Ghana May Hold Rate to Aid Economy Growing Slowest Since ’83

Updated on
  • Inflation rate declined to 18.4% in June from 18.9% in May
  • Government seeks to narrow budget gap to 5% of GDP this year

Slowing inflation could give Bank of Ghana Governor Abdul Nashiru Issahaku room to continue supporting an economy forecast to expand at the slowest pace since 1983.

The Bank of Ghana will probably leave its benchmark interest rate unchanged at 26 percent for a fourth consecutive meeting on July 18, eight out of ten analysts surveyed by Bloomberg said. Two analysts forecast a 100 basis points cut. The central bank raised the rate four times by a total of 500 basis points in 2015 to support a plunging currency that fueled consumer-price growth. Inflation slowed to 18.4 percent in June from 18.9 percent the month before.

The government cut its growth forecast for West Africa’s largest economy after Nigeria to 3.2 percent last month due to lower-than-expected gold and crude oil production. This will complicate efforts to rein in the budget deficit even after President John Dramani Mahama’s administration agreed to an International Monetary Fund loan of almost $1 billion in April last year to help finance chronically large fiscal shortfalls and limit declines in the currency.

“I expect the MPC rate to be maintained,” Nana Kofi Agyeman Gyamfi, an analyst at Bora Capital Advisors Ltd. in Accra, said by phone on July 13. The “government cannot spend to stimulate growth in the economy because of restrictions from the IMF and citizens do not have money to spend as a result of high inflation, high transport fares and utility bills.”

The ministry of finance forecasts the budget deficit will narrow to 5 percent of gross domestic product this year from 6.5 percent in 2015 and over 10 percent in the preceding three years. The government is seeking to reduce the shortfall by improving revenue collection, raising water and electricity prices and cutting expenditure.

Power Outages

Economic growth has slowed as prolonged power outages and a drop in the price of Ghana’s main exports, including oil and cocoa, reduced revenue. Mahama has pledged to jump-start the economy as he seeks re-election against Nana Akufo-Addo, the candidate for the opposition New Patriotic Party, later this year.

The growth outlook “could deteriorate further into 2017 as there is evidence of increasing strain in the corporate sector,” Mark Bohlund, Africa economist at Bloomberg Intelligence in London, wrote in a note last week. “While increased oil production should provide a boost over 2016-2018, stricter lending conditions are becoming a more prominent threat to economic growth.”

Finance Minister Seth Terkper said last month Ghana will sell $1 billion of Eurobonds by September to finance the budget shortfall. Yields on Ghana’s Eurobond due August 2023 fell 2.0 basis points on Friday to an almost 11-month low of 9.75 percent. The cedi has weakened 3.2 percent against the dollar since the start of 2016 after losing 14 percent of its value against the U.S. currency last year.

Slowing growth is “something they’ll have to consider,” Yvonne Mhango, a sub-Saharan Africa economist at Renaissance Capital Ltd. in Johannesburg, said by phone. “Keeping the rates firm supports adopting a more accommodative policy to ensure that we don’t see further acceleration of inflation and to keep the currency stable. They will err on the side of caution.”

— With assistance by Paul Wallace, and Simbarashe Gumbo

(Updates with number of estimates in second paragraph.)
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