IT is with great pleasure and humility that I present to this august House the 2009 Budget Statement and Economic Policy of the National Democratic Congress (NDC) government on behalf of His Excellency, President John Evans Atta Mills.
In pursuit of its social democratic agenda to promote ”A Better Ghana” in which real opportunities for gainful employment prosperous enterprise and social and economic welfare for all our people, the NDC Government has identified four broad themes by which the challenges confronting the national economy can be addressed.
Job creation will require the expansion of infrastructure, investing in Ghana’s human capital and providing transparent and accountable governance.
In his State of the Nation Address, His Excellency the President highlighted the fundamentals of our current economic situation and predicament which include a large fiscal and trade deficits higher than expected rate of inflation, an increase in the national debt stock, and the depreciation in the value of the Cedi.
We also have to contend with low levels of productivity in agriculture, industry and manufacturing among others.
Externally, the world economy has been experiencing a severe credit crunch alongside the recent global energy and food price hikes.
The general effects of these developments were that MDAs had expenditure over-commitments.
The implication of the domestic and external state of affairs briefly described above is that 2009 will be very challenging for the new NDC administration. The Government is nevertheless committed to its pledge of providing improved social services to uphold the living conditions and dignity of the average Ghanaian.
The policy thrust of the 2009 budget is to reduce the current budget deficit to sustainable levels, improve the exchange rate regime, and work towards the attainment of single digit inflation.
The main strategies to be used will include enforcement of fiscal discipline, significant reduction in unproductive recurrent expenditure and improvement in revenue generation (including dividends from state owned enterprises). Infrastructure development in the roads, energy and water sectors will be accelerated and expanded whilst providing security and justice for all.
These measures will be pursed within a process of monitoring and evaluation of all MDA activities to ensure the effective implementation of government policies and the achievement of objectives and set targets.
The savings so achieved will be channeled into projects beneficial to our people.
We will also focus attention on some key expenditure in our budget in an effort to rationalise them and infuse some level of efficiency and value for money. These will include a critical look at the wage bill administration, the management of statutory funds, and the profitability, financialsituation and relevance of state-owned enterprises and subvented organizations.
In that regard, Ghanaians should expect a significant change in the management of the economy.
Managers of government institutions, especially state-owned companies, will be held to a high level of accountability.
Government will also partner the private sector to provide the necessary enabling policy environment and incentives for both enterprise growth and the efficient and effective delivery of public services.
We believe that these strategies will lead to the delivery of improved and better social services and generate sustainable employment opportunities within a secure environment for the people of Ghana.
SECTION TWO: WORLD ECONOMIC DEVELOPMENTS AND OUTLOOK
The world economy witnessed three major shocks between 2007 and 2008: a global financial crisis, and upward spiral in food and fuel prices. These shocks have led to decreases in business investments and in consumer confidence, especially in the developed economies. For these reasons, the world economy turned sharply into a downturn in 2008
The result, according to the World Economic Outlook Update, is that world economic growth is projected to be 3.4 per cent in 2008 down from 5.2 per cent in 2007. This downturn is mostly led by the advanced economies, which have been hit the hardest by the financial and economic crisis. Growth rate in the developed economies is projected to decline from 2.7 per cent in 2007 to 1.0 per cent in 2008.
Growth prospects are worse than expected not only in the United States of America and Europe but also in major emerging market economies. In the United States of America and Canada, economic growth rates in 2008 are projected to decrease to 1.1 per cent and 0.6 per cent respectively from their respective 2007 rates of 2.0 per cent and 2.7 per cent. In the Euro area, rate of economic expansion is projected to decrease by more than 50 per cent to 1.0 per cent from its 2007 rate of 2.6 per cent.
The developing economies also have not been spared the global economic slowdown. Growth in developing economies including emerging economies is projected to be 6.3per cent in 2008 down from the realized growth rate of 8.3 per cent in 2007.
For now, Africa seems to have been hit only mildly by the global financial crisis because of the limited level of integration of most African financial markets into those of the rest of the World.
Even then, the rate of growth in economic activities slowed down in 2008 and is estimated to be 5.2 per cent in 2008, down from the 6.2 per cent growth rate in 2007.
In developing countries in Asia, the rate of economic expansion declined from 10.6 per cent in 2007 to an estimated rate of 7.8 per cent in 2008. China°os economic growth slowed to 9.0 per cent in 2008, its lowest in seven years from the 2007 rate of 13.0 per cent. The story is similar in India. India°os growth rate is
estimated to decrease by 2.0 percentage points in 2008 from the 2007 rate of 9.3 per cent.
A similar pattern of slowdown in economic activities in 2008 characterized countries in Latin America, Eastern Europe and Russia. The only region of the world that was not projected to experience a lower rate of economic expansion in 2008 relative to 2007 rate is the Middle East, because of the large revenues from oil exports following the record high price of oil during the first half of 2008.
The general economic downturn has affected world trade. The rate of growth in the volume of world trade in goods and services decreased from 7.2 per cent in 2007 to a projected rate of 4.1 per cent in 2008. The rates of growth in both exports and imports declined in both developing and advanced economies.
With the global financial crisis still deepening, the prospects for World GDP growth in 2009 are diminishing.
World output growth is projected to be just 0.5 per cent in 2009, down from 3.4 per cent in 2008.
Emerging and developing economies are projected to grow by 3.3 per cent in 2009, down from 6.3 per cent in 2008. For the developed economies, output is expected to contract in 2009 by 2.0 per cent. This would be the first annual contraction since World War II. This is expected to decrease the volume of world trade in 2009, leading to a decline in exports from developing economies.
Inflation
Global inflation soared in 2008. This was mostly due to the high food prices, which worsened in 2008, and the record high price of oil during the first half of 2008.
In advanced economies, inflation rate increased from 2.1 per cent in 2007 to a projected rate of 3.5 per cent in 2008. In developing economies, inflation rate increased from 6.4 per cent in 2007 to a projected rate of 9.2 per cent in 2008.
The high rate of inflation of 2008, especially the high food prices put a big burden on consumers in general and
the poor in particular. Inflation generally eats away real incomes of consumers, and expenditure on food takes the
biggest portion of the poor’s budget. The World Bank estimates that the cost of higher food and fuel prices to consumers in developing countries will be equal to about US$680 billion in 2008.
International Commodity Prices Oil
Starting the year with about US$90 per barrel as the average price in January 2008, international price of crude oil continued to soar till it hit a record high of US$147 per barrel in July. This led to increases in costs of production of firms, reinforcing the global economic slowdown of 2008. However, in response to the
slowdown, crude oil prices started to ease during the later part of 2008. By December 2008, average monthly price of crude oil had fallen below US$50.
International crude oil price is expected to stay low in 2009 relative to 2008 because of the collapse in world growth, which is expected to lower global demand for crude oil.
The international price of cocoa was high in 2008. On the London International Futures and Funds Exchange
(IFFE), the weekly average price increased from £1,089 for the first week of January 2008 to £1,701 for the last week of June.
From this period onwards, the price took a downward trend reaching £1,288 in the second week of November before surging again to reach £1,763 by the end of December 2008.
Like most international commodities, the projected decline in the rate of growth of the world economy is expected to have a negative impact on cocoa’s world market price, albeit not to the same degree of that projected for crude oil price.
Gold
The world market for gold was very favourable in 2008. The realized international average weekly price started
the year at $861.96 and reached as high as US$997.80 in the third week of March. Even though it started to ease a little thereafter, the weekly average price was $868.98 by the end of December 2008.
The nature of the international market for gold in 2008 was caused by demand pressures. The international financial crisis caused the dollar to depreciate and dimmed the prospects for the other major world currencies, causing investors to increase the gold holdings in their investment portfolios.
Implications for Ghana
Like other developing economies, the downturn in the advanced economies in 2009 is expected to have negative
effect on Ghana’s exports and, thus, our external balance. Weak demand for exports and weak commodity prices imply less export revenue. In addition, expected shortfalls in remittances, a slowdown in donor support and private capital inflows as a result of the global recession are all likely to have negative impact on the Ghanaian economy in general and on public finances in particular. These therefore call for vigilance and careful monitoring of further developments in the World economy so that corrective actions could be taken quickly when the need arises.
SECTION THREE: DEVELOPMENTS AND OUTLOOK IN THE WEST AFRICA SUB-REGION
Developments in West African Monetary Zone (WAMZ) Countries
The macroeconomic performance of the WAMZ countries was generally satisfactory during the first half of the year. Real GDP growth remained strong, on the back of robust performance in the agricultural sectors of member countries. Inflationary pressures, however, surged on account of the global energy and food price shocks. Fiscal outcomes deteriorated partly reflecting the fiscal costs of the measures implemented to mitigate the
burden of the external shocks. External sector performance was mixed, to the extent that although most countries recorded marked growth in gross external reserves, the steep rise in import prices led to the decline in reserves in terms of months of imports they could cover.
Information available from the half-year data for 2008 compiled by the West African Monetary Institute (WAMI) indicate that the weighted average real growth for the region was 6.7 per cent which was 0.6 percentage points above the 2007 growth. In terms of country performance, Ghana, Nigeria and Guinea
sustained their growth performance while the Gambia and Sierra Leone recorded reduced growth rates. At the sector level, Agriculture and Service sectors were the main contributors to growth.
Monetary Developments
Broad money (M2+) growth accelerated in the Region as credit to the private sector expanded markedly in all countries with the exception of Guinea that registered a deceleration. Credit to Government, however, fell across the member countries. The Net Foreign Assets (NFA) in the Zone also grew at a slower pace during the review period.
In response to the threat of high inflation occasioned by rising food and energy prices, most Central Banks in the Zone increased policy rates during the review period. However, with the exception of The Gambia, real interest rates in all countries were negative during the period.
External Developments
Exchange rates in the Zone remained relatively stable during the first half of 2008, with some countries experiencing real appreciation of their currencies. Ghana’s exchange rate depreciation was significant relative to the corresponding half of 2007.
SECTION FOUR: MACROECONOMIC PERFORMANCE FOR 2008 OVERVIEW OF ECONOMIC PERFORMANCE
In the 2008 Budget Statement and Economic Policy of the Government of Ghana, the following targets were
set:
• a real GDP growth of at least 7.0 per cent;
• an end period inflation rate of between 6.0 and 8.0 per cent;
• an average inflation of 7.0 per cent;
• accumulation of gross international reserves equivalent to at least three months of import cover; and
• an overall budget deficit including divestiture of 4.0 per cent of GDP and a deficit excluding divestiture of 5.7 per cent of GDP.
All of these targets were missed. The provisional results for 2008 indicate that:
real GDP grew by 6.2 per cent; inflation rate as at end December 2008 was 18.1 per cent; average inflation for the year was 16.5 per cent; gross international reserves reduced to the equivalence of 1.8 months of import cover for goods and services; and the overall budget deficit excluding divestiture hit a high of
GH¢2,557.6 million, equivalent to 14.9 of GDP. Adding divestiture receipts, however, reduced the deficit to
GH¢1,982.9 million, equivalent to 11.5 per cent of GDP.
In order to quickly stabilise the economy, the Ministry of Finance and Economic Planning intends to deepen
collaboration with the Bank of Ghana to ensure better formulation and implementation of fiscal and monetary policies.
Real Sector Developments
Overall GDP Growth
The provisional real GDP grew by 6.2 per cent in 2008. The sectoral components of the growth were as
follows.
Agriculture Sector Developments
The agriculture sector, the largest among the three sectors in the national accounts grew by 4.9 per cent against a target of 5.0 per cent.
Within the agriculture sector, value addition from the crop and livestock sub-sectors recorded a 5.5 per cent growth.
The cocoa production and marketing sub-sector recorded a growth of 5.0 per cent against a target of 4.0 per cent.
Forestry and logging grew by 3.5 per cent, while the fishing subsector grew by 3.0 per cent, against the respective targets of 3.0 per cent and 5.0 per cent.
*******(Place table here)
Industrial Sector Developments
Madam Speaker, the industrial sector, grew at 8.3 per cent compared to a target of 9.8 per cent. With the exception of construction which exceeded the growth target of 13 per cent, all the industrial sub-sector components registered lower than projected outturns.
The mining and quarrying subsector registered a significant decline in growth rate from 20.0 per cent in 2007 to 2.0 per cent in 2008.
****** (Place table here)
Services Sector Developments
The Services Sector grew by 6.9 per cent compared to 10.0 per cent in 2007. This was the result of a less- than-expected growth in wholesale and retail trade and commodity, social and personal service; and producers of private non-profit services.
Within the sub-sectors, transport, storage and communication grew by 10.0 per cent, indicating 2.0 percentage point increase over the target of 8.0 per cent.
***** (Table 3)
FISCAL DEVELOPMENTS
Madam Speaker, the fiscal operations of government in 2008 came under severe stress, resulting in high fiscal deficits. The fiscal deficit excluding divestiture receipts, was GH¢2,557.6
million, equivalent to 14.9 per cent of GDP, while the deficit including divestiture was GH¢1,982.9 million, equivalent to 11.5 per cent of GDP.
