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April, 2015
Q1 – 2015 Economic Sector Report
First Quarter Economic Report
Ghana Dips Deep Into Debt Trap
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Q1 – 2015 Economic Sector Report
April, 2015
Executive Summary
The first quarter of 2015 witnessed serious macroeconomic instability due to the large and
growing fiscal and current account deficits, reinforced by a hamstrung monetary policy,
power crisis and vulnerability to external shocks.
During the first quarter of 2015, the Government of Ghana borrowed a total of GHC 16.08
billion from the domestic market, this included contingent liability from Bank of Ghana
and Ghana Cocoa Board. Government is to borrow GHC 25.42 billion from the domestic
market by end of first half of the year. Government inability to manage its borrowing
culture clearly depicts a struggling government’s appetite for funds. Government was
expected to comply with its targets for 1Q15 by borrowing GHC12.71 billion, however as
mostly expected it overshot it targets by GHC3.37 billion.
Interestingly, the borrowing target set for the first half of the year is about GHC 1.22
billion higher than the total amount borrowed last year and just about GHC 4.28 billion
less the expected total government revenue and grants for this year.
Thus, holding all other factors constant, the percentage of domestic debt to total debt
increased from 45.47% to 53.68% within the first quarter. This increase in domestic
borrowing gives clear indication that government expenditure is not likely to slow down
any time soon. More so, this action is contrary to the government's claim that it will reduce
domestic borrowing to free up funds for the private sector this year. Ghana woes
worsened as it……
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
Struggled for a new equilibrium price for crude oil on the world market
Inflation rate decreased from 17% in December 2014 to 16.4% in January 2015,
before increasing again to 16.5% by end of February 2015 with March inflation
going up to 16.6%.
 Monetary policy stance has been ineffective due to the increase in central bank
financing of government budget deficit.
 Despite the deteriorating economic exchange rate performance we expect the cedi
to end the 2Q15 at GHC3.96. We strongly don’t think that the elevated local –
currency bond return will offset the likely GHS weakness in the second half.
 Soaring Domestic Debt could cripple the Ghanaian economy
 First tranche of US$114.8 million from IMF cannot shore up the gross international
reserves to a sustainable level
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Q1 – 2015 Economic Sector Report
April, 2015
Oil Price Developments
The unexpected downward slide in oil prices came as a shock to many analysts last year.
Prices of crude oil dropped from an average of US$ 111.80 per barrel in June 2014 to a
record low of US$ 45.13 per barrel in January 2015. This was the lowest price level
recorded since May 2009. The decline was mainly due to tensions in the oil market as well
as excess global production over demand. Global production was largely influenced by
the US shale production and Saudi Arabia; the latter waving the option of production
reduction that will see a decrease in its market share. Additionally, the downward revision
of expected demand, especially from China and emerging countries like Brazil and Russia
also contributed to the decline in crude oil prices.
Source: Reuters & GN Research
On the average, crude oil prices reduced from US$62.34 per barrel in December 2014 to
US$47.76 per barrel in January 2015 due to the excess supply on the market, appreciation
of the US dollar and lower demand from China (second largest consumer of world oil).
Conversely, the geopolitical uproar between Libya and Iraq, the announcement of
reduction in oil drilling in the US and less investment by large oil companies caused oil
prices to rise on the average to US$58.1 per barrel in February 2015, before declining to
US$55.89 per barrel in March.
Given the current position of major oil producing countries not to cut down production
levels and the lower demand from China, we expect prices of crude oil to stay below US
$60 per barrel by close of second quarter 2015.
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Q1 – 2015 Economic Sector Report
April, 2015
Implications for Ghana
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As an importer
Lower prices of crude oil will help in macroeconomic management since it will give
relief to the Bank of Ghana to reduce its prime rate
The windfall gains from the lower oil prices will allow flexibilities in government
fiscal and budget management
As an exporter
The continuous decline in oil prices on the international market will cause fiscal
slippages and worsen our fiscal deficit.
Lower crude oil prices will impact negatively on our gross international reserves
and the stability of the domestic currency
The appreciation of the US dollar will mean a further depreciation of the Ghanaian
cedi in the coming months.
Revenue Target
The decline in crude oil prices due to the increase in US shale oil production, lower
demand from China and the position of OPEC and Russia not to cut down production
levels forced many governments, including Ghana, to review their expected revenue for
2015.
