All things being equal, inflation will decline further to 11.2 per cent by the end of 2017, the Institute of Statistical, Social and Economic Research (ISSER) has revealed, in tandem with government’s end-year inflation target.
This is welcome news for Ghana’s private sector as the drop is set to trigger some easing in base lending rates and increase money supply, which would then mean availability of money for lending.
Ghana‘s inflation outlook has been described by economists as promising on account of government’s business-friendly posturing since it took over from the previous administration.
The confidence in measures being taken to restore stability has led some analysts to describe government’s end-year inflation target of 11.2 per cent as not ambitious enough.
“In the month that the budget was presented, the inflation rate was 12. 8 per cent and therefore between March and December this year, government could do better lowering inflation further below the 11.2 per cent mark,” notes economist Leslie Mensah of the Institute for Fiscal Studies (IFS).
The 91-day and 182-day Treasury bill rates are going for 12.69 and 14.14 percent respectively while bank lending rates are hovering around 30 to 40 per cent.
In its 2017 Post-Budget analysis, ISSER said “The outcome of the 2017 policy initiatives on the monetary sector greatly hinges on the success of the fiscal stimulus, which is expected to increase private sector activities and lead to increases in GDP resulting from increases in tax revenue.
Given the expected revenue increase of 33.6 per cent and a GDP growth of 6.3 per cent in 2017, this comes to a tax buoyancy rate of 5.32 which is on the high side according to IMF Estimates (2017).”
It added that the policy to ensure macro-stability and a reduced budget deficit to 6.5 percent of GDP can bring confidence to the money markets thereby reducing interest rates especially if government reduces its borrowing from the domestic financial system.”
Presently inflation is hovering around 13.0 percent. While BMI, research outfit of Fitch Ratings is projecting an average year inflation rate of 13.0 per cent, Investment firm, InvestCorp is predicting an end-year inflation rate of 12.0 per cent. The year 2016 ended with a Monetary Policy rate of 25.5 per cent and an inflation of 15.4 per cent with the decline driven mainly by non-food factors and the relative stability in the local currency.
Credit to the private sector also recorded slower growth resulting from the tight monetary policy with M2+ recording an annual growth of 22.0 per cent in 2016 compared to 26.1 percent recorded in the preceding year.
However, the policy rate has been reviewed downwards twice this year by the Monetary Policy Committee of the Central Bank as it presently stands at 22.5 per cent.
On development in the Public Debt, the research outfit said the country’s debt stock which reached a level of about 73 percent of GDP at end- December 2016, is in excess of the debt sustainability threshold of 70 percent.
This has resulted in high debt service costs with interest payments alone taking up nearly 42 percent of tax revenue. The public debt was estimated to be above GH¢ 122 billion at the end of December 31, 2016 and now stands at GH¢127.1 billion as at May 2017.
The debt-service costs, ISSER said are among the fastest-growing item of expenditure and consume 32 pesewas and 42 pesewas of every cedi of government total revenue and tax revenue. The total debt represented 266 percent of exports, 363 percent of budget revenue and 475 percent of tax revenue. ISSER warned that government’s penchant to resort to external borrowing poses a macroeconomic risk.
“As the debt burden continues to escalate, continuing currency depreciation could lead to a rapid increase in the value of foreign-currency denominated debt and its concomitant interest payments beyond sustainable levels,” it said.
It added that if Ghana wishes to grow faster it must first raise the balance of payments constraint on demand and put an ice on its appetite for borrowing. “ If the balance of payments equilibrium growth rate can be raised by making exports more attractive and by reducing the income elasticity of demand for imports, demand can be expanded without producing balance of payments difficulties. Most importantly, government must start to curb the relentless rise of debt.”