With your permission, I would like to present the details of the fiscal performance for 2008.
Receipts
Provisional fiscal outturn for 2008 indicates that total receipts, comprising domestic revenue, grants and other receipts amounted to GH¢9,538.2 million, equivalent to 55.4 per cent of GDP. The outturn was 34.2 per cent higher than the budget estimate of GH¢7,107.2 million and 56.8 per cent higher than
the outturn for 2007.
Domestic revenue, made up of tax and non-tax revenue totaled GH¢4,802.4 million. This amount which was equivalent to 27.9 per cent of GDP was also 0.8 per cent higher than the budget estimate of GH¢4,763.2 million and 31.5 per cent increase over the outturn for 2007.
Tax revenue amounted to GH¢4,299.5 million, equivalent to 25.0 per cent of GDP, against a budget estimate of
GH¢3,973.8 million, equivalent 24.4 per cent of GDP. This outturn was 29.8 per cent higher than that recorded in 2007.
Direct taxes which comprise personal income, self-employed income, company and other taxes such as airport tax, amounted to GH¢1,253.2 million, exceeding the budget estimate of GH¢1,122.4 million by 11.7 per cent. The outturn indicates a 33.3 per cent increase over the outturn in 2007. The good performance in direct taxes can mainly be attributed to the performance of pay-as-you earn tax type which recorded a 16.8 per cent yield higher than the budget target, and 31.1 per cent mincrease over the outturn in 2007.
Indirect taxes, made up of value added, petroleum and excise taxes amounted to GH¢1,532.9 million, marginally below the budget estimate of GH¢1,548.5 million. The outturn was, however, 17.3 per cent higher than the outturn recorded in 2007. The low performance in indirect taxes is mainly explained by the poor performance of petroleum taxes.
In 2008, domestic VAT recorded a total amount of GH¢417.2 million, 12.1 per cent higher than the budget estimate of GH¢372.0 million. The outturn also indicates a 23.7 per cent increase over the outturn for 2007.
Import VAT for the period under review amounted to GH¢670.8 million, against a budget estimate of GH¢628.1
million. The outturn was 35.0 per cent higher than the outturn in 2007.
Petroleum taxes recorded an outturn of GH¢386.2 million, 21.2 per cent lower than the budget estimate of GH¢490.0 million and 4.2 per cent lower than the outturn recorded in 2007. The underperformance of petroleum taxes was mainly a result of the downward revision of some petroleum taxes and levies, as well as a decline in the volume of petroleum products consumed.
International Trade Taxes for the period yielded GH¢719.4 million, 3.6 per cent lower than the budget estimate of GH¢746.3 million. The outturn, however, was 24.8 per cent higher than the corresponding figure in 2007.
Madam Speaker, National Health Insurance Levy (NHIL) for 2008 amounted to GH¢318.3 million, 33.4 per cent higher than the budget estimate of GH¢235.4 million and 23.5 per cent higher than the outturn recorded in 2007.
During the 2008 fiscal year, receipts from non-tax revenue, amounted to GH¢433.9 million, equivalent to 2.5 per cent of GDP. Of this amount, GH¢308.1 million was retained by the MDAs while GH¢125.8 million was lodged into the Consolidated Fund. The outturn for total non-tax revenue was 2.3 per cent higher than the budget estimate and a 28.3 per cent increase over the outturn recorded in 2007.
Total grant disbursements for 2008 amounted to GH¢820.8 million, against a budget estimate of GH¢853.4 million. The outturn was 4.3 per cent lower than that for the same period in 2007, on account of low project grant disbursements. Project grants were 22.0 per cent below the budget estimate of GH¢514.8 million, but 15.3 per cent higher than the outturn for 2007. Programme grants recorded GH¢257.2 million, 28.0 per cent higher than the budget estimate of GH¢201.0 million.
Multilateral HIPC Assistance recorded an outturn of GH¢95.2 million.
During the period under review, total programme and project loans amounted to GH¢668.2 million, against a budget estimate of GH¢621.5 million. Project loan disbursements were GH¢514.9 million, 6.1 per cent
higher than the budget estimate of GH¢485.3 million and 36.2 per cent higher than the outturn in 2007. Programme loans amounted to GH¢153.3 million against a budget target of
GH¢136.2 million.
Divestiture receipts for the year amounted to GH¢998.4 million, comprising GH¢983.0 million from the sale of 70 per cent of Ghana Telecom shares and GH¢15.4 million from WESTEL.
Exceptional Financing of the budget, which is predominantly debt relief from our bilateral partners, amounted to GH¢77.5 million.
Payments
Total payments for 2008, comprising discretionary and statutory payments, amounted to GH¢9,538.2
million, significantly higher than the budget estimate of GH¢7,107.2 million. The details are outlined below.
Statutory Payments
Total statutory payments which include interest payments, amortization, transfers to households, and statutory funds, amounted to GH¢2,356.5 million, equivalent to 13.7 per cent of
GDP, against a budget estimate of GH¢1,728.9 million, equivalent to 10.6 per cent of GDP. The outturn indicates a 36.0 per cent increase over the outturn for 2007.
External Debt Service for the year amounted to GH¢694.7 million, against a budget target of GH¢293.2 million and an outturn of GH¢439.0 million recorded in 2007. Principal and interest payments were GH¢497.4 million and GH¢197.3 million, respectively.
Domestic interest payments, amounted to GH¢481.9 million, 36.8 per cent higher than the budget target, and a 49.6 per cent increase over the outturn recorded during the same period in 2007. The outturn was equivalent to 2.8 per cent of GDP. The higher than budgeted expenditure on domestic interest payment was due to higher than projected domestic borrowing and increases in the cost of borrowing.
Transfers to households, in the form of pensions, gratuities and social security contributions by Government
on behalf of public sector workers, collectively amounted to GH¢361.5 million, against a budget estimate of GH¢318.0 million. The outturn represents a 25.5 per cent increase over the 2007 outturn.
During the year, transfers to the Road Fund and Petroleum-related Funds amounted to a total of GH¢105.7 million, against a budget target of GH¢132.7 million.Of this transfer, GH¢102.9 million was disbursed to the Road
Fund.
In 2008, the District Assemblies Common Fund (DACF) received an amount of GH¢252.1 million, 7.6 per cent higher than the budget target. Transfers into the Ghana Education Trust Fund (GETFund) amounted to GH¢204.1 million, against a budget target of GH¢163.9 million. The over performance was as a result of the higher than projected outturn for tax revenue and VAT receipts.
Transfers into the National Health Insurance Fund (NHIF) was GH¢256.5 million, 8.9 per cent higher than the budget target of GH¢235.4 million.
Discretionary Payments
Total discretionary payments amounted to GH¢7,181.8 million, equivalent to 41.7 per cent of GDP, against
a budget target of GH¢5,378.2 million, equivalent to 33.0 per cent of GDP and an outturn of GH¢4,348.2 million, equivalent to 31.1 per cent of GDP recorded in 2007.
Personal emoluments (item 1) for the period amounted to GH¢1,987.6 million, equivalent to 11.5 per cent of GDP. The outturn was 27.4 per cent higher than the budget estimate of GH¢1,559.9 million and 40.1 per cent higher than the outturn for 2007. The wage overrun was mainly the result of higher than anticipated salary increases to public sector workers, as well as higher than programmed number of public sector workers.
Administration expenditure (item 2) amounted to GH¢412.7 million against a budget estimate of GH¢385.6
million. The outturn was 7.0 per cent higher than the budget estimate and 0.7 per cent higher than the outturn in 2007.
Service expenditure (item 3) registered an outturn of GH¢235.7 million, against a budget target of 120.6 million. This was mainly due to payments for some expenditures that had not been budgeted for.
Total Investment Outlays (Item 4) for the year amounted to GH¢1,002.9 million (5.8 per cent of GDP),
about 34.5 per cent higher than the budget estimate of GH¢745.8 million. Of this amount, expenditures directly tied to the proceeds from the sovereign bond issued on the international capital markets amounted to GH¢581.9 million, (3.4 per cent of GDP).
Foreign-financed capital expenditure in 2008 amounted to GH¢916.4 million, 8.4 per cent lower than the budget estimate of GH¢1,000.2 million, but 26.2 per cent higher than the outturn in 2007.
Multilateral Debt Relief Initiative (MDRI) and Highly Indebted Poor Country (HIPC) financed expenditures
totaled GH¢278.9 million, against a budget estimate of GH¢183.2 million. Of this, GH¢185.2 million was expended on HIPC-related projects and programmes.
An amount of GH¢467.2 million was spent from the Reserve Fund for the purchase of crude oil for the Volta
River Authority (VRA), and the payment of judgment debts emanating from court orders against the government.
Other transfers, made up of retention of internally-generated funds, safety net for deregulation, subsidies for lifeline consumers of electricity and tax exemptions, amounted to GH¢831.5 million, against a budget target of GH¢679.2 million.
Clearance of Arrears and Liquidation of Commitments
During the period under review a total amount of GH¢142.3 million was paid in respect of clearance of arrears and
liquidation of commitments carried over from 2007. The outturn for the period was made up of road arrears of GH¢46.9 million and non-road commitments of GH¢95.4 million.
Overall Budget Balance and Financing
The overall budget balance excluding divestiture, amounted to a deficit of GH¢2,557.6 million, equivalent to 14.9 per cent of GDP. This compares with a budget estimate of a deficit of GH¢929.2 million, equivalent to
5.7 per cent of GDP.
The overall budget balance including divestiture, showed a deficit of GH¢1,982.9 million, equivalent to 11.5 per cent of GDP compared with a budgeted deficit of GH¢653.4 million, equivalent to 4.0 per cent of GDP.
The overall budget deficit including divestiture was financed from both domestic and foreign sources. Net Domestic Financing of the budget amounted to GH¢1,152.7 million, equivalent to 6.7 per cent of GDP, while financing from foreign sources totaled GH¢830.2 million, equivalent to 4.8 per cent of GDP. Of this amount GH¢581.9 million, equivalent to 3.4 per cent of GDP was a drawdown on the receipts from the sovereign
bond issued in 2007 on the international capital markets.
***** (Table 4, Overall Balance)
DEVELOPMENTS IN PUBLIC DEBT AND AID MANAGEMENT
The policy of public debt management in Ghana is to source funds at the minimum cost possible within a prudent level of risk, to meet government financing needs while ensuring that public debt is maintained at sustainable levels over the medium to long term.
The policy also entails the development of the domestic capital market and access to the international capital markets.
Review of 2008
Public Debt Stock
In 2008, gross public debt rose by about US$600 million to an end year position of US$8,002.5 million,
which is about 8.1 per cent increase over the 2007 position of US$7,405.5 million. The increase in public debt during the year was mainly driven by about US$400.0 million and US$200.0 increase in external and domestic debts, respectively.
By end 2008, public debt consisted of 49 per cent and 51 per cent of external and domestic debts, respectively. Prior to implementation of the MDRI in 2006, external debt, which was mainly made up of multilateral and bilateral debt, accounted for over 75 per cent of the public debt. The percentage share of external debt fell to 41 per cent in 2006 before rising to 48 per cent in 2007, mainly due to the inflow of US$750.0 million from
Ghana’s maiden sovereign bond issued on the international capital markets.
The ratio of Gross public debt to GDP declined from 142.6 per cent in 2001 to 41.4 per cent in 2006 under the dual impact of the Highly Indebted Poor Country (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI). Unfortunately, the ratio has since 2007 risen to 52.1 per cent (as recorded in December
2008) as result of renewed borrowing on non-concessional terms and mostly for economically unproductive projects.
Developments in External Debt
External Debt Strategy
External debt strategy in 2008 focused on seeking grants and highly concessional loans, with minimal funds from commercial sources.
External Debt Stock and Creditor Categorization
Ghana’s total external debt (including IMF debt) stood at US$3,982.6 million by end December, 2008, representing 24.7 per cent of GDP. By creditor categorizations, multilateral debt continued to dominate, constituting about 49.2 per cent of total external debt despite the substantial debt relief under the
Multilateral Debt Relief Initiative (MDRI).
Bilateral and commercial debts constitute 27.5 per cent and 23.3 per cent, respectively. On creditor basis, the World Bank continues to hold the largest share, contributing about one third of the total external debt.
Currency Composition of External Debt
The Special Drawing Rights (SDR) transacted in US Dollars continued to dominate the currency composition of external debt portfolio. By the end of 2008, it accounted for about 41.6 per cent with the US Dollar and the Euro accounting for about 35.4 per cent and 16.5 per cent, respectively. The Chinese Yuan, Japanese Yen, and others constitute about 2.0 per cent, 1.0 per cent and 4.0 per cent, respectively, of the external debt
portfolio.