The Petroleum Benchmark Revenue price was reviewed from the estimated US$99.38 per
barrel produced by the adjustment price formula stipulated in the Petroleum Revenue
Management Act (PRMA) to the IMF’s forecast of US$52.8 per barrel. Correspondingly,
the 2015 Budget estimate for revenue was reduced from GHC 4.2 billion to GHC1.5 billion
(representing a decline of 64.4%). Total domestic revenue is expected to fall from the GHC
30.9 billion to GHC 27.8 billion. In sum, total revenue and grants is expected to be GHC
29.7 billion instead of GHC32.4billion proposed earlier. This resulted in a proposal by
government to withdraw GHC487.2 million from the Ghana Stabilization Fund, every
quarter, to finance the gap.
Given that crude oil ended last year as the second highest contributor to export revenue
and the unclear path of future crude oil prices, we expect the government to fast track the
review of the hedging program so as to minimize future losses in oil revenue.
Again, the outbreak of black pod disease after the heavy rainfall in the months before the
main crop season resulted in lower cocoa production. Coupled with high inflation and
persistent decline in the domestic currency, it is expected that the volume of cocoa
smuggling will increase this year. These new developments have compelled the Ghana
Cocoa Board to review its target for the main crop season from 780,000 MT to 720,000 MT.
Given the above challenges, it is evident that government cannot meet the targeted 850,000
tonnes by end of the 2014/15 cocoa season. Thus, we expect a shortfall in export earnings
from cocoa this year.
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April, 2015
Q1 – 2015 Economic Sector Report
Inflation Rate
Consumer inflation declined from 17% in December 2014 to 16.4% in January 2015 due to a
reduction of non-food inflation category from 23.9% in December 2014 to 23% in January
2015. However, inflation rate increased marginally to 16.5% in February 2015 due to an
increase in food inflation by 0.1%. The month of March also recorded a marginal increase
of 0.1% to end the quarter at 16.6%. This was propelled by a 0.2% and 0.1% increase in
food and non-alcoholic beverage inflation and non-food group inflation respectively.
Conversely, the monthly change rate decreased from 3.4% in January to 1.2% in February
and 1% in March.
Consumer Price Inflation (CPI), Year-on-year Change Rate (%), March 2014 to 2015
Given the hamstrung monetary policy stance of the Bank of Ghana, the weakening of the
domestic currency, non-reduction of fuel prices at the pump, moderating effects from the
introduction of the special petroleum tax of 17.5% and the high cost of production due to
the current energy crisis, we expect consumer inflation to increase to 16.8% in April, 2015.
Nevertheless, we expect the tight monetary and fiscal policies stipulated in the IMF 3-year
program to contain inflation levels by end of second quarter.
Table 1: Inflation Rate Actual Vs Forecast
Month
GN
Research
Forecast
Jan- Feb15A 15A
16.4 16.5
Mar- Apr- May- Jun15A 15F
15F
15F
16.6 16.8 17.2
17.0
Jul- Aug- Sep15F 15F
15F
16.9 16.7
16.4
Oct15F
16.8
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Nov- Dec15F
15F
17.0
17.1
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Q1 – 2015 Economic Sector Report
April, 2015
Monetary Policy Stance
The Bank of Ghana through its inflation targeting framework uses the interest rate as an
instrument to maintain price stability and lower inflation rates. Thus, in periods of higher
inflation, we expect the government to increase its monetary policy rate and vice-versa.
However, the Monetary Policy Committee of the Bank of Ghana decided to keep its
monetary policy rate at 21% in February, due to the drop in the risk to inflation resulting
from lower crude oil prices on the international market. Nevertheless, since February 2013
to date, the monetary policy stance has not yielded the expected results due to the increase
in central bank financing of the government deficits and its interference in the foreign
exchange market.
Monetary Policy Rate vs. Inflation Rate (Feb 13-Feb 15)
The Central Bank financing of the government increased from GHS 9.12 billion in 2012 to
GHS 14.12 billion in 2013. As at September 2014, Central Bank financing stood at GHS
15.82 billion (representing an increase of 11.99%). This increment contributed largely to the
31.1% growth in Net Domestic Assets of the Central Bank which increased growth in
broad money supply from 19.1% in December 2013 to 36.6% by end of 2014 and caused
inflation rates to soar from 13.8% in January to 17% in December 2014.
