Bank of Ghana

Monetary Policy Committee

Press Release

March 27, 2023

Good morning, ladies and gentlemen of the media and welcome to the press briefing
after the 111th Monetary Policy Committee (MPC) meetings which took place last week.
The Committee deliberated on recent macroeconomic developments and assessed
the current state of the economy and 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 is projected to decline in 2023 to 2.9 percent, down from the 3.4
percent in 2022 (according to recent IMF projections released in January 2023).
The projected slowdown comes on the back of persistent elevated inflation levels,
tightened financial conditions, and uncertainty stemming from the lingering effects
of the Russia-Ukraine war. The onset of the recent turmoil in the banking sector in
the U.S. and Europe is likely to further cloud the outlook. The above
notwithstanding, latest Purchasing Managers’ Indices (PMI) pointed to some
rebound in economic activity in February 2023, reflecting the moderation in price
pressures, improved supply chains, and the re-opening of China’s economy. But it
is unclear yet how the recent banking sector crises in the U.S. and Europe would
impact this initial rebound.

2. Headline inflation in Advanced Economies appears to have peaked, and currently

on a steady decline across advanced and emerging market economies, driven by
lower energy and food prices stemming from weakened global demand and easing
supply chain constraints. However, underlying inflationary pressures persist mainly
from the pass-through effects of high input costs, rising wages especially in
advanced economies, and currency depreciation against the U.S. dollar. In the
outlook, global headline inflation is expected to ease to 6.6 percent by December
2023, from 8.8 percent in December 2022, reflecting declining fuel and non-fuel
commodity prices and the effects of central bank policy actions.

3. Global financial conditions eased somewhat in early 2023 as slower growth and
moderating inflation in advanced economies led markets to price in further
reduction in the pace of future policy rate hikes. More recently, the U.S. Federal
 Reserve, European Central Bank, and the Bank of England have all increased their
respective policy rates, albeit at a slower pace, but with commitment to maintain a
tight monetary policy stance until inflation is contained. Meanwhile, concerns that
inflation may stay elevated for longer than previously anticipated kept long-term
bond yields high, while fears about global growth prospects and the hawkish
posture of central banks in advanced economies amid the ongoing turbulence in
the banking system, have triggered volatility in the equities market.

4. On the Domestic Scene, recent price developments indicate that the inflation
surge in the economy, witnessed since December 2021, has peaked. The latest
two readings since the January MPC meeting indicated two consecutive drops in
headline inflation from the peak of 54.1 percent in December 2022 to 53.6 percent
in January 2023, and to 52.8 percent in February. The latest decline in inflation
was attributed to lower food inflation, while non-food inflation remained broadly
stable. Food inflation declined to 59.1 percent in February 2023 from 61.0 percent
a month earlier, while non-food inflation remained flat at 47.9 percent.

5. Underlying inflationary pressures also eased in the first two months of the year.
Excluding energy and utility prices, the Bank’s core inflation measure, declined
from 53.2 percent in December 2022 to 52.8 percent in January and to 52.0
percent in February 2023. Also, the weighted inflation expectations of banks,
consumers, and businesses, declined.

6. In the real sector, the Bank’s high frequency indicators pointed to further
moderation in economic activity in line with the challenging macroeconomic
environment. The January 2023 update of the Bank’s Composite Index of
Economic Activity (CIEA) indicated a contraction in economic activity by 7.6
percent, compared to a growth rate of 4.2 percent in the same period of 2022. The
main indicators that weighed down the Index during the period were port activity,
cement sales, imports, and credit to the private sector.

7. While real sector activity showed continued decline, both business and consumer
sentiments continued to show further improvement in February 2023. Consumer
confidence improved on account of easing inflationary pressures which led to
some optimism about future economic conditions. Also, business sentiments
improved as companies met short-term targets amid positive company and
industry prospects. The survey findings were consistent with observed trends in
Ghana’s PMI for February 2023, which rose above the benchmark level of 50 for
the first time since January 2022.