Interest Rate Composition of External debt
Interest rate composition of the external debt is distributed in the ratio of 90.1, 8.4 and 1.5 per cent for fixed, variable and interest-free rates, respectively. The high proportion of the fixed interest rate is as a result of the high share of multilateral,bilateral and the Euro bond debt which bear fixed interest rates.
The variable interest rates mainly emanate from the export credit facilities and commercial loans while interest free facilities are mainly from the Chinese Government and some bilateral creditors.
Maturity Profile – Loan Term and Repayment
The average term to maturity (ATM) of the external portfolio is about 23 years, indicating that, largely, the external debt is of a long term profile. The principal repayment profile shows that about 2.6 per cent of the total outstanding debt falls due within the next 12 months and 19.7 per cent and 77.6 per cent fall due
within the 5 years and 20 years and beyond, respectively. Over 75 per cent of the external obligations fall due in the long term, indicating a high concentration of external obligations in the long term. In terms of cost profile, interest and other charges falling due within the next 12 months represents about 2.1 per cent of the external debt portfolio.
New Commitments
Loans
Traditional creditors remained the preferred source of borrowing, with cautious move to tap resources from
commercial sources to support growth catalytic sectors. During the year, about 46 loans were contracted totaling about US$2,630.9 million. About 20 per cent of the total committed amounts were from multilaterals, with 22 per cent and 58 per cent from bilateral and export credits sources, respectively. In terms of sectoral allocation, 37 per cent went to energy and the rest went to health, roads, water, defence, interior and finance.
Grants
In 2008, 36 grants amounting to US$455.9 million were committed as development assistance. In terms of use of
funds, General Budget Support under the Multi Donor Budgetary Support (MDBS) constituted 23 per cent with the remaining as project grants.
Developments under Debt Relief Initiatives
HIPC and MDRI Receipt Account
In 2008, a total of GH¢236.99 million (US$241.9 million) was received as debt relief, comprising GH¢170.2 million and GH¢66.87 million for HIPC and MDRI respectively.
About 49.7 per cent and 50.3 per cent of the HIPC relief came from multilateral and bilateral sources respectively. Of the MDRI,about 66.3 per cent came from the World Bank (IDA) and 33.7
per cent from the African Development Bank (AfDB).
Domestic Debt
Sale of Treasury Securities
In 2008 domestic borrowing supported the execution of the budget, refinancing of maturing government bills, and the develop cent growth rate in 2007.
In developing countries in Asia, the rate of economic expansion declined from 10.6 per cent in 2007 to an estimated rate of 7.8 per cent in 2008. China’s economic growth slowed to 9.0 per cent in 2008, its lowest in seven years from the 2007 rate of 13.0 per cent. The story is similar in India. India°os growth rate is estimated to decrease by 2.0 percentage points in 2008 from the 2007 rate of 9.3 per cent.
A similar pattern of slowdown in economic activities in 2008 characterized countries in Latin America, Eastern Europe and Russia. The only region of the world that was not projected to experience a lower rate of economic expansion in 2008 relative to 2007 rate is the Middle East, because of the large revenues from oil exports following the record high price of oil during the first half of 2008.
The general economic downturn has affected world trade. The rate of growth in the volume of world trade in goods and services decreased from 7.2 per cent in 2007 to a projected rate of 4.1 per cent in 2008. The rates of growth in both exports and imports declined in both developing and advanced economies.
With the global financial crisis still deepening, the prospects for World GDP growth in 2009 are diminishing.
World output growth is projected to be just 0.5 per cent in 2009, down from 3.4 per cent in 2008.
Emerging and developing economies are projected to grow by 3.3 per cent in 2009, down from 6.3 per cent in 2008. For the developed economies, output is expected to contract in 2009 by 2.0 per cent. This would be the first annual contraction since World War II. This is expected to decrease the volume of world trade in 2009, leading to a decline in exports from developing economies.
Inflation
Global inflation soared in 2008. This was mostly due to the high food prices, which worsened in 2008, and the record high price of oil during the first half of 2008.
In advanced economies, inflation rate increased from 2.1 per cent in 2007 to a projected rate of 3.5 per cent in 2008. In developing economies, inflation rate increased from 6.4 per cent in 2007 to a projected rate of 9.2 per cent in 2008.
The high rate of inflation of 2008, especially the high food prices put a big burden on consumers in general and the poor in particular. Inflation generally eats away real incomes of consumers, and expenditure on food takes the biggest portion of the poor’s budget. The World Bank estimates that the cost of higher food and fuel prices to consumers in developing countries will be equal to about US$680 billion in 2008.
International Commodity Prices Oil
Starting the year with about US$90 per barrel as the average price in January 2008, international price of crude oil continued to soar till it hit a record high of US$147 per barrel in July. This led to increases in costs of production of firms, reinforcing the global economic slowdown of 2008. However, in response to the slowdown, crude oil prices started to ease during the later part of 2008. By December 2008, average monthly price of crude oil had fallen below US$50.
International crude oil price is expected to stay low in 2009 relative to 2008 because of the collapse in world growth, which is expected to lower global demand for crude oil.
The international price of cocoa was high in 2008. On the London International Futures and Funds Exchange
(IFFE), the weekly average price increased from £1,089 for the first week of January 2008 to £1,701 for the last week of June.
From this period onwards, the price took a downward trend reaching £1,288 in the second week of November before surging again to reach £1,763 by the end of December 2008.
Like most international commodities, the projected decline in the rate of growth of the world economy is expected to have a negative impact on cocoa’s world market price, albeit not to the same degree of that projected for crude oil price.
Gold
The world market for gold was very favourable in 2008. The realized international average weekly price started
the year at $861.96 and reached as high as US$997.80 in the third week of March. Even though it started to ease a little thereafter, the weekly average price was $868.98 by the end of December 2008.
The nature of the international market for gold in 2008 was caused by demand pressures. The international financial crisis caused the dollar to depreciate and dimmed the prospects for the other major world currencies, causing investors to increase the gold holdings in their investment portfolios.
Implications for Ghana
Like other developing economies, the downturn in the advanced economies in 2009 is expected to have negative effect on Ghana’s exports and, thus, our external balance. Weak demand for exports and weak commodity prices imply less export revenue. In addition, expected shortfalls in remittances, a slowdown in donor support and private capital inflows as a result of the global recession are all likely to have negative impact on the Ghanaian economy in general and on public finances in particular. These, therefore, call for vigilance and careful monitoring of further developments in the World economy so that corrective actions could be taken quickly when the need arises.
SECTION THREE: DEVELOPMENTS AND OUTLOOK IN THE WEST AFRICA SUB-REGION
The macroeconomic performance of the WAMZ countries was generally satisfactory during the first half of the year. Real GDP growth remained strong, on the back of robust performance in the agricultural sectors of member countries. Inflationary pressures, however, surged on account of the global energy and food price shocks. Fiscal outcomes deteriorated partly reflecting the fiscal costs of the measures implemented to mitigate the burden of the external shocks. External sector performance was mixed, to the extent that although most countries recorded marked growth in gross external reserves, the steep rise in import prices led to the decline in reserves in terms of months of imports they could cover.
Information available from the half-year data for 2008 compiled by the West African Monetary Institute (WAMI) indicate that the weighted average real growth for the region was 6.7 per cent which was 0.6 percentage points above the 2007 growth. In terms of country performance, Ghana, Nigeria and Guinea sustained their growth performance while the Gambia and Sierra Leone recorded reduced growth rates. At the sector level, Agriculture and Service sectors were the main contributors to growth.
Monetary Developments
Broad money (M2+) growth accelerated in the Region as credit to the private sector expanded markedly in all countries with the exception of Guinea that registered a deceleration. Credit to Government, however, fell across the member countries. The Net Foreign Assets (NFA) in the Zone also grew at a slower pace during the review period.
In response to the threat of high inflation occasioned by rising food and energy prices, most Central Banks in the Zone increased policy rates during the review period. However, with the exception of The Gambia, real interest rates in all countries were negative during the period.
External Developments
Exchange rates in the Zone remained relatively stable during the first half of 2008, with some countries experiencing real appreciation of their currencies. Ghana’s exchange rate depreciation was significant relative to the corresponding half of 2007.
SECTION FOUR: MACROECONOMIC PERFORMANCE FOR 2008 OVERVIEW OF ECONOMIC PERFORMANCE
In the 2008 Budget Statement and Economic Policy of the Government of Ghana, the following targets were set:
• a real GDP growth of at least 7.0 per cent;
• an end period inflation rate of between 6.0 and 8.0 per cent;
• an average inflation of 7.0 per cent;
• accumulation of gross international reserves equivalent to at least three months of import cover; and
• an overall budget deficit including divestiture of 4.0 per cent of GDP and a deficit excluding divestiture of 5.7 per cent of GDP.
All of these targets were missed. The provisional results for 2008 indicate that:
real GDP grew by 6.2 per cent; inflation rate as at end December 2008 was 18.1 per cent; average inflation for the year was 16.5 per cent; gross international reserves reduced to the equivalence of 1.8 months of import cover for goods and services; and the overall budget deficit excluding divestiture hit a high of GH¢2,557.6 million, equivalent to 14.9 of GDP. Adding divestiture receipts, however, reduced the deficit to GH¢1,982.9 million, equivalent to 11.5 per cent of GDP.
In order to quickly stabilise the economy, the Ministry of Finance and Economic Planning intends to deepen
collaboration with the Bank of Ghana to ensure better formulation and implementation of fiscal and monetary policies.
Real Sector Developments
Overall GDP Growth
The provisional real GDP grew by 6.2 per cent in 2008. The sectoral components of the growth were as follows.
Agricultural Sector Developments
The agriculture sector, the largest among the three sectors in the national accounts grew by 4.9 per cent against a target of 5.0 per cent.
Within the agriculture sector, value addition from the crop and livestock sub-sectors recorded a 5.5 per cent growth.
The cocoa production and marketing sub-sector recorded a growth of 5.0 per cent against a target of 4.0 per cent.
Forestry and logging grew by 3.5 per cent, while the fishing subsector grew by 3.0 per cent, against the respective targets of 3.0 per cent and 5.0 per cent.
Services Sector Developments
The Services Sector grew by 6.9 per cent compared to 10.0 per cent in 2007. This was the result of a less- than-expected growth in wholesale and retail trade and commodity, social and personal service; and producers of private non-profit services.
Within the sub-sectors, transport, storage and communication grew by 10.0 per cent, indicating 2.0 percentage point increase over the target of 8.0 per cent.
***** (Table 3)
FISCAL DEVELOPMENTS
Madam Speaker, the fiscal operations of government in 2008 came under severe stress, resulting in high fiscal deficits. The fiscal deficit excluding divestiture receipts, was GH¢2,557.6
million, equivalent to 14.9 per cent of GDP, while the deficit including divestiture was GH¢1,982.9 million, equivalent to 11.5 per cent of GDP.
With your permission, I would like to present the details of the fiscal performance for 2008.
Receipts
Provisional fiscal outturn for 2008 indicates that total receipts, comprising domestic revenue, grants and other receipts amounted to GH¢9,538.2 million, equivalent to 55.4 per cent of GDP. The outturn was 34.2 per cent higher than the budget estimate of GH¢7,107.2 million and 56.8 per cent higher than
the outturn for 2007.
Domestic revenue, made up of tax and non-tax revenue totaled GH¢4,802.4 million. This amount which was equivalent to 27.9 per cent of GDP was also 0.8 per cent higher than the budget estimate of GH¢4,763.2 million and 31.5 per cent increase over the outturn for 2007.
Tax revenue amounted to GH¢4,299.5 million, equivalent to 25.0 per cent of GDP, against a budget estimate of
GH¢3,973.8 million, equivalent 24.4 per cent of GDP. This outturn was 29.8 per cent higher than that recorded in 2007.
Direct taxes which comprise personal income, self-employed income, company and other taxes such as airport tax, amounted to GH¢1,253.2 million, exceeding the budget estimate of GH¢1,122.4 million by 11.7 per cent. The outturn indicates a 33.3 per cent increase over the outturn in 2007. The good performance in direct taxes can mainly be attributed to the performance of pay-as-you earn tax type which recorded a 16.8 per cent yield higher than the budget target, and 31.1 per cent mincrease over the outturn in 2007.
Indirect taxes, made up of value added, petroleum and excise taxes amounted to GH¢1,532.9 million, marginally below the budget estimate of GH¢1,548.5 million. The outturn was, however, 17.3 per cent higher than the outturn recorded in 2007. The low performance in indirect taxes is mainly explained by the poor performance of petroleum taxes.
In 2008, domestic VAT recorded a total amount of GH¢417.2 million, 12.1 per cent higher than the budget estimate of GH¢372.0 million. The outturn also indicates a 23.7 per cent increase over the outturn for 2007.
