7 billion (39.9 percent of GDP).

18. External sector developments show mixed trends in the prices of Ghana’s main
export commodities. Brent crude prices eased from the highs of over US$100 per
barrel to US$93.6 per barrel in October 2022, recording a year-to-date growth of
25.1 percent. The recent decline in crude prices mainly reflects global recession
fears amid weakened growth momentum in China. Gold prices trended
downwards to US$1,666.7 per fine ounce in October 2022, representing a drop of
6.9 percent, on the back of a strong US dollar and rising interest rates. Cocoa
prices settled at an average price of US$2,337.71 per tonne in October, down by
5.8 percent year-to-date, owing to expectations of a large crop and mixed grinding
data.

19. Provisional data on the balance of payments show that the current account deficit
deteriorated from 2.4 percent of GDP (US$1,860.3 million) in September 2021 to
2.8 percent of GDP (US$1,831.6 million) in September 2022. The higher deficit
was on account of higher payment outflows in the services and income accounts,
which offset the significant improvement in the trade surplus recorded over the
period. The capital and financial account recorded significant outflows amounting
to US$1,486.0 million during the review period, compared with inflows of
US$3,491.0 million a year earlier. The outflows were explained by portfolio
reversals, reduced FDI inflows, lower private capital inflows, and higher build-up
of deposit taking corporations foreign assets. The current account deficit, together
with outflows in the capital and financial accounts, resulted in a balance of
payments deficit of US$3,410.0 million at the end of September 2022, compared

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 with a balance of payments surplus of US$510.0 million in December 2021,
leading to a significant drawdown in international reserves.

20. At the end of October 2022, the stock of Gross International Reserves position
had declined to US$6.7 billion equivalent to 2.9 months of import cover compared
with the reserve level of US$9.7 billion (4.3 months of imports) at the end of
December 2021. Net International Reserves, which excludes encumbered assets
and petroleum funds, was estimated at US$2.8 billion as at October 2022.

21. The significant decline in reserve buffers arising partly from loss of market access,
significant portfolio reversals, rising petroleum product importation bill, market
reaction to sovereign downgrades by rating agencies on fiscal concerns, alongside
increased foreign exchange demand exerted intense pressures on the local
currency. In the year to November 24, 2022, the Ghana Cedi cumulatively
depreciated by 54.2 percent, 48.9 percent, and 49.9 percent against the US dollar,
the Pound, and Euro, respectively. In comparison with the same period of last
year, the Ghana Cedi was much stronger, depreciating by 2.6 percent and 0.2
percent against the US dollar and the Pound, respectively, and appreciated by 6.6
percent against Euro.

Summary and Outlook

22. Two years since the Covid-19 pandemic and a war in-between, the global
economy continues to face severe headwinds coupled with heightened
uncertainties. Global growth has slowed, with recession concerns dominating
markets in the near term. Global inflation remains high, driven largely by food and
energy prices. Central Banks’ resolve to dampen the persistent and broad-based
inflation pressures globally has led to aggressive policy tightening in Advanced
Economies. The US Federal Reserve has frontloaded its policy tightening cycle,
resulting in tight global financing conditions and a stronger US dollar against major
international currencies. These developments have spilled over into currency
pressures and imported inflation, complicated access to external capital markets,
and resulted in acute capital outflows, especially in emerging markets and frontier
economies. Risks to the global outlook are firmly on the downside reflecting
possibility of policy mistakes amid deteriorating growth and elevated inflation,
tighter financing conditions, and stronger US dollar. These external shocks have
had severe consequences on the Ghanaian economy, reflected in high and rising
inflation from exchange rate pass-through effects, and complicated the policy
environment.

23. The foreign exchange market witnessed increased volatility, with intense pressure
on the local currency, especially in September and October. Factors such as
tightening global financing conditions, the sovereign downgrades, the de facto
closure to the international capital market, portfolio reversals, and increased
demand for foreign exchange amid supply constraints, contributed to the
significant weakening of the Ghana cedi. More recently, the sharp depreciation
episode has been driven by speculation of a possible debt restructuring which led
to portfolio rebalancing in favour of foreign currency holdings as against Ghana
cedi denominated assets. Looking ahead, the next few readings of inflation will
shed light on the extent of pass-through of the accelerated depreciation of the
Ghana cedi in October on inflation dynamics.