8. Development in the monetary aggregates in February 2023 showed strong growth

in broad money supply (M2+), an indication of increased liquidity in the banking
system, driven mainly by expansion in the Net Domestic Assets. M2+ recorded an
annual growth of 44.9 percent in February 2023, compared with 17.7 percent in
February 2022, reflected in currency outside banks and deposit liabilities of the

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 banking sector. Reserve money similarly went up by 54.3 percent compared with
21.9 percent, over the same comparative period.

9. Annual nominal growth in private sector credit was up by 29.5 percent in February
2023, compared with 17.1 percent in the corresponding period of 2022. However,
in real terms, private sector credit contracted by 15.3 percent compared with 1.2
percent contraction, over the same period a year before, due to the high level of
inflation.

10. Developments in the banking sector broadly reflected the challenging operating
environment in 2022 on account of macroeconomic conditions, and the recent
implementation of the Domestic Debt Exchange Programme (DDEP) which all 23
universal banks participated in. Our preliminary assessment of the impact of the
DDEP on the banking sector, based on December 2022 data, indicates significant
losses on account of impairment of banks’ holdings in GoG bonds. The impact of
the DDEP as currently assessed is moderated by the timely introduction of
regulatory reliefs by the Bank of Ghana to support the banking sector, similar to
the reliefs provided to banks at the onset of the Covid-19 pandemic. As a result,
the industry is still fairly resilient. Our preliminary assessment will be updated once
banks’ external auditors complete their audits of banks’ 2022 financial performance
making the necessary adjustments to fully reflect the DDEP impact. Banks are
expected to publish their 2022 audited financial statements by end April 2023
following a one-month dispensation granted by the Bank of Ghana on the account
of the DDEP.

11. Total assets of the industry stood at GH¢209.4 billion in December 2022,
representing a growth of 16.4 percent, reflecting sustained growth in deposits and
exchange rate variations on banks’ balance sheets. Total investments declined
significantly to GH¢64.8 billion in December 2022 from GH¢83.1 billion in
December 2021, indicating a contraction of 22.1 percent, compared with the 29.0
percent growth in the same period a year before. Total credit, on the other hand,
increased by 28.5 percent to GH¢69.1 billion in December 2022 from GH¢53.8
billion in December 2021. Of the total liabilities of the banking system, total
deposits stood at GH¢157.9 billion, representing an increase of 30.4 percent year-
on-year, compared with 16.6 percent recorded during the same period in 2021.

12. Key financial soundness indicators remained broadly sound, supported largely by
the regulatory reliefs provided by the Bank. Among others, the minimum Capital
Adequacy Ratio (CAR) required to be maintained by banks was reduced from 13
percent to 10 percent as of 31st December 2022, and losses from the DDEP are
to be reflected in the computation of CAR over a period of up to three (3) years.
Accordingly, the industry’s average CAR adjusted for the regulatory reliefs was
15.7 percent in December 2022, compared with the CAR of 16.6 percent as of
December 2022 without the DDEP. The adjusted CAR reflected valuation losses
on GoG bonds, elevated credit risk, and revaluation losses on foreign currency
denominated loans. Asset quality marginally improved, with the industry’s Non-
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 Performing Loans (NPL) ratio at 15.1 percent in December 2022, almost
unchanged from 15.2 percent in December 2021, reflecting the higher growth in
credit, which outpaced the growth in the NPL stock.

13. Provisional data on budget execution for January – December 2022 indicated a
higher overall broad fiscal deficit (cash basis) of GH¢49.7 billion (8.1 percent of
GDP), against the revised mid-year 2022 target of GH¢38.9 billion (6.3 percent of
GDP). The primary balance (on cash basis) recorded a deficit of GH¢4.0 billion
(0.6 percent of GDP), against a primary surplus target of GH¢2.5 billion (0.4
percent of GDP). Total revenue and grants amounted to GH¢96.7 billion (15.7
percent of GDP), marginally short of the revised target of GH¢96.8 billion (15.73
percent of GDP). Total expenditure was GH¢146.3 billion (23.8 percent of GDP)
above the revised target of GH¢135.7 billion (22.0 percent of GDP). These
developments resulted in a deficit of GH¢49.7 billion, of which GH¢48.2 billion was
financed from domestic sources.