Import VAT for the period under review amounted to GH¢670.8 million, against a budget estimate of GH¢628.1
million. The outturn was 35.0 per cent higher than the outturn in 2007.
Petroleum taxes recorded an outturn of GH¢386.2 million, 21.2 per cent lower than the budget estimate of GH¢490.0 million and 4.2 per cent lower than the outturn recorded in 2007. The underperformance of petroleum taxes was mainly a result of the downward revision of some petroleum taxes and levies, as well as a decline in the volume of petroleum products consumed.
International Trade Taxes for the period yielded GH¢719.4 million, 3.6 per cent lower than the budget estimate of GH¢746.3 million. The outturn, however, was 24.8 per cent higher than the corresponding figure in 2007.
Madam Speaker, National Health Insurance Levy (NHIL) for 2008 amounted to GH¢318.3 million, 33.4 per cent higher than the budget estimate of GH¢235.4 million and 23.5 per cent higher than the outturn recorded in 2007.
During the 2008 fiscal year, receipts from non-tax revenue, amounted to GH¢433.9 million, equivalent to 2.5 per cent of GDP. Of this amount, GH¢308.1 million was retained by the MDAs while GH¢125.8 million was lodged into the Consolidated Fund. The outturn for total non-tax revenue was 2.3 per cent higher than the budget estimate and a 28.3 per cent increase over the outturn recorded in 2007.
Total grant disbursements for 2008 amounted to GH¢820.8 million, against a budget estimate of GH¢853.4 million. The outturn was 4.3 per cent lower than that for the same period in 2007, on account of low project grant disbursements. Project grants were 22.0 per cent below the budget estimate of GH¢514.8 million, but 15.3 per cent higher than the outturn for 2007. Programme grants recorded GH¢257.2 million, 28.0 per cent higher than the budget estimate of GH¢201.0 million.
Multilateral HIPC Assistance recorded an outturn of GH¢95.2 million.
During the period under review, total programme and project loans amounted to GH¢668.2 million, against a budget estimate of GH¢621.5 million. Project loan disbursements were GH¢514.9 million, 6.1 per cent
higher than the budget estimate of GH¢485.3 million and 36.2 per cent higher than the outturn in 2007. Programme loans amounted to GH¢153.3 million against a budget target of
GH¢136.2 million.
Divestiture receipts for the year amounted to GH¢998.4 million, comprising GH¢983.0 million from the sale of 70 per cent of Ghana Telecom shares and GH¢15.4 million from WESTEL.
Exceptional Financing of the budget, which is predominantly debt relief from our bilateral partners, amounted to GH¢77.5 million.
Payments
Total payments for 2008, comprising discretionary and statutory payments, amounted to GH¢9,538.2
million, significantly higher than the budget estimate of GH¢7,107.2 million. The details are outlined below.
Statutory Payments
Total statutory payments which include interest payments, amortization, transfers to households, and statutory funds, amounted to GH¢2,356.5 million, equivalent to 13.7 per cent of
GDP, against a budget estimate of GH¢1,728.9 million, equivalent to 10.6 per cent of GDP. The outturn indicates a 36.0 per cent increase over the outturn for 2007.
External Debt Service for the year amounted to GH¢694.7 million, against a budget target of GH¢293.2 million and an outturn of GH¢439.0 million recorded in 2007. Principal and interest payments were GH¢497.4 million and GH¢197.3 million, respectively.
Domestic interest payments, amounted to GH¢481.9 million, 36.8 per cent higher than the budget target, and a 49.6 per cent increase over the outturn recorded during the same period in 2007. The outturn was equivalent to 2.8 per cent of GDP. The higher than budgeted expenditure on domestic interest payment was due to higher than projected domestic borrowing and increases in the cost of borrowing.
Transfers to households, in the form of pensions, gratuities and social security contributions by Government
on behalf of public sector workers, collectively amounted to GH¢361.5 million, against a budget estimate of GH¢318.0 million. The outturn represents a 25.5 per cent increase over the 2007 outturn.
During the year, transfers to the Road Fund and Petroleum-related Funds amounted to a total of GH¢105.7 million, against a budget target of GH¢132.7 million.Of this transfer, GH¢102.9 million was disbursed to the Road
Fund.
In 2008, the District Assemblies Common Fund (DACF) received an amount of GH¢252.1 million, 7.6 per cent higher than the budget target. Transfers into the Ghana Education Trust Fund (GETFund) amounted to GH¢204.1 million, against a budget target of GH¢163.9 million. The over performance was as a result of the higher than projected outturn for tax revenue and VAT receipts.
Transfers into the National Health Insurance Fund (NHIF) was GH¢256.5 million, 8.9 per cent higher than the budget target of GH¢235.4 million.
Discretionary Payments
Total discretionary payments amounted to GH¢7,181.8 million, equivalent to 41.7 per cent of GDP, against
a budget target of GH¢5,378.2 million, equivalent to 33.0 per cent of GDP and an outturn of GH¢4,348.2 million, equivalent to 31.1 per cent of GDP recorded in 2007.
Personal emoluments (item 1) for the period amounted to GH¢1,987.6 million, equivalent to 11.5 per cent of GDP. The outturn was 27.4 per cent higher than the budget estimate of GH¢1,559.9 million and 40.1 per cent higher than the outturn for 2007. The wage overrun was mainly the result of higher than anticipated salary increases to public sector workers, as well as higher than programmed number of public sector workers.
Administration expenditure (item 2) amounted to GH¢412.7 million against a budget estimate of GH¢385.6
million. The outturn was 7.0 per cent higher than the budget estimate and 0.7 per cent higher than the outturn in 2007.
Service expenditure (item 3) registered an outturn of GH¢235.7 million, against a budget target of 120.6 million. This was mainly due to payments for some expenditures that had not been budgeted for.
Total Investment Outlays (Item 4) for the year amounted to GH¢1,002.9 million (5.8 per cent of GDP),
about 34.5 per cent higher than the budget estimate of GH¢745.8 million. Of this amount, expenditures directly tied to the proceeds from the sovereign bond issued on the international capital markets amounted to GH¢581.9 million, (3.4 per cent of GDP).
Foreign-financed capital expenditure in 2008 amounted to GH¢916.4 million, 8.4 per cent lower than the budget estimate of GH¢1,000.2 million, but 26.2 per cent higher than the outturn in 2007.
Multilateral Debt Relief Initiative (MDRI) and Highly Indebted Poor Country (HIPC) financed expenditures
totaled GH¢278.9 million, against a budget estimate of GH¢183.2 million. Of this, GH¢185.2 million was expended on HIPC-related projects and programmes.
An amount of GH¢467.2 million was spent from the Reserve Fund for the purchase of crude oil for the Volta
River Authority (VRA), and the payment of judgment debts emanating from court orders against the government.
Other transfers, made up of retention of internally-generated funds, safety net for deregulation, subsidies for lifeline consumers of electricity and tax exemptions, amounted to GH¢831.5 million, against a budget target of GH¢679.2 million.
Clearance of Arrears and Liquidation of Commitments
During the period under review a total amount of GH¢142.3 million was paid in respect of clearance of arrears and
liquidation of commitments carried over from 2007. The outturn for the period was made up of road arrears of GH¢46.9 million and non-road commitments of GH¢95.4 million.
Overall Budget Balance and Financing
The overall budget balance excluding divestiture, amounted to a deficit of GH¢2,557.6 million, equivalent to 14.9 per cent of GDP. This compares with a budget estimate of a deficit of GH¢929.2 million, equivalent to
5.7 per cent of GDP.
The overall budget balance including divestiture, showed a deficit of GH¢1,982.9 million, equivalent to 11.5 per cent of GDP compared with a budgeted deficit of GH¢653.4 million, equivalent to 4.0 per cent of GDP.
The overall budget deficit including divestiture was financed from both domestic and foreign sources. Net Domestic Financing of the budget amounted to GH¢1,152.7 million, equivalent to 6.7 per cent of GDP, while financing from foreign sources totaled GH¢830.2 million, equivalent to 4.8 per cent of GDP. Of this amount GH¢581.9 million, equivalent to 3.4 per cent of GDP was a drawdown on the receipts from the sovereign
bond issued in 2007 on the international capital markets.
***** (Table 4, Overall Balance)
DEVELOPMENTS IN PUBLIC DEBT AND AID MANAGEMENT
The policy of public debt management in Ghana is to source funds at the minimum cost possible within a prudent level of risk, to meet government financing needs while ensuring that public debt is maintained at sustainable levels over the medium to long term.
The policy also entails the development of the domestic capital market and access to the international capital markets.
Review of 2008
Public Debt Stock
In 2008, gross public debt rose by about US$600 million to an end year position of US$8,002.5 million,
which is about 8.1 per cent increase over the 2007 position of US$7,405.5 million. The increase in public debt during the year was mainly driven by about US$400.0 million and US$200.0 increase in external and domestic debts, respectively.
By end 2008, public debt consisted of 49 per cent and 51 per cent of external and domestic debts, respectively. Prior to implementation of the MDRI in 2006, external debt, which was mainly made up of multilateral and bilateral debt, accounted for over 75 per cent of the public debt. The percentage share of external debt fell to 41 per cent in 2006 before rising to 48 per cent in 2007, mainly due to the inflow of US$750.0 million from
Ghana’s maiden sovereign bond issued on the international capital markets.
The ratio of Gross public debt to GDP declined from 142.6 per cent in 2001 to 41.4 per cent in 2006 under the dual impact of the Highly Indebted Poor Country (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI). Unfortunately, the ratio has since 2007 risen to 52.1 per cent (as recorded in December
2008) as result of renewed borrowing on non-concessional terms and mostly for economically unproductive projects.
Developments in External Debt
External Debt Strategy
External debt strategy in 2008 focused on seeking grants and highly concessional loans, with minimal funds from commercial sources.
External Debt Stock and Creditor Categorization
Ghana’s total external debt (including IMF debt) stood at US$3,982.6 million by end December, 2008, representing 24.7 per cent of GDP. By creditor categorizations, multilateral debt continued to dominate, constituting about 49.2 per cent of total external debt despite the substantial debt relief under the
Multilateral Debt Relief Initiative (MDRI).
Bilateral and commercial debts constitute 27.5 per cent and 23.3 per cent, respectively. On creditor basis, the World Bank continues to hold the largest share, contributing about one third of the total external debt.
Currency Composition of External Debt
The Special Drawing Rights (SDR) transacted in US Dollars continued to dominate the currency composition of external debt portfolio. By the end of 2008, it accounted for about 41.6 per cent with the US Dollar and the Euro accounting for about 35.4 per cent and 16.5 per cent, respectively. The Chinese Yuan, Japanese Yen, and others constitute about 2.0 per cent, 1.0 per cent and 4.0 per cent, respectively, of the external debt
portfolio.
Interest Rate Composition of External debt
Interest rate composition of the external debt is distributed in the ratio of 90.1, 8.4 and 1.5 per cent for fixed, variable and interest-free rates, respectively. The high proportion of the fixed interest rate is as a result of the high share of multilateral,bilateral and the Euro bond debt which bear fixed interest rates.
The variable interest rates mainly emanate from the export credit facilities and commercial loans while interest free facilities are mainly from the Chinese Government and some bilateral creditors.
Maturity Profile – Loan Term and Repayment
The average term to maturity (ATM) of the external portfolio is about 23 years, indicating that, largely, the external debt is of a long term profile. The principal repayment profile shows that about 2.6 per cent of the total outstanding debt falls due within the next 12 months and 19.7 per cent and 77.6 per cent fall due
within the 5 years and 20 years and beyond, respectively. Over 75 per cent of the external obligations fall due in the long term, indicating a high concentration of external obligations in the long term. In terms of cost profile, interest and other charges falling due within the next 12 months represents about 2.1 per cent of the external debt portfolio.
New Commitments
Loans
Traditional creditors remained the preferred source of borrowing, with cautious move to tap resources from
commercial sources to support growth catalytic sectors. During the year, about 46 loans were contracted totaling about US$2,630.9 million. About 20 per cent of the total committed amounts were from multilaterals, with 22 per cent and 58 per cent from bilateral and export credits sources, respectively. In terms of sectoral allocation, 37 per cent went to energy and the rest went to health, roads, water, defence, interior and finance.
Grants
In 2008, 36 grants amounting to US$455.9 million were committed as development assistance. In terms of use of
funds, General Budget Support under the Multi Donor Budgetary Support (MDBS) constituted 23 per cent with the remaining as project grants.
Developments under Debt Relief Initiatives
HIPC and MDRI Receipt Account
In 2008, a total of GH¢236.99 million (US$241.9 million) was received as debt relief, comprising GH¢170.2 million and GH¢66.87 million for HIPC and MDRI respectively.
About 49.7 per cent and 50.3 per cent of the HIPC relief came from multilateral and bilateral sources respectively. Of the MDRI,about 66.3 per cent came from the World Bank (IDA) and 33.7
per cent from the African Development Bank (AfDB).