Again, although the foreign exchange directives introduced last year was retracted,
stakeholders still have less confidence in the foreign exchange market. This has caused
disparities in the interbank market rate, forex bureau exchange rate and the Bank of Ghana
rate. As at the end of first quarter, the year-to-date depreciation of the cedi to the dollar
amounted to 17.68%.
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April, 2015
Q1 – 2015 Economic Sector Report
Thus, the hamstrung monetary policy stance is largely responsible for the exchange rate
volatility, soaring interest rates, rising inflation, and mounting debt and debt-servicing
costs.
We expect the Central Bank to desist from interfering so much in the foreign exchange
market so as to restore the balance between the Bank of Ghana rate, interbank market rate
and the forex bureau exchange rate. Again, due to the established positive long-run
relationship between money supply, inflation and exchange rates in Ghana, we expect the
Central Bank to reduce its financing of government budget deficits which increases money
supply as well as inflation levels.
However, if the Central Bank continues with its plan of raising GHC 25.42 billion through
the issuance of short and medium term bills by first half of 2015 to support government
expenditures, we expect inflation rate to end the second quarter at 17% in spite of any
tight monetary policy stance or IMF assistance.
Interest Rate
Interest rates on the money market remained relatively stable throughout the first quarter
of 2015 due to the Central Banks decision to maintain the policy rate at 21%. The rate on
the 91-day instrument increased marginally from 25.83% in January to 25.84% in February
before declining to 25.8% in March. Similarly, the 182-day treasury bill increased
marginally from 26.40% in January to 26.42% in February before declining to 26% in
March. The rate on the 1-year and 2-year fixed notes remained at 22.5% and 23%
respectively, throughout the first quarter. However, Ghana’s interest rate continues to be
one of the highest in the sub-region.
The 91-days treasury bill yield increased marginally by 0.01 percentage points between
January and February but reduced significantly by 0.53 percentage points to end the first
quarter at 23.75%. Correspondingly, the yield on 182-days treasury bill remained constant
between January and February but fell marginally by 0.32 to close the first quarter at
23.01%.
Table 3: Interest Rates in First Quarter 2015 (%)
Interest Rate
Jan 2015
Feb 2015
Mar 2015
91-days Treasury Bill
25.83
25.84
25.80
182-days Treasury Bill
26.40
26.42
26.00
1-year fixed note
22.50
22.50
22.50
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April, 2015
Q1 – 2015 Economic Sector Report
2-year fixed note
23.00
Source: Bank of Ghana & GN Research
23.00
23.00
Table 4: Treasury Bill Yield Forecast for 2015 (%)
Month
91-days
182-days
Jan15A
24.27
23.33
Feb15A
24.28
23.33
Mar15A
23.75
23.01
Apr15F
24.08
23.54
May15F
24.25
23.44
Jun15F
24.54
23.32
Jul15F
23.61
23.18
Aug15F
24.23
23.04
Sep15F
24.21
22.99
Oct15F
24.25
23.13
Nov15F
23.66
23.31
Dec15F
24.01
23.50
Exchange Rate
The weakening of the domestic currency was further underscored by the weak structure of
the Ghanaian economy. The high energy cost, high inflation, high interest rates and excess
demand for foreign currency resulted in further depreciation of the cedi in the first
quarter.
Table 5: Performance of Cedi vis-à-vis Inflation in 2014 and 2015
Period
Inflation rate
Q1
Q2
Q3
Q4
2015 Q1
14.50%
15.00%
16.50%
17.00%
16.70%
Cedi
rate*
23.95%
38.98%
43.72%
40.99%
17.68%
depreciation
Source: Ghana Statistical Service, Bank of Ghana & GN Research
The ray of hope for government in this quagmire is the expected funds from the 3-year
IMF program and a possible issue of another Eurobond this year. However, there are
concerns about the sustainability of these short-term measures implemented in shoring up
the value of the cedi considering lowering domestic productivity aggravated by high
import dependence of Ghanaian consumers. The resultant downward pressure on the
value of the Cedi has been evident in the first three months of 2015.