14. Prices of Ghana’s major export commodities traded mixed in February 2023
relative to the same period in 2022. Brent crude oil prices, which had been on a
downward trend during the later part of 2022, increased in the first two months of
2023 as China gradually relaxed its COVID-19 restrictions. Brent crude oil dipped
by 11.0 percent to US$83.9 per barrel in February 2023 from US$94.3 per barrel
in February 2022. For the same period, cocoa beans traded at US$2,677.8 per
tonne compared to US$2,681.1 per tonne. In contrast, gold prices recorded some
marginal gains of 0.1 percent to settle at US$1,858.9 per fine ounce in February
2023, driven largely by weak US dollar and expectation of further interest rate hikes
by the Federal Reserve Bank.

15. Despite the mixed performance in the prices of Ghana’s major commodities, the
trade balance improved in the first two months of 2023 mainly on the back of higher
export volumes. In the first two months, total exports expanded by 11.2 percent
year-on-year to US$2.8 billion, driven mainly by higher gold, cocoa, and other
export receipts. The value of gold exports amounted to US$1.1 billion, representing
an increase of 35.8 percent, driven mainly by a 38.5 percent increase in export
volumes to 619,373 ounces. Cocoa beans and product exports increased by 15.5
percent and 3.3 percent to US$387.6 million and US$159.3 million respectively,
mainly on the back of higher production volumes. Earnings from ‘other’ exports,
including non-traditional exports, were estimated at US$538.2 million, representing
a 10.8 percent year-on-year growth. In contrast, exports of crude oil declined by
18.3 percent to US$562.6 million, largely due to lower export volumes.

16. The total import bill on the other hand, declined by 11.8 percent year-on-year to
US$2.0 billion, driven by compression in non-oil imports. Non-oil imports dipped
by 17.6 percent to US$1.4 billion, while oil and gas imports increased marginally
by 4.8 percent to US$622.9 million. The combination of exports growth and lower
imports resulted in a trade surplus of US$752.8 million for the first two months of

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 2023, higher than the trade surplus of US$205.8 million recorded for the same
period in 2022.

17. For the year 2022, the overall balance of payments recorded a deficit of US$3.6
billion. The capital and financial account recorded a net outflow of US$2.1 billion
(2.9 percent of GDP), mainly on account of lower FDI flows and significant portfolio
reversals. These, together with the current account deficit of US$1.5 billion (2.1
percent of GDP), resulted in the deficit of the overall balance. As a result, Gross
International Reserves for 2022 declined by US$3.5 billion to US$6.2 billion. Net
International Reserves, which adjusts Gross reserves for the Heritage and
Stabilization funds as well as other encumbered funds also declined by US$3.7
billion to settle at US$2.4 billion by December 2022. Gross International Reserves
further declined to US$5.9 billion at the end of February 2023, providing cover for
2.8 months of imports of goods and services. However, Net International Reserves
improved to US$2.6 billion, reflecting a slight decline in encumbered funds.

18. The local currency has been under pressure since October 2022, reflecting
concerns about the DDEP, further sovereign rating downgrades, and seasonal
demand pressures. However, the progress made on the DDEP and positive
sentiments, thereafter, including the beginning of discussions with external debtors
improved sentiments and helped reverse some of the losses. In the year to March
22, 2023, the Ghana cedi cumulatively depreciated by 22.1 percent, 23.5 percent,
and 23.1 percent against the US dollar, the Pound, and Euro, respectively.

Summary and Outlook

19. To summarise, the Committee observed that, global growth is projected to
moderate further, but with positive prospects of easing price pressures, improved
supply chain constraints, and re-opening of China’s economy. However, risks to
the growth outlook are still tilted to the downside, reflecting the lagged impact of
policy rate hikes, potential slowdown effects from the recent banking sector turmoil
in advanced economies, and further ramifications from the lingering geopolitical
tensions.