Domestic Debt
Sale of Treasury Securities
In 2008 domestic borrowing supported the execution of the budget, refinancing of maturing government bills, and the development of the financial market.
In 2008, the Government„s debt strategy was geared primarily
at:
• the reduction of debt servicing costs; and
• extending the maturity profile of the debt stock.
A key component of the strategy was to shift from the heavy reliance on short term domestic financing to longer term maturity bonds open to non-resident investors. This was to help diversify the investor base in government securities and to avoid bunching up of maturing debt in the short term.
Due to the commodity crisis in 2008, which triggered high inflation, the shift to longer term securities was unsuccessful as there was strong preference for short term instruments by domestic investors. The financial crunch also discouraged the re-opening, and new issuance, of medium term securities to non-
resident investors.
The total sale of Government of Ghana securities from January to December 2008 amounted to GH¢3,848.27 million, while maturities were GH¢3,012.10 million, resulting in a net borrowing of GH¢836.17 million. For the same period in 2007, a total sale of GH¢3,969.31 million with maturities of GH¢3,107.53 million was done, resulting in a net sale of GH¢861.72 million.
Domestic Debt Stock
The stock of marketable debt resulting from the issuance of Government of Ghana securities stood at GH¢3,370.70 million as at end December 2008.This constitutes an increase of 34.11 per cent over the 2007 stock of GH¢2,513.46 million.
112.
The short term debt now constitutes about 52.01 per cent of the marketable debt, whilst the 5-Year Treasury bond and the Golden Jubilee Savings bonds issues represent about 9.95 per cent.
Monetary Developments
Price Developments
Headline Inflation
Inflationary pressures built up rapidly in the first half of 2008, reflecting the impact of higher international food and crude oil prices on the domestic market. In the second half, however, inflationary pressures softened on the back of good food harvests and falling crude oil prices, but firmed up slightly in
November and December 2008.
Headline inflation measured as year-on-year changes in the consumer price index increased from 12.8 per cent in January 2008 to 18.1 per cent in December 2008, after peaking at 18.4 per cent in June 2008. Food inflation increased significantly from 10.6 per cent at the beginning of the year to 16.7 per cent at the end of 2008, peaking at 17.7 per cent in June 2008.
Similarly, non-food inflation also increased from 14.4 per cent to 19.1 per cent over the same period.
*****(Figure 1)
Contributions to changes in CPI
The national consumer price index for 2008 increased by 38.98 points compared with 23.71 points in the corresponding period in 2007. The food and beverages sub-sector contributed 46.67 per cent towards the upward movements in the national index while the non-food inflation contributed 53.33 per cent. Monthly
changes in inflation registered an average increase of 1.41 per cent in 2008, higher than the 1.00 per cent average increase in 2007.
Money and Financial Markets
Broad money including foreign currency deposits (M2+) grew by 40.20 per cent in December 2008 to reach GH¢8,061.2 million, compared with 35.9 per cent in December 2007 and 38.8 per cent a year earlier. Currency with the public increased by 27. 8 per cent, demand deposits by 31.2 per cent, savings and time deposits by 33.7 per cent, and foreign currency deposits by 83.0 per cent during the year. The change in the composition of
money holdings during the year was a reflection of developments in the rate of inflation and depreciation of the
domestic currency.
Sources of Change in M2+
Net Domestic Assets (NDA) of the banking system was the main source of growth in M2+ during the review period. It increased by 82.5 per cent mainly on account of the banking system°os net
claims on Government, claims on the private sector, mainly from Commercial banks. The growth in M2+ was, however, moderated by a drop of 13.7 per cent in Net Foreign Assets of the banking system.
Credit Developments
118.
Credit to the private sector recorded an annual growth of 48.1 per cent, reflecting a slowdown from the annual growth of 59.6 per cent in 2007. At the end of the year, credit to the private sector amounted to GH¢4,887.1 million.
Distribution of Credit by Sector
The top three beneficiaries of banks’ outstanding credit to the private sector continued to be the Services (23.18 per cent), Commerce & Finance (26.15 per cent) and Manufacturing (11.88 per cent). By holder, the Indigenous Enterprises and Household sectors also continued to dominate in banks’ allocation of credit
to the private sector, accounting for 66.8 per cent and 21.6 per cent, of the total respectively.
Exchange Rate Developments
The Ghana Cedi lost ground against all the major currencies from the second quarter, partly as a result of
re-alignments of the major international currencies, a surge in demand for foreign exchange to meet higher oil bills and food prices, servicing of external debts, and high expenditures on infrastructural development.
On the inter-bank market, the Ghana Cedi was steady during the first quarter. However in the second quarter, it weakened sharply and by the end of the first half it had depreciated by 6.0, 4.6 and 11.7 per cent against the US Dollar, the Pound Sterling and the Euro, respectively. The Ghana Cedi continued to depreciate against the US Dollar and the Euro but traded strongly against the Pound Sterling in the second half of the year. On an annual basis, the Ghana Cedi depreciated by 20.1 per cent and 16.3 per cent against the US Dollar and the Euro,
respectively. Against the Pound Sterling it appreciated by 8.1 per cent.
122.
On the forex bureau market the movement of the Ghana cedi against the US Dollar and the Euro was similar to the movement on the inter-bank market. It recorded annual depreciations of 20.6 per cent and 16.1 per cent against the US Dollar and the Euro, respectively, but appreciated by 5.2 per cent against the Pound Sterling.
Financial Markets
Money Market Developments
123.
Interest rates generally moved upwards in 2008. The Prime Rate was increased on three occasions from 13.5 per cent at the beginning of the year to 14.25 per cent in March, 16.0 per cent in May and to 17 per cent in July. The decision to raise the policy rate upwards was informed by increased risks to price stability.
124.
In response to the prime rate trends, average interest rates on government securities and on the interbank market also went up during the year. The average interest rate of the 91-day Treasury bill gained 14.06 percentage points to 24.67 per cent, while the average interest rate on the 1-year and 2-year fixed rate notes also increased by 7.70 percentage points and 8.20 percentage points to 20.00 percentage points and 21.00
percentage points respectively. The interbank weighted average rate also gained 7.05 percentage points to close the year at 19.03 per cent.
125.
Commercial banks’ average deposit and lending rates also followed the general trend of increases in rates. Banks°o average savings deposit, 3-month time deposit and lending rates increased by 4.45, 7.38 and 3.00 percentage points, respectively, to record 9.00 per cent, 16.38 per cent and 27.25 per cent at the end of 2008.
The Stock Market
126.
The stock market performed well in 2008 against the backdrop of tumbling stock prices in major stock exchanges in the world. Ghana’s Stock Exchange was considered one of the best performers in the world in 2008.
GSE All-Share Index
The year began on a good note with the GSE All-share index recording a 1.8 per cent rise in January and expectations were rife that the index would track the record-breaking performances of 2003 and 2004 which recorded 154.7 and 91.3 per cent growth, respectively.
128.
By the end of 2008, the GSE All Share Index closed at 10,431.6 points from the previous year°os close of 6,599.8 points, gaining 58.1 per cent.
Sectoral Performance
129.
The strong performance of the Finance sector contributed significantly to the upward movement in the GSE-All Share index. The Finance sector index ended the year as the best performing sector on the exchange. From the previous year’s close of 455.2 points, the index moved up to 754.0 points, gaining an increase of 65.7 per cent.
130.
The Manufacturing sector followed with an increase of 63 per cent. The Food and Beverage sector index also increased by 50.6 per cent.
131.
The Distribution sector index gained 6.7 per cent (42.1 points) from 632.1 points at the beginning of the year to end the year at 674.2 points.
132.
The Agriculture sector index ended the year at 200.0 points from 98.0 points.
133.
The Mining sector made a gain of GH¢ 0.10 or 3.2 per cent. The index rose marginally from 113.9 points to 114.18 points.
134.
Severe turbulence on the world’s major financial markets appeared to have affected most African stock exchanges. Out of the 14 exchanges surveyed, Ghana and Malawi were the only exchanges that registered significant growth. South Africa, Tanzania and Tunisia made marginal gains while nine recorded declines.
External Sector Developments
Developments in the Balance of Payments
135.
Provisional estimates of the current account balance in 2008 indicated a deficit of US$3,473.47 million, equivalent to 20.87 per cent of the GDP, compared with a deficit of US$2,151.48 million, equivalent to 14.7 per cent of the GDP in 2007. The deficit was due primarily to widening of the trade deficit that more than offset an improvement in the invisibles (services, income and current transfers) account.
Trade in Goods
136.
Trade in merchandise goods for 2008 showed a significant increase in both exports and imports, compared to the growth rates recorded in 2007. Exports and imports increased by 26.4 per cent and 27.2 per cent year-on-year, respectively in 2008, compared with 11.9 per cent and 19.4 per cent, respectively, in 2007.
Export Performance
137.
Export earnings were provisionally estimated at US$5,275.33 million, up by 26.4 per cent from the 2007 level. With the exception of minerals, all the principal exports performed well. While minerals increased by 5.1 per cent, cocoa products recorded the highest growth of 66.9 per cent followed by gold, cocoa beans, and timber products with 30.2 per cent, 28.9 per cent and 24.1 per cent, respectively.
138.
Cocoa exports rose from US$975.7 million in 2007 to US$1,239.65 million in 2008, up by 66.9 per cent or US$262.0 million. This was mainly on account of increases in both volumes exported and realized export prices. The volume of cocoa beans exported increased by 4.2 per cent to 568,820 tonnes. Average prices realized from exports of beans increased by 21.9 per cent to US$2,179.34 per tonne in 2008.
139.
Gold exports were equally strong in 2008. Export earnings increased by 29.6 per cent from US$1,733.78 million in 2007 to US$2,246.25 million in 2008. The growth in value was due to the combined effects of price and volume as average realized prices went up by 25.8 per cent and the volume of exports
increased by 4.06 per cent.
140.
The value of exports of timber products also improved considerably to about US$309.0 million, from the US$249.0 million recorded in 2007. While average prices increased by 17.64 per cent to US$554.09 million per cubic metre, the volume went up to 557,663 cubic metres, an increase of 5.5 per cent.
Import Performance
141.
Total import bill for 2008 rose by 27.2 per cent from US$8,066.11 million in 2007 to US$10,260.97 million. This was mainly boosted by a significant growth of 32.5 per cent in non- oil imports.
Oil Imports
142.
Total oil imports for the period under review is provisionally estimated at US$2,349.22 million up by 12.1 per cent compared with US$2,095.00 million in 2007. The bill for petroleum products in 2007 was mainly due to increased consumption of oil products following the electricity load shedding that the country experienced during most part of 2007. The 2008 bill on the other hand, was mainly accounted for by the increase in oil prices on the world market, which reached a high of US$147 per barrel in July 2008.
Non-oil imports
143.
There was considerable rise of 32.5 per cent in non-oil imports from US$5,971.11 in 2007 to US$7,911.75 in 2008. This was mainly due to increased consumption and continued investment activity within the economy. Imports of capital goods, intermediate goods and consumption goods grew by 34.3, 35.86 and 19.96 per cent, respectively.
144.
The increase in capital goods was reflected in the growth of capital goods, except transport equipment and industrial transport equipment, while the increase in intermediate goods was mainly on account of growth in food and beverages, primarily for industry, parts and accessories of capital goods, primary industrial supplies, parts and accessories of transport equipment; and foods and beverages processed for industries.
145.
The growth in consumption goods was underpinned by increases, mostly in food and beverages primarily meant for
consumption, non-durable consumer goods and semi-durable consumer goods. However, growth in durable consumer goods, was marginal. Other goods increased by 54.54 per cent to US$769.3 million due to an increase in importation of passenger cars which grew from US$443.12 million to US$756.24 million, up by 70.65 per cent.
Services, Current Transfers and Income Account
146.
The surplus on the services, current transfers and income account in 2008 amounted to US$1,512.17 million, a much lower figure than the US$1,742.5 million recorded in 2007. Services and investment income recorded more outflows in 2008 compared to 2007 due to higher freight and insurance charges associated with the higher import growth. Private transfers increased from US$1,833.8 million to US$1,921.92 million while official transfers increased from US$209.4 million to US$241.11 million.
147.
With the deterioration in the balance of trade more than offsetting the surplus on the services, income and current transfers account, the current account recorded a deficit of US$3,473.47 million, equivalent to 20.87 per cent of the GDP.
The Capital and Financial Account
148.
The balance on the capital and financial account recorded a surplus of US$2,666.05 million, a marginal increase over the 2007 surplus of US$2,591.42 million.
Private Capital Flows
149.
Net private capital inflows during the year were estimated to have increased by US$1,150.36 million to US$2,211.84 million. The main contributing factor to the increase in the account was a major improvement in divestiture receipts, mainly from the sale of Ghana Telecom, and a significant upward shift in direct
investment, which was estimated at US$1,220.41 million, compared with an inflow of US$855.38 million for 2007.
