GOVERNOR'S SPEECH - 12TH CONSULTATIVE GROUP MEETING FOR ACCRA NOV 7, 2005

TWELFTH CONSULTATIVE GROUP MEETING FOR GHANA

DR. PAUL A. ACQUAH, GOVERNOR, BANK OF GHANA

Accra, November 7, 2005

1. Your Excellency, President John Agyekum Kufuor, Mr. Chairman and co-Chairman, Your Excellencies, Members of the Diplomatic Corps, Honourable Ministers of State, Honourable Members of Parliament, Donor Partners, Distinguished Invited Guests, Ladies and Gentlemen.

2. The Senior Minister has provided the context in which the GPRS II has been framed as the key policy document for the coming years. In discussing the outlook for the economy, it is fair to say that policies are now being framed in the context of a good deal of macroeconomic stability, and on the basis of reasonably strong fundamentals. In contrast to only a few years ago, the economy has moved steadily, and one could say is now, onto a stable, low inflation trajectory, with significantly reduced inflationary expectations and greater exchange rate stability evident especially in 2005.

3. Indeed, consumer price inflation which peaked at 41.5 percent in March 2001, has been cut to below 15.0 percent and some core inflation measures are tracking inflation within single digit range. Data for the third quarter of 2005 indicate that the average monthly price increase was 0.1 percent, the lowest since 2000. Second, the disinflation process has been accompanied by rising GDP growth, a maintenance of the external value of the cedi vis-?-vis the US dollar, and some appreciation against the pound sterling and the euro, the other major trading currencies on the domestic foreign exchange market, and the build-up of a good cushion of reserves.

4. The process of restoring macroeconomic stability has been underpinned by a strong fiscal and monetary policy framework which has focused on engineering a switch from a high inflation, interest rate and exchange rate depreciation regime to a low inflation and interest rate regime with exchange rate stability.

? Domestic debt reduction has been set as a strategic goal and the ratio of domestic debt to GDP has been cut in half over the last three years; This is essential to crowd-in instead of crowding out the private sector. Fiscal consolidation has been achieved through strong domestic resource mobilization and efficient tax system, and its administration along with expenditure discipline and management. The fiscal deficit (excluding grants but including foreign financed capital expenditure turned in at 3.7 percent of GDP by half-year 2005), the lowest in the last five years. We see the fiscal anchor becoming more robust as we go forward.

? In the context of a new inflation-targeting framework and the Monetary Policy Committee process, the central bank?s policy rate (the prime rate) along with domestic liquidity has been managed to underpin the decline in inflation.

? With reduced public sector borrowing, interest rates on the money market have declined while bank credit to the private sector has been increasing quite rapidly relative to GDP. At the end of June 2005, credit to the private sector stood at 12.5 percent of GDP, up from 11.5 percent in June 2004, amongst the highest in the last five years. The increase in the amount of credit to the private sector over the last year was concentrated mostly in five sectors: Manufacturing, Commerce and Finance, Import Trade, Construction, and Services. However, only a small proportion (equivalent to 1.6 percent of GDP) went to SMEs.

5. The external payments position has grown increasingly resilient, including withstanding the hike in oil prices on the international market. The external sector has registered a strong performance over the last four years with significantly increased volume of trade. . Exports have increased by 56.5 percent, non-oil imports have increased by 59.0 percent, and net private transfers have doubled over this period.

? The current account position (an estimated deficit of $182.9 million over the first three quarters of 2005) has been bolstered by growing private inward remittances, ? from NGOs, religious groups, individuals etc. ? captured through the banks and finance companies. For the January-August 2005 period, these flows amounted to $2.76 billion, which represents 57.9 per cent increase over the corresponding period in 2004, which were in turn 29.0 per cent increase over the same period in 2003. Of the total remittances in January ? August 2005, 28.1 per cent was from individuals.

? The foreign exchange market has continued to deepen and has shown considerably reduced volatility. Foreign exchange transactions (i.e. purchases plus sales) by banks and forex bureaux in the first three quarters of 2005 amounted to $4.52 billion, which was 46.4 per cent increase over purchases and sales over the same period in 2004. Transactions by banks alone in the January-September 2005 period came to $3.85 billion as compared with $2.69 billion over the same period in 2004.

The Outlook

6. The improved economic conditions today should serve to underpin a positive outlook moving forward; to accelerated growth based on the investment strategy and reforms underlying the GPRS II. With a strategy of efficient use of the fiscal space created by debt relief, and policies firmly anchored on prudent domestic and external debt management, a scaled-up donor support and private capital flows would be required to raise GDP growth into the range of 7-8 percent per annum that is needed to achieve the MDGs.

7. From a macroeconomic perspective, monetary policy will continue to be committed to lowering inflation to single digits by end-2006. Indeed the underlying trends in headline inflation indicate that given the current thrust of fiscal and monetary policies single digit inflation could be attained in the course of 2006.

8. The external payments position is expected to strengthen in 2006, underpinned by export growth and net private transfers which should allow maintenance of a good reserve cover. The value of merchandise exports is projected to grow by 3.5 percent in 2006 to reach a new threshold of US$3.025 billion. It is expected that gold exports will reach US$1.0 billion (an increase of some 8.0 percent over 2005) and earnings from cocoa beans and products are expected to be US$ 964 million in 2006, about the same level as in 2005. The oil bill, currently estimated at $970 billion for this year, remains a source of downside risk to the outlook that will need to be managed. However, the multilateral debt cancellation will significantly improve Ghana?s debt profile and fiscal and external debt sustainability.

9. On the financial sector side, we are positioning the industry to do real intermediation rather than concentrating on the safety of lending to government. We have in place a reformed monetary policy framework; the focus remains inflation-targeting, and rigorous prudential policy to ensure the soundness of the banking system and secure financial stability. We have introduced changes to increase the efficiency of the monetary policy transmission process, including a significant reduction of reserve requirements for banks. We have also modernized the payments system infrastructure, including establishing the Real Time Gross Settlement System (RTGS), and a common platform for electronic payments and point of sale at the retail level. We have established a central securities depository system, which is a core infrastructure for capital market development, as it ensures electronic registry and security of title to government securities and equities; and is a vehicle for secondary market trading. Within the new framework of the universal banking licensing system, banks should be in a position to provide a wide range of financial services to support the development of a vibrant capital market.

10. The exchange and payments system is a liberal one, free of restrictions on payments and transfers for current international transactions (Ghana has accepted the obligations under Article VIII of the Articles of Agreement of the International Monetary Fund). But there are exchange controls on the books that burden the system. A new foreign exchange bill has been drafted and will be presented to Parliament for passage early next year. This bill will give clarity to the existing rules on foreign exchange transactions and provide assurance that the economy is open for capital flows. At the same time, we will defend the credibility of the financial system through the passage of the Anti-Money Laundering Bill.

11. In conclusion, the fiscal and monetary policy framework initiated in 2001 has so far brought about significant progress in stabilizing the economy with improved fundamentals and outlook. The economy is poised to make the transition from stability to high growth. Significant and predictable donor disbursements and private sector inflows would give it a good spark. I am sure we can count on your support to scale-up our efforts to achieve the objectives of the GPRS II.

Thank you for your attention.