20. Global inflation is easing as food and energy prices moderate due to weakened
global demand, improved supply of goods, and continued monetary policy
tightening. Despite the emerging risks to global financial stability, central banks in
major advanced economies have demonstrated strong commitment to containing
underlying inflationary pressures with sustained policy rate hikes, albeit, at lower
rates than earlier anticipated. Global financing conditions have eased slightly,
reflecting changing market expectations regarding the pace of policy tightening.

21. The US dollar index initially firmed up amid rising demand for safe-haven
currencies following the collapse of Silicon Valley Bank and Signature Bank, but
so far, swift regulatory action and assurances to contain contagion risks, combined

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 with decisions to boost dollar liquidity somewhat eased market concerns about a
wider banking and financial crisis.

22. The Committee was of the view that the ease in price pressures abroad would
likely impact positively on Ghana’s domestic inflation profile. On the other hand,
the Committee noted that, the domestic economy still faces relatively tight global
financing conditions, emerging risks in the global financial system, and heightened
uncertainty about the global economic outlook. The effects of these on the
domestic economy could be amplified by inherent vulnerabilities, including
structural excess liquidity following the DDEP, and the widening negative output
gap.

23. The macro-prudential risk assessments conducted during the last MPC meeting
indicated increased pressure on profitability and solvency of banks prior to the
implementation of the DDEP. The preliminary data available at this MPC, show
that the pre-pandemic capital buffers in the banking sector have been weakened
somewhat by the recent macroeconomic challenges and the DDEP, although
banks remain liquid. These require contingency measures by banks, supported by
the regulatory reliefs to contain potential risks to financial stability. The Bank of
Ghana will continue to monitor these developments going forward, and stands
ready to act very swiftly to safeguard the stability of the financial sector.

24. On fiscal policy, the Committee noted that the budget statement for 2023 has set
fiscal policy on a consolidation path which is consistent with key elements agreed
with the IMF at the Staff Level in December 2022. The domestic debt exchange,
new revenue measures, and structural fiscal reforms will provide significant
reduction of debt service and help create fiscal space. The fiscal outlook is
contingent on financing of the budget and will require the conclusion of the
domestic debt exchange programme as well as securing the requisite financing
assurances from bilateral donors. Indications are that these discussions are
proceeding well. Based on the above, it is imperative that Parliament prioritizes the
passage of the revenue bills currently before it. Under the Staff Level Agreement
with the IMF, the Bank of Ghana and the Ministry of Finance have finalised a
Memorandum of Understanding on zero financing to the budget, which will be
signed shortly. The passage of the relevant revenue bills by Parliament will
therefore conclude the required prior actions to advance Ghana’s programme to
the IMF Executive Board. This will be critical in resetting the economy on the path
of recovery, including putting it firmly on a disinflation path and sustained growth.

25. Headline inflation has declined marginally for two consecutive months, but
continues to remain relatively high compared to the medium-term target of 8±2
percent. To place the economy firmly on the path of stability and reinforce the pace
of disinflation, it is important that the monetary policy stance be tuned further to re-
anchor inflation expectations towards the medium-term target. Given these
considerations, the MPC decided to increase the Monetary Policy Rate by 150
basis points to 29.5 percent.
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Additional Measures
26. The Committee also decided to reset the Cash Reserve Ratio on domestic
currency deposits for banks from 12 percent to 14 percent, effective 13th April,
2023. In addition, the Bank will step up liquidity management operations to address
excess liquidity conditions in the market. The Committee will continue to monitor
developments in the banking sector and deploy other macroprudential tools to
ensure financial stability.

Informational Note
The next Monetary Policy Committee (MPC) meeting is scheduled for May 17
- 19, 2023. The meeting will conclude on Monday, May 22, 2023, with the
announcement of the policy decision.