Official Capital Flows
150.
Net official capital inflows declined significantly by US$645.61 million from US$1,168.64 million to US$523.03 million in 2008 mainly on account of Government°os drawdown on the balance of the sovereign bond.
151.
In spite of the above developments, the balance on the financial and capital account was less than enough to finance the deficit on the current account, resulting in as overall balance of payments deficit of US$940.7 million, equivalent to 6.1 per cent of GDP. In the corresponding period of 2007, the overall balance of payments recorded a surplus of US$413.1 million, equivalent to 2.8 per
FISCAL DEVELOPMENTS
The fiscal operations of government in 2008 came under severe stress, resulting in high fiscal deficits. The fiscal deficit excluding divestiture receipts, was GH¢2,557.6 million, equivalent to 14.9 per cent of GDP, while the deficit including divestiture was GH¢1,982.9 million, equivalent to 11.5 per cent of GDP.
With your permission, I would like to present the details of the fiscal performance for 2008.
Receipts
Provisional fiscal outturn for 2008 indicates that total receipts, comprising domestic revenue, grants and other receipts amounted to GH¢9,538.2 million, equivalent to 55.4 per cent of GDP. The outturn was 34.2 per cent higher than the budget estimate of GH¢7,107.2 million and 56.8 per cent higher than the outturn for 2007.
Domestic revenue, made up of tax and non-tax revenue totaled GH¢4,802.4 million. This amount which was equivalent to 27.9 per cent of GDP was also 0.8 per cent higher than the budget estimate of GH¢4,763.2 million and 31.5 per cent increase over the outturn for 2007.
Tax revenue amounted to GH¢4,299.5 million, equivalent to 25.0 per cent of GDP, against a budget estimate of GH¢3,973.8 million, equivalent 24.4 per cent of GDP. This outturn was 29.8 per cent higher than that recorded in 2007.
Direct taxes which comprise personal income, self-employed income, company and other taxes such as airport tax, amounted to GH¢1,253.2 million, exceeding the budget estimate of GH¢1,122.4 million by 11.7 per cent. The outturn indicates a 33.3 per cent increase over the outturn in 2007. The good performance in direct taxes can mainly be attributed to the performance of pay-as-you earn tax type which recorded a 16.8 per cent yield higher than the budget target, and 31.1 per cent mincrease over the outturn in 2007.
Indirect taxes, made up of value added, petroleum and excise taxes amounted to GH¢1,532.9 million, marginally below the budget estimate of GH¢1,548.5 million. The outturn was, however, 17.3 per cent higher than the outturn recorded in 2007. The low performance in indirect taxes is mainly explained by the poor performance of petroleum taxes.
In 2008, domestic VAT recorded a total amount of GH¢417.2 million, 12.1 per cent higher than the budget estimate of GH¢372.0 million. The outturn also indicates a 23.7 per cent increase over the outturn for 2007.
Import VAT for the period under review amounted to GH¢670.8 million, against a budget estimate of GH¢628.1 million. The outturn was 35.0 per cent higher than the outturn in 2007.
Petroleum taxes recorded an outturn of GH¢386.2 million, 21.2 per cent lower than the budget estimate of GH¢490.0 million and 4.2 per cent lower than the outturn recorded in 2007. The underperformance of petroleum taxes was mainly a result of the downward revision of some petroleum taxes and levies, as well as a decline in the volume of petroleum products consumed.
International Trade Taxes for the period yielded GH¢719.4 million, 3.6 per cent lower than the budget estimate of GH¢746.3 million. The outturn, however, was 24.8 per cent higher than the corresponding figure in 2007.
The National Health Insurance Levy (NHIL) for 2008 amounted to GH¢318.3 million, 33.4 per cent higher than the budget estimate of GH¢235.4 million and 23.5 per cent higher than the outturn recorded in 2007.
During the 2008 fiscal year, receipts from non-tax revenue, amounted to GH¢433.9 million, equivalent to 2.5 per cent of GDP. Of this amount, GH¢308.1 million was retained by the MDAs while GH¢125.8 million was lodged into the Consolidated Fund. The outturn for total non-tax revenue was 2.3 per cent higher than the budget estimate and a 28.3 per cent increase over the outturn recorded in 2007.
Total grant disbursements for 2008 amounted to GH¢820.8 million, against a budget estimate of GH¢853.4 million. The outturn was 4.3 per cent lower than that for the same period in 2007, on account of low project grant disbursements. Project grants were 22.0 per cent below the budget estimate of GH¢514.8 million, but 15.3 per cent higher than the outturn for 2007. Programme grants recorded GH¢257.2 million, 28.0 per cent higher than the budget estimate of GH¢201.0 million.
Multilateral HIPC Assistance recorded an outturn of GH¢95.2 million.
During the period under review, total programme and project loans amounted to GH¢668.2 million, against a budget estimate of GH¢621.5 million. Project loan disbursements were GH¢514.9 million, 6.1 per cent higher than the budget estimate of GH¢485.3 million and 36.2 per cent higher than the outturn in 2007. Programme loans amounted to GH¢153.3 million against a budget target of GH¢136.2 million.
Divestiture receipts for the year amounted to GH¢998.4 million, comprising GH¢983.0 million from the sale of 70 per cent of Ghana Telecom shares and GH¢15.4 million from WESTEL.
Exceptional Financing of the budget, which is predominantly debt relief from our bilateral partners, amounted to GH¢77.5 million.
Payments
Total payments for 2008, comprising discretionary and statutory payments, amounted to GH¢9,538.2 million, significantly higher than the budget estimate of GH¢7,107.2 million. The details are outlined below.
Statutory Payments
Total statutory payments which include interest payments, amortization, transfers to households, and statutory funds, amounted to GH¢2,356.5 million, equivalent to 13.7 per cent of GDP, against a budget estimate of GH¢1,728.9 million, equivalent to 10.6 per cent of GDP. The outturn indicates a 36.0 per cent increase over the outturn for 2007.
External Debt Service for the year amounted to GH¢694.7 million, against a budget target of GH¢293.2 million and an outturn of GH¢439.0 million recorded in 2007. Principal and interest payments were GH¢497.4 million and GH¢197.3 million, respectively.
Domestic interest payments, amounted to GH¢481.9 million, 36.8 per cent higher than the budget target, and a 49.6 per cent increase over the outturn recorded during the same period in 2007. The outturn was equivalent to 2.8 per cent of GDP. The higher than budgeted expenditure on domestic interest payment was due to higher than projected domestic borrowing and increases in the cost of borrowing.
Transfers to households, in the form of pensions, gratuities and social security contributions by Government on behalf of public sector workers, collectively amounted to GH¢361.5 million, against a budget estimate of GH¢318.0 million. The outturn represents a 25.5 per cent increase over the 2007 outturn.
During the year, transfers to the Road Fund and Petroleum-related Funds amounted to a total of GH¢105.7 million, against a budget target of GH¢132.7 million.Of this transfer, GH¢102.9 million was disbursed to the Road Fund.
In 2008, the District Assemblies Common Fund (DACF) received an amount of GH¢252.1 million, 7.6 per cent higher than the budget target. Transfers into the Ghana Education Trust Fund (GETFund) amounted to GH¢204.1 million, against a budget target of GH¢163.9 million. The over performance was as a result of the higher than projected outturn for tax revenue and VAT receipts.
Transfers into the National Health Insurance Fund (NHIF) was GH¢256.5 million, 8.9 per cent higher than the budget target of GH¢235.4 million.
Discretionary Payments
Total discretionary payments amounted to GH¢7,181.8 million, equivalent to 41.7 per cent of GDP, against a budget target of GH¢5,378.2 million, equivalent to 33.0 per cent of GDP and an outturn of GH¢4,348.2 million, equivalent to 31.1 per cent of GDP recorded in 2007.
Personal emoluments (item 1) for the period amounted to GH¢1,987.6 million, equivalent to 11.5 per cent of GDP. The outturn was 27.4 per cent higher than the budget estimate of GH¢1,559.9 million and 40.1 per cent higher than the outturn for 2007. The wage overrun was mainly the result of higher than anticipated salary increases to public sector workers, as well as higher than programmed number of public sector workers.
Administration expenditure (item 2) amounted to GH¢412.7 million against a budget estimate of GH¢385.6 million. The outturn was 7.0 per cent higher than the budget estimate and 0.7 per cent higher than the outturn in 2007.
Service expenditure (item 3) registered an outturn of GH¢235.7 million, against a budget target of 120.6 million. This was mainly due to payments for some expenditures that had not been budgeted for.
Total Investment Outlays (Item 4) for the year amounted to GH¢1,002.9 million (5.8 per cent of GDP), about 34.5 per cent higher than the budget estimate of GH¢745.8 million. Of this amount, expenditures directly tied to the proceeds from the sovereign bond issued on the international capital markets amounted to GH¢581.9 million, (3.4 per cent of GDP).
Foreign-financed capital expenditure in 2008 amounted to GH¢916.4 million, 8.4 per cent lower than the budget estimate of GH¢1,000.2 million, but 26.2 per cent higher than the outturn in 2007.
Multilateral Debt Relief Initiative (MDRI) and Highly Indebted Poor Country (HIPC) financed expenditures
totaled GH¢278.9 million, against a budget estimate of GH¢183.2 million. Of this, GH¢185.2 million was expended on HIPC-related projects and programmes.
An amount of GH¢467.2 million was spent from the Reserve Fund for the purchase of crude oil for the Volta
River Authority (VRA), and the payment of judgment debts emanating from court orders against the government.
Other transfers, made up of retention of internally-generated funds, safety net for deregulation, subsidies for lifeline consumers of electricity and tax exemptions, amounted to GH¢831.5 million, against a budget target of GH¢679.2 million.
Clearance of Arrears and Liquidation of Commitments
During the period under review a total amount of GH¢142.3 million was paid in respect of clearance of arrears and liquidation of commitments carried over from 2007. The outturn for the period was made up of road arrears of GH¢46.9 million and non-road commitments of GH¢95.4 million.
Overall Budget Balance and Financing
The overall budget balance excluding divestiture, amounted to a deficit of GH¢2,557.6 million, equivalent to 14.9 per cent of GDP. This compares with a budget estimate of a deficit of GH¢929.2 million, equivalent to 5.7 per cent of GDP.
The overall budget balance including divestiture, showed a deficit of GH¢1,982.9 million, equivalent to 11.5 per cent of GDP compared with a budgeted deficit of GH¢653.4 million, equivalent to 4.0 per cent of GDP.
The overall budget deficit including divestiture was financed from both domestic and foreign sources. Net Domestic Financing of the budget amounted to GH¢1,152.7 million, equivalent to 6.7 per cent of GDP, while financing from foreign sources totaled GH¢830.2 million, equivalent to 4.8 per cent of GDP. Of this amount GH¢581.9 million, equivalent to 3.4 per cent of GDP was a drawdown on the receipts from the sovereign bond issued in 2007 on the international capital markets.
***** (Table 4, Overall Balance)
DEVELOPMENTS IN PUBLIC DEBT AND AID MANAGEMENT
The policy of public debt management in Ghana is to source funds at the minimum cost possible within a prudent level of risk, to meet government financing needs while ensuring that public debt is maintained at sustainable levels over the medium to long term.
The policy also entails the development of the domestic capital market and access to the international capital markets.
Review of 2008
Public Debt Stock
In 2008, gross public debt rose by about US$600 million to an end year position of US$8,002.5 million,
which is about 8.1 per cent increase over the 2007 position of US$7,405.5 million. The increase in public debt during the year was mainly driven by about US$400.0 million and US$200.0 increase in external and domestic debts, respectively.
By end 2008, public debt consisted of 49 per cent and 51 per cent of external and domestic debts, respectively. Prior to implementation of the MDRI in 2006, external debt, which was mainly made up of multilateral and bilateral debt, accounted for over 75 per cent of the public debt. The percentage share of external debt fell to 41 per cent in 2006 before rising to 48 per cent in 2007, mainly due to the inflow of US$750.0 million from
Ghana’s maiden sovereign bond issued on the international capital markets.
The ratio of Gross public debt to GDP declined from 142.6 per cent in 2001 to 41.4 per cent in 2006 under the dual impact of the Highly Indebted Poor Country (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI). Unfortunately, the ratio has since 2007 risen to 52.1 per cent (as recorded in December
2008) as result of renewed borrowing on non-concessional terms and mostly for economically unproductive projects.
Developments in External Debt
External Debt Strategy
External debt strategy in 2008 focused on seeking grants and highly concessional loans, with minimal funds from commercial sources.
External Debt Stock and Creditor Categorization
Ghana’s total external debt (including IMF debt) stood at US$3,982.6 million by end December, 2008, representing 24.7 per cent of GDP. By creditor categorizations, multilateral debt continued to dominate, constituting about 49.2 per cent of total external debt despite the substantial debt relief under the
Multilateral Debt Relief Initiative (MDRI).