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24. Notwithstanding the significant improvement in the trade surplus, largely driven by
higher export receipts from increased gold production and higher crude oil prices,
relative to imports, the current account deficit widened, reflecting increased cost
of imported petroleum products arising from higher crude oil prices. This
underscores the fact that, on average, higher crude oil prices have relatively
modest gains on the trade account. The balance of payments swung into a deficit
in the first nine months, from a surplus last year due to continuing large current
account deficit and, importantly, significant outflows in the capital and financial
account. These developments culminated in significant loss of reserves, resulting
in further currency pressures. With no access to the international capital market
for financing, reserves build-up has been constrained. Risks to the external sector
outlook are therefore on the upside and measures are being taken to gradually
rebuild reserves in more sustainable ways to preserve stability, going forward.

25. The implementation of the 2022 Budget has come under severe stress. Revenue
shortfalls, expenditure rigidities, lack of access to the international capital market
to fund the budget, uncovered auctions and non-resident portfolio reversals have
all acted to create a huge financing gap. With access to external capital market
closed and domestic market under performing, there has been severe pressure
on the Bank of Ghana’s overdraft facility available to Government for short term
cashflow management, without which the Government would have had difficulty
in meeting its obligations. The 2023 Budget Statement has committed to reset
fiscal policy and firmly place it on the course of fiscal consolidation. New revenue
measures and expenditure rationalization measures have been announced. To
guarantee debt sustainability over the medium term, a debt exchange operation is
proposed to be undertaken to support the consolidation agenda. The broad
expectation is for steadfast implementation of these measures to foster
confidence, improve the debt-metrics and complement the current monetary policy
stance at tackling current inflationary pressures.

26. Although domestic growth conditions have been strong in the first half of the year,
latest high frequency indicators point to some moderation. The Bank’s CIEA
contracted year-on-year in the third quarter, on the back of weakened
consumption, trade, and construction activities. These trends signal that growth
may remain below potential levels on account of rising cost of living amid
significant uncertainty in the outlook. Both business and consumer sentiments
continue to soften and remain at low levels. Despite these trends, private sector
credit growth, in real terms, remains relatively strong and provides scope for the
real sector to continue on the path of sustaining a positive outlook for economic
activity.

27. On the transmission of monetary policy changes to inflation, the Committee was
of the view that there is evidence that the policy rate increases in the past few
months have helped dampen the pace of monthly price increases. Between May
and August 2022, the monthly inflation number eased from a peak of 5.1 percent
to 1.9 percent. However, this was reversed in September and October on account
of additional shocks from upward adjustment in ex-pump petroleum prices, utility
tariff adjustments, and transportation fare increases. In the event, inflation jumped
in October 2022 to 40.4 percent and has dragged along with it, core inflation, which
is almost at par with headline inflation and indicating significant underlying inflation
pressures and upside risks to the inflation outlook.

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28. The inflation forecast shows that in the outlook, inflation will likely peak in the first
quarter of 2023 and settle at around 25 percent by the end of 2023. This forecast
is conditioned on the continued maintenance of tight monetary policy stance and
the deployment of tools to contain excess liquidity in the economy. There are
however some risks to this forecast that would have to be monitored, including
additional pressures from the proposed VAT increase, and exchange rate
pressures. Continued vigilance to the evolution of these potential price pressures
in the outlook will be key.

29. The Committee is of the view that significant upside risks to the inflation outlook
remain. To continue to anchor inflation expectations, the Committee therefore
decided to increase the policy rate by 250 basis points to 27.0 percent.

Informational Note
The next Monetary Policy Committee (MPC) meeting is scheduled for January
24 - 27, 2023. The meeting will conclude on Monday, January 30, 2023, with
the announcement of the policy decision.