The outlook for 2015 regarding the exchange rate of the cedi is largely negative against the
backdrop of depreciations in the first quarter. We expect the Ghana Cedi to make some
marginal gains upon the receipt of expected funds from the IMF. However, the pass
through effects from rising consumer inflation and weak monetary policy stance could
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Q1 – 2015 Economic Sector Report
April, 2015
cause the cedi to experience marginal declines to tip up a flaccid depreciation trend in
subsequent quarters to close the year at relatively higher exchange rates.
Gross International Reserves
The increase in capital flight due to the power crisis, softening of commodity prices on the
world market and seasonal demand for foreign exchange continued to impact negatively
on Ghana’s international reserves. Gross international reserves plus encumbered assets
and petroleum funds fell from US$ 5.5 billion, equivalent to 3.2 months of import cover in
December 2014 to US$ 4.9 billion in January 2015, equivalent to 2.9 months of imports
cover. This was due to the decline in commodity prices on the world market and the
excess demand for foreign exchange by importers. All other things being equal, taking
inference from the 17.86% cumulative depreciation of the cedi in the first quarter, GN
Research estimates gross international reserves to end the first quarter at US$ 4.0 billion.
Source: BOG & GN Research
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Q1 – 2015 Economic Sector Report
April, 2015
Source: BOG & GN Research
International Trade
Total earnings from merchandise exports were provisionally estimated at US$ 900.7
million and import earnings at US$1.2 billion for the month of January 2015. Thus, trade
balance amounted to a deficit of US$257.4 million higher than US$ 231.61 million recorded
same time last year. Given the high volatility in crude oil prices and the cumulative
depreciation of the cedi by 17.68% experienced in the first quarter, we expect total trade
balance deficit to soar up.
Source: Bank of Ghana & GN Research
Public Debt
The country’s total public debt as at December 2014 stood at GHC 76.1 billion
(representing 67.1% of GDP) from the GHC51.9 billion recorded in December 2013. Total
domestic debt amounted to GHC 34.6 billion whilst total external debt stood at GHC 41.5
billion as at end of last year.
During the first quarter of 2015, the Government of Ghana, Ghana Cocoa Board and Bank
of Ghana borrowed a total of GHC 16.08 billion from the domestic market. In particular,
the Government of Ghana borrowed GHC 13.49 billion out of a total of GHC 25.42 billion
it set out to borrow from the domestic market by end of first half of the year whereas the
Ghana Cocoa Board and Bank of Ghana borrowed GHC 847.22 million and GHC 1.75
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April, 2015
Q1 – 2015 Economic Sector Report
billion respectively. Interestingly, the borrowing target set by the government for the first
half of the year is about GHC 1.22 billion higher than the total amount borrowed last year
and just about GHC 4.28 billion less the expected total government revenue and grants for
this year. Thus, holding all other factors constant, the percentage of domestic debt to total
debt increased from 45.47% to 54.98% within the first quarter.
Total Debt to GDP (%)
70
60
50
40
30
20
10
0
60.8
55.77
32.1
2008
36.2
2009
37.8
2010
42.6
2011
48.03
2012
2013
2014
Source: Bank of Ghana & GN Research
This increase in domestic borrowing gives clear indication that government expenditure is
not likely to slow down any time soon. More so, this action is contrary to the government's
claim to reduce domestic borrowing to free up funds for the private sector this year. The
figure below shows the trend of government domestic debt from 2008 to date.
Source: Bank of Ghana & GN Research
The increase in government domestic borrowing crowded out many private businesses
from the credit market due to the high yield of most short term securities on the money
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Q1 – 2015 Economic Sector Report
April, 2015
market. Besides, given the lower risk associated with government securities as compared
to lending to businesses, most financial institutions preferred to lend to government.
However, given the increase in commercial banks holdings in government securities and
the persistent increase in total debt stock, the probability of government delaying in
payment or defaulting is very high. This poses a huge threat to the financial industry.
Coupled with low demand for goods and services, high energy costs, persistent
depreciation of the cedi and various tax commitments, most firms have been forced to
either limit production or lay-off workers. A mix of these factors contributed largely to the
decline in GDP growth from 7.3% in 2013 to 4.2% in 2014. Correspondingly, GN Research
expects GDP growth to reduce to 3.7% by end of year.
Furthermore, the expected impact of tighter monetary policy stance on inflation levels has
been nullified due to the increase in central bank financing of government budget deficits.
IMF BAILOUT
After several months of negotiation with the IMF, the board has finally approved a total of
US$918 million for Ghana which will be disbursed in tranches over the next three years.