Bilateral and commercial debts constitute 27.5 per cent and 23.3 per cent, respectively. On creditor basis, the World Bank continues to hold the largest share, contributing about one third of the total external debt.
Currency Composition of External Debt
The Special Drawing Rights (SDR) transacted in US Dollars continued to dominate the currency composition of external debt portfolio. By the end of 2008, it accounted for about 41.6 per cent with the US Dollar and the Euro accounting for about 35.4 per cent and 16.5 per cent, respectively. The Chinese Yuan, Japanese Yen, and others constitute about 2.0 per cent, 1.0 per cent and 4.0 per cent, respectively, of the external debt
portfolio.
Interest Rate Composition of External debt
Interest rate composition of the external debt is distributed in the ratio of 90.1, 8.4 and 1.5 per cent for fixed, variable and interest-free rates, respectively. The high proportion of the fixed interest rate is as a result of the high share of multilateral,bilateral and the Euro bond debt which bear fixed interest rates.
The variable interest rates mainly emanate from the export credit facilities and commercial loans while interest free facilities are mainly from the Chinese Government and some bilateral creditors.
Maturity Profile – Loan Term and Repayment
The average term to maturity (ATM) of the external portfolio is about 23 years, indicating that, largely, the external debt is of a long term profile. The principal repayment profile shows that about 2.6 per cent of the total outstanding debt falls due within the next 12 months and 19.7 per cent and 77.6 per cent fall due
within the 5 years and 20 years and beyond, respectively. Over 75 per cent of the external obligations fall due in the long term, indicating a high concentration of external obligations in the long term. In terms of cost profile, interest and other charges falling due within the next 12 months represents about 2.1 per cent of the external debt portfolio.
New Commitments
Loans
Traditional creditors remained the preferred source of borrowing, with cautious move to tap resources from
commercial sources to support growth catalytic sectors. During the year, about 46 loans were contracted totaling about US$2,630.9 million. About 20 per cent of the total committed amounts were from multilaterals, with 22 per cent and 58 per cent from bilateral and export credits sources, respectively. In terms of sectoral allocation, 37 per cent went to energy and the rest went to health, roads, water, defence, interior and finance.
Grants
In 2008, 36 grants amounting to US$455.9 million were committed as development assistance. In terms of use of
funds, General Budget Support under the Multi Donor Budgetary Support (MDBS) constituted 23 per cent with the remaining as project grants.
Developments under Debt Relief Initiatives
HIPC and MDRI Receipt Account
In 2008, a total of GH¢236.99 million (US$241.9 million) was received as debt relief, comprising GH¢170.2 million and GH¢66.87 million for HIPC and MDRI respectively.
About 49.7 per cent and 50.3 per cent of the HIPC relief came from multilateral and bilateral sources respectively. Of the MDRI,about 66.3 per cent came from the World Bank (IDA) and 33.7
per cent from the African Development Bank (AfDB).
Domestic Debt
Sale of Treasury Securities
In 2008 domestic borrowing supported the execution of the budget, refinancing of maturing government bills, and the development of the financial market.
In 2008, the Government„s debt strategy was geared primarily
at:
• the reduction of debt servicing costs; and
• extending the maturity profile of the debt stock.
A key component of the strategy was to shift from the heavy reliance on short term domestic financing to longer term maturity bonds open to non-resident investors. This was to help diversify the investor base in government securities and to avoid bunching up of maturing debt in the short term.
Due to the commodity crisis in 2008, which triggered high inflation, the shift to longer term securities was unsuccessful as there was strong preference for short term instruments by domestic investors. The financial crunch also discouraged the re-opening, and new issuance, of medium term securities to non-
resident investors.
The total sale of Government of Ghana securities from January to December 2008 amounted to GH¢3,848.27 million, while maturities were GH¢3,012.10 million, resulting in a net borrowing of GH¢836.17 million. For the same period in 2007, a total sale of GH¢3,969.31 million with maturities of GH¢3,107.53 million was done, resulting in a net sale of GH¢861.72 million.
Domestic Debt Stock
The stock of marketable debt resulting from the issuance of Government of Ghana securities stood at GH¢3,370.70 million as at end December 2008.This constitutes an increase of 34.11 per cent over the 2007 stock of GH¢2,513.46 million.
112.
The short term debt now constitutes about 52.01 per cent of the marketable debt, whilst the 5-Year Treasury bond and the Golden Jubilee Savings bonds issues represent about 9.95 per cent.
Monetary Developments
Price Developments
Headline Inflation
Inflationary pressures built up rapidly in the first half of 2008, reflecting the impact of higher international food and crude oil prices on the domestic market. In the second half, however, inflationary pressures softened on the back of good food harvests and falling crude oil prices, but firmed up slightly in
November and December 2008.
Headline inflation measured as year-on-year changes in the consumer price index increased from 12.8 per cent in January 2008 to 18.1 per cent in December 2008, after peaking at 18.4 per cent in June 2008. Food inflation increased significantly from 10.6 per cent at the beginning of the year to 16.7 per cent at the end of 2008, peaking at 17.7 per cent in June 2008.
Similarly, non-food inflation also increased from 14.4 per cent to 19.1 per cent over the same period.
*****(Figure 1)
Contributions to changes in CPI
The national consumer price index for 2008 increased by 38.98 points compared with 23.71 points in the corresponding period in 2007. The food and beverages sub-sector contributed 46.67 per cent towards the upward movements in the national index while the non-food inflation contributed 53.33 per cent. Monthly
changes in inflation registered an average increase of 1.41 per cent in 2008, higher than the 1.00 per cent average increase in 2007.
Money and Financial Markets
Broad money including foreign currency deposits (M2+) grew by 40.20 per cent in December 2008 to reach GH¢8,061.2 million, compared with 35.9 per cent in December 2007 and 38.8 per cent a year earlier. Currency with the public increased by 27. 8 per cent, demand deposits by 31.2 per cent, savings and time deposits by 33.7 per cent, and foreign currency deposits by 83.0 per cent during the year. The change in the composition of
money holdings during the year was a reflection of developments in the rate of inflation and depreciation of the
domestic currency.
Sources of Change in M2+
Net Domestic Assets (NDA) of the banking system was the main source of growth in M2+ during the review period. It increased by 82.5 per cent mainly on account of the banking system°os net
claims on Government, claims on the private sector, mainly from Commercial banks. The growth in M2+ was, however, moderated by a drop of 13.7 per cent in Net Foreign Assets of the banking system.
Credit Developments
118.
Credit to the private sector recorded an annual growth of 48.1 per cent, reflecting a slowdown from the annual growth of 59.6 per cent in 2007. At the end of the year, credit to the private sector amounted to GH¢4,887.1 million.
Distribution of Credit by Sector
The top three beneficiaries of banks’ outstanding credit to the private sector continued to be the Services (23.18 per cent), Commerce & Finance (26.15 per cent) and Manufacturing (11.88 per cent). By holder, the Indigenous Enterprises and Household sectors also continued to dominate in banks’ allocation of credit
to the private sector, accounting for 66.8 per cent and 21.6 per cent, of the total respectively.
Exchange Rate Developments
The Ghana Cedi lost ground against all the major currencies from the second quarter, partly as a result of
re-alignments of the major international currencies, a surge in demand for foreign exchange to meet higher oil bills and food prices, servicing of external debts, and high expenditures on infrastructural development.
On the inter-bank market, the Ghana Cedi was steady during the first quarter. However in the second quarter, it weakened sharply and by the end of the first half it had depreciated by 6.0, 4.6 and 11.7 per cent against the US Dollar, the Pound Sterling and the Euro, respectively. The Ghana Cedi continued to depreciate against the US Dollar and the Euro but traded strongly against the Pound Sterling in the second half of the year. On an annual basis, the Ghana Cedi depreciated by 20.1 per cent and 16.3 per cent against the US Dollar and the Euro,
respectively. Against the Pound Sterling it appreciated by 8.1 per cent.
122.
On the forex bureau market the movement of the Ghana cedi against the US Dollar and the Euro was similar to the movement on the inter-bank market. It recorded annual depreciations of 20.6 per cent and 16.1 per cent against the US Dollar and the Euro, respectively, but appreciated by 5.2 per cent against the Pound Sterling.
Financial Markets
Money Market Developments
123.
Interest rates generally moved upwards in 2008. The Prime Rate was increased on three occasions from 13.5 per cent at the beginning of the year to 14.25 per cent in March, 16.0 per cent in May and to 17 per cent in July. The decision to raise the policy rate upwards was informed by increased risks to price stability.
124.
In response to the prime rate trends, average interest rates on government securities and on the interbank market also went up during the year. The average interest rate of the 91-day Treasury bill gained 14.06 percentage points to 24.67 per cent, while the average interest rate on the 1-year and 2-year fixed rate notes also increased by 7.70 percentage points and 8.20 percentage points to 20.00 percentage points and 21.00
percentage points respectively. The interbank weighted average rate also gained 7.05 percentage points to close the year at 19.03 per cent.
125.
Commercial banks’ average deposit and lending rates also followed the general trend of increases in rates. Banks°o average savings deposit, 3-month time deposit and lending rates increased by 4.45, 7.38 and 3.00 percentage points, respectively, to record 9.00 per cent, 16.38 per cent and 27.25 per cent at the end of 2008.
The Stock Market
126.
The stock market performed well in 2008 against the backdrop of tumbling stock prices in major stock exchanges in the world. Ghana’s Stock Exchange was considered one of the best performers in the world in 2008.
GSE All-Share Index
The year began on a good note with the GSE All-share index recording a 1.8 per cent rise in January and expectations were rife that the index would track the record-breaking performances of 2003 and 2004 which recorded 154.7 and 91.3 per cent growth, respectively.
128.
By the end of 2008, the GSE All Share Index closed at 10,431.6 points from the previous year°os close of 6,599.8 points, gaining 58.1 per cent.
Sectoral Performance
129.
The strong performance of the Finance sector contributed significantly to the upward movement in the GSE-All Share index. The Finance sector index ended the year as the best performing sector on the exchange. From the previous year’s close of 455.2 points, the index moved up to 754.0 points, gaining an increase of 65.7 per cent.
130.
The Manufacturing sector followed with an increase of 63 per cent. The Food and Beverage sector index also increased by 50.6 per cent.
131.
The Distribution sector index gained 6.7 per cent (42.1 points) from 632.1 points at the beginning of the year to end the year at 674.2 points.
132.
The Agriculture sector index ended the year at 200.0 points from 98.0 points.
133.
The Mining sector made a gain of GH¢ 0.10 or 3.2 per cent. The index rose marginally from 113.9 points to 114.18 points.
134.
Severe turbulence on the world’s major financial markets appeared to have affected most African stock exchanges. Out of the 14 exchanges surveyed, Ghana and Malawi were the only exchanges that registered significant growth. South Africa, Tanzania and Tunisia made marginal gains while nine recorded declines.
External Sector Developments
Developments in the Balance of Payments
135.
Provisional estimates of the current account balance in 2008 indicated a deficit of US$3,473.47 million, equivalent to 20.87 per cent of the GDP, compared with a deficit of US$2,151.48 million, equivalent to 14.7 per cent of the GDP in 2007. The deficit was due primarily to widening of the trade deficit that more than offset an improvement in the invisibles (services, income and current transfers) account.
Trade in Goods
136.
Trade in merchandise goods for 2008 showed a significant increase in both exports and imports, compared to the growth rates recorded in 2007. Exports and imports increased by 26.4 per cent and 27.2 per cent year-on-year, respectively in 2008, compared with 11.9 per cent and 19.4 per cent, respectively, in 2007.
Export Performance
137.
Export earnings were provisionally estimated at US$5,275.33 million, up by 26.4 per cent from the 2007 level. With the exception of minerals, all the principal exports performed well. While minerals increased by 5.1 per cent, cocoa products recorded the highest growth of 66.9 per cent followed by gold, cocoa beans, and timber products with 30.2 per cent, 28.9 per cent and 24.1 per cent, respectively.
138.
Cocoa exports rose from US$975.7 million in 2007 to US$1,239.65 million in 2008, up by 66.9 per cent or US$262.0 million. This was mainly on account of increases in both volumes exported and realized export prices. The volume of cocoa beans exported increased by 4.2 per cent to 568,820 tonnes. Average prices realized from exports of beans increased by 21.9 per cent to US$2,179.34 per tonne in 2008.
139.
Gold exports were equally strong in 2008. Export earnings increased by 29.6 per cent from US$1,733.78 million in 2007 to US$2,246.25 million in 2008. The growth in value was due to the combined effects of price and volume as average realized prices went up by 25.8 per cent and the volume of exports
increased by 4.06 per cent.
140.
The value of exports of timber products also improved considerably to about US$309.0 million, from the US$249.0 million recorded in 2007. While average prices increased by 17.64 per cent to US$554.09 million per cubic metre, the volume went up to 557,663 cubic metres, an increase of 5.5 per cent.