The target of the program is to overhaul Ghana’s debt sustainability through a sustained
fiscal consolidation, and to support growth with adequate capital spending and a
reduction in financing cost. In reference to these targets, the program will restrain and
prioritise public expenditure with a transparent budget process, strengthen the
effectiveness of monetary policy (through reduction in government financing by the Bank
of Ghana) as well as increase tax collection (IMF, 2015).
The predictable consequences of this bailout will be to expect tight monetary policy and
increasing interest rates that will stifle productive investment and make savings into shortrun financial assets preferable to long-term productive assets. The cost of credit to the
private sector will increase and attract mostly risky borrowers with an equally high
probability of default. Many businesses are likely to shut down due to low demand for
goods and services and some workers will lose their jobs in both the private and public
sectors.
More so, we expect tight fiscal policies such as lowering of spending ceilings and
scrapping off of the GHC50m subsidies on petroleum products as inscribed in the bailout
plan. The latter will cause an increase in consumer inflation and reduce the real income of
consumers drastically.
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April, 2015
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According to the Finance Minister, Mr. Terkper, the first tranche of US$114.8 million will
be used to shore up the Central Bank’s declining gross international reserves to stabilize
the cedi. As at January 2015, Ghana’s gross international reserves plus encumbered assets
and petroleum funds stood at US$4.9 billion, equivalent to 2.9 months of imports cover
which was below the threshold of 3 months import cover. This contributed largely to the
depreciation of the cedi by 17.68% as at the end of first quarter 2015. However, we expect
the cedi to continue falling at a diminishing rate given that the first tranche from the IMF
will not be enough to shore up the gross international reserves to a sustainable level.
Traditionally, we would have expected the depreciation of the domestic currency to
benefit exporters immensely. However, due to the increase in cost of raw materials that
are mostly imported, many firms have reduced production below capacity and/or laid-off
workers. The working capital of most importers keeps dwindling due to the persistent
depreciation of the cedi. In particular, the proceeds from the sale of imported items cannot
purchase the same stock sold to generate that sales. Duties and other import taxes that are
computed on the dollar value of goods have also gone up astronomically. This makes the
importation business less lucrative and has forced many traders out of business.
Nevertheless, some traders have been able to transfer the foreign exchange losses and the
increase in duties to consumers in the form of higher prices.
At the national level, the persistent depreciation of the cedi has increased government’s
statutory obligations such as external debts and interest payments. This has contributed
largely to the increase in government domestic borrowing which crowds out the private
sector from the credit market.
Thus, until the government implements strategies to
diversify our exports and move into exports with high value addition, the currency
depreciation will continue to be a macroeconomic riddle.
Outlook for Second Quarter

We expect the cedi to continue depreciating at a diminishing rate given the
depleting state of international reserves and the reliance on short term strategies
such as the first tranche from the IMF to shore up reserves.

We expect inflation rate to end the quarter at 17% due to the ineffective monetary
policy stance, high energy costs, high input prices and the persistent weakening of
the domestic currency. This soaring inflation levels could be minimised if the
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April, 2015
Q1 – 2015 Economic Sector Report
monetary policy rate is maintained at 21% so as to keep lending rates at a
sustainable level.

We expect the yields on short term securities to rise marginally due to the active
participation of government in the auction market for deficit financing and the
expectation of higher inflation in the coming months.
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Increasing domestic debt will continue to crowd out the private sector from the
credit market. We expect the managers of the economy to reduce domestic
borrowing and channel their efforts towards widening the tax base and mobilising
tax revenue to finance budget deficit.

The power crisis will continue to increase the cost structure of most businesses
For enquiries please contact us at our office:
Business Address: Groupe Nduom Head Office,
C625/3 Fourth Crescent,
Asylum Down, Accra.
Postal Address: P.O. Box GP 17187, Accra-Ghana.
Email Address: [email protected]
Tel:
0302 218 855
Disclaimer
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Q1 – 2015 Economic Sector Report
April, 2015
This document is published for informational purposes and users are advised against relying solely
on the information contained herein to make their investment decisions. The information should
neither be considered as a solicitation nor offers to buy or sell an investment. The information is
obtained from internal and external sources which GN Research considers reliable but GN
Research has not independently verified such information and GN Research does not guarantee
that it is accurate or complete.
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