Import Performance
141.
Total import bill for 2008 rose by 27.2 per cent from US$8,066.11 million in 2007 to US$10,260.97 million. This was mainly boosted by a significant growth of 32.5 per cent in non- oil imports.
Oil Imports
142.
Total oil imports for the period under review is provisionally estimated at US$2,349.22 million up by 12.1 per cent compared with US$2,095.00 million in 2007. The bill for petroleum products in 2007 was mainly due to increased consumption of oil products following the electricity load shedding that the country experienced during most part of 2007. The 2008 bill on the other hand, was mainly accounted for by the increase in oil prices on the world market, which reached a high of US$147 per barrel in July 2008.
Non-oil imports
143.
There was considerable rise of 32.5 per cent in non-oil imports from US$5,971.11 in 2007 to US$7,911.75 in 2008. This was mainly due to increased consumption and continued investment activity within the economy. Imports of capital goods, intermediate goods and consumption goods grew by 34.3, 35.86 and 19.96 per cent, respectively.
144.
The increase in capital goods was reflected in the growth of capital goods, except transport equipment and industrial transport equipment, while the increase in intermediate goods was mainly on account of growth in food and beverages, primarily for industry, parts and accessories of capital goods, primary industrial supplies, parts and accessories of transport equipment; and foods and beverages processed for industries.
145.
The growth in consumption goods was underpinned by increases, mostly in food and beverages primarily meant for
consumption, non-durable consumer goods and semi-durable consumer goods. However, growth in durable consumer goods, was marginal. Other goods increased by 54.54 per cent to US$769.3 million due to an increase in importation of passenger cars which grew from US$443.12 million to US$756.24 million, up by 70.65 per cent.
Services, Current Transfers and Income Account
146.
The surplus on the services, current transfers and income account in 2008 amounted to US$1,512.17 million, a much lower figure than the US$1,742.5 million recorded in 2007. Services and investment income recorded more outflows in 2008 compared to 2007 due to higher freight and insurance charges associated with the higher import growth. Private transfers increased from US$1,833.8 million to US$1,921.92 million while official transfers increased from US$209.4 million to US$241.11 million.
147.
With the deterioration in the balance of trade more than offsetting the surplus on the services, income and current transfers account, the current account recorded a deficit of US$3,473.47 million, equivalent to 20.87 per cent of the GDP.
The Capital and Financial Account
148.
The balance on the capital and financial account recorded a surplus of US$2,666.05 million, a marginal increase over the 2007 surplus of US$2,591.42 million.
Private Capital Flows
149.
Net private capital inflows during the year were estimated to have increased by US$1,150.36 million to US$2,211.84 million. The main contributing factor to the increase in the account was a major improvement in divestiture receipts, mainly from the sale of Ghana Telecom, and a significant upward shift in direct
investment, which was estimated at US$1,220.41 million, compared with an inflow of US$855.38 million for 2007.
Official Capital Flows
150.
Net official capital inflows declined significantly by US$645.61 million from US$1,168.64 million to US$523.03 million in 2008 mainly on account of Government°os drawdown on the balance of the sovereign bond.
151.
In spite of the above developments, the balance on the financial and capital account was less than enough to finance the deficit on the current account, resulting in as overall balance of payments deficit of US$940.7 million, equivalent to 6.1 per cent of GDP. In the corresponding period of 2007, the overall balance of payments recorded a surplus of US$413.1 million, equivalent to 2.8 per cent of GDP.
International Reserves
152.
Gross international reserves also fell by US$800.4 million from a stock of US$2,836.7 million at the end of 2007 to US$2,036.2 million, mainly as a result of a drawn down in foreign bond proceeds to finance planned capital investments. The gross international reserves as at end 2008 translates into a cover for 1.8 months of imports for goods and services.
SECTION FIVE: MACROECONOMIC FRAMEWORK
Medium-Term Framework
The NDC Vision
153.
The vision of the NDC GoDEVELOPMENTS IN PUBLIC DEBT AND AID MANAGEMENT
The policy of public debt management in Ghana is to source funds at the minimum cost possible within a prudent level of risk, to meet government financing needs while ensuring that public debt is maintained at sustainable levels over the medium to long term.
The policy also entails the development of the domestic capital market and access to the international capital markets.
Review of 2008
Public Debt Stock
In 2008, gross public debt rose by about US$600 million to an end year position of US$8,002.5 million,
which is about 8.1 per cent increase over the 2007 position of US$7,405.5 million. The increase in public debt during the year was mainly driven by about US$400.0 million and US$200.0 increase in external and domestic debts, respectively.
By end 2008, public debt consisted of 49 per cent and 51 per cent of external and domestic debts, respectively. Prior to implementation of the MDRI in 2006, external debt, which was mainly made up of multilateral and bilateral debt, accounted for over 75 per cent of the public debt. The percentage share of external debt fell to 41 per cent in 2006 before rising to 48 per cent in 2007, mainly due to the inflow of US$750.0 million from
Ghana’s maiden sovereign bond issued on the international capital markets.
The ratio of Gross public debt to GDP declined from 142.6 per cent in 2001 to 41.4 per cent in 2006 under the dual impact of the Highly Indebted Poor Country (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI). Unfortunately, the ratio has since 2007 risen to 52.1 per cent (as recorded in December
2008) as result of renewed borrowing on non-concessional terms and mostly for economically unproductive projects.
Developments in External Debt
External Debt Strategy
External debt strategy in 2008 focused on seeking grants and highly concessional loans, with minimal funds from commercial sources.
External Debt Stock and Creditor Categorization
Ghana’s total external debt (including IMF debt) stood at US$3,982.6 million by end December, 2008, representing 24.7 per cent of GDP. By creditor categorizations, multilateral debt continued to dominate, constituting about 49.2 per cent of total external debt despite the substantial debt relief under the
Multilateral Debt Relief Initiative (MDRI).
Bilateral and commercial debts constitute 27.5 per cent and 23.3 per cent, respectively. On creditor basis, the World Bank continues to hold the largest share, contributing about one third of the total external debt.
Currency Composition of External Debt
The Special Drawing Rights (SDR) transacted in US Dollars continued to dominate the currency composition of external debt portfolio. By the end of 2008, it accounted for about 41.6 per cent with the US Dollar and the Euro accounting for about 35.4 per cent and 16.5 per cent, respectively. The Chinese Yuan, Japanese Yen, and others constitute about 2.0 per cent, 1.0 per cent and 4.0 per cent, respectively, of the external debt
portfolio.
Interest Rate Composition of External debt
Interest rate composition of the external debt is distributed in the ratio of 90.1, 8.4 and 1.5 per cent for fixed, variable and interest-free rates, respectively. The high proportion of the fixed interest rate is as a result of the high share of multilateral,bilateral and the Euro bond debt which bear fixed interest rates.
The variable interest rates mainly emanate from the export credit facilities and commercial loans while interest free facilities are mainly from the Chinese Government and some bilateral creditors.
Maturity Profile – Loan Term and Repayment
The average term to maturity (ATM) of the external portfolio is about 23 years, indicating that, largely, the external debt is of a long term profile. The principal repayment profile shows that about 2.6 per cent of the total outstanding debt falls due within the next 12 months and 19.7 per cent and 77.6 per cent fall due
within the 5 years and 20 years and beyond, respectively. Over 75 per cent of the external obligations fall due in the long term, indicating a high concentration of external obligations in the long term. In terms of cost profile, interest and other charges falling due within the next 12 months represents about 2.1 per cent of the external debt portfolio.
New Commitments
Loans
Traditional creditors remained the preferred source of borrowing, with cautious move to tap resources from
commercial sources to support growth catalytic sectors. During the year, about 46 loans were contracted totaling about US$2,630.9 million. About 20 per cent of the total committed amounts were from multilaterals, with 22 per cent and 58 per cent from bilateral and export credits sources, respectively. In terms of sectoral allocation, 37 per cent went to energy and the rest went to health, roads, water, defence, interior and finance.
Grants
In 2008, 36 grants amounting to US$455.9 million were committed as development assistance. In terms of use of
funds, General Budget Support under the Multi Donor Budgetary Support (MDBS) constituted 23 per cent with the remaining as project grants.
Developments under Debt Relief Initiatives
HIPC and MDRI Receipt Account
In 2008, a total of GH¢236.99 million (US$241.9 million) was received as debt relief, comprising GH¢170.2 million and GH¢66.87 million for HIPC and MDRI respectively.
About 49.7 per cent and 50.3 per cent of the HIPC relief came from multilateral and bilateral sources respectively. Of the MDRI,about 66.3 per cent came from the World Bank (IDA) and 33.7
per cent from the African Development Bank (AfDB).
Domestic Debt
Sale of Treasury Securities
In 2008 domestic borrowing supported the execution of the budget, refinancing of maturing government bills, and the development of the financial market.
In 2008, the Government„s debt strategy was geared primarily
at:
• the reduction of debt servicing costs; and
• extending the maturity profile of the debt stock.
A key component of the strategy was to shift from the heavy reliance on short term domestic financing to longer term maturity bonds open to non-resident investors. This was to help diversify the investor base in government securities and to avoid bunching up of maturing debt in the short term.
Due to the commodity crisis in 2008, which triggered high inflation, the shift to longer term securities was unsuccessful as there was strong preference for short term instruments by domestic investors. The financial crunch also discouraged the re-opening, and new issuance, of medium term securities to non-
resident investors.
The total sale of Government of Ghana securities from January to December 2008 amounted to GH¢3,848.27 million, while maturities were GH¢3,012.10 million, resulting in a net borrowing of GH¢836.17 million. For the same period in 2007, a total sale of GH¢3,969.31 million with maturities of GH¢3,107.53 million was done, resulting in a net sale of GH¢861.72 million.
Domestic Debt Stock
The stock of marketable debt resulting from the issuance of Government of Ghana securities stood at GH¢3,370.70 million as at end December 2008.This constitutes an increase of 34.11 per cent over the 2007 stock of GH¢2,513.46 million.
112.
The short term debt now constitutes about 52.01 per cent of the marketable debt, whilst the 5-Year Treasury bond and the Golden Jubilee Savings bonds issues represent about 9.95 per cent.
Monetary Developments
Price Developments
Headline Inflation
Inflationary pressures built up rapidly in the first half of 2008, reflecting the impact of higher international food and crude oil prices on the domestic market. In the second half, however, inflationary pressures softened on the back of good food harvests and falling crude oil prices, but firmed up slightly in
November and December 2008.
Headline inflation measured as year-on-year changes in the consumer price index increased from 12.8 per cent in January 2008 to 18.1 per cent in December 2008, after peaking at 18.4 per cent in June 2008. Food inflation increased significantly from 10.6 per cent at the beginning of the year to 16.7 per cent at the end of 2008, peaking at 17.7 per cent in June 2008.
Similarly, non-food inflation also increased from 14.4 per cent to 19.1 per cent over the same period.
*****(Figure 1)
Contributions to changes in CPI
The national consumer price index for 2008 increased by 38.98 points compared with 23.71 points in the corresponding period in 2007. The food and beverages sub-sector contributed 46.67 per cent towards the upward movements in the national index while the non-food inflation contributed 53.33 per cent. Monthly
changes in inflation registered an average increase of 1.41 per cent in 2008, higher than the 1.00 per cent average increase in 2007.
Money and Financial Markets
Broad money including foreign currency deposits (M2+) grew by 40.20 per cent in December 2008 to reach GH¢8,061.2 million, compared with 35.9 per cent in December 2007 and 38.8 per cent a year earlier. Currency with the public increased by 27. 8 per cent, demand deposits by 31.2 per cent, savings and time deposits by 33.7 per cent, and foreign currency deposits by 83.0 per cent during the year. The change in the composition of
money holdings during the year was a reflection of developments in the rate of inflation and depreciation of the
domestic currency.
Sources of Change in M2+
Net Domestic Assets (NDA) of the banking system was the main source of growth in M2+ during the review period. It increased by 82.5 per cent mainly on account of the banking system°os net
claims on Government, claims on the private sector, mainly from Commercial banks. The growth in M2+ was, however, moderated by a drop of 13.7 per cent in Net Foreign Assets of the banking system.
Credit Developments
118.
Credit to the private sector recorded an annual growth of 48.1 per cent, reflecting a slowdown from the annual growth of 59.6 per cent in 2007. At the end of the year, credit to the private sector amounted to GH¢4,887.1 million.
Distribution of Credit by Sector
The top three beneficiaries of banks’ outstanding credit to the private sector continued to be the Services (23.18 per cent), Commerce & Finance (26.15 per cent) and Manufacturing (11.88 per cent). By holder, the Indigenous Enterprises and Household sectors also continued to dominate in banks’ allocation of credit
to the private sector, accounting for 66.8 per cent and 21.6 per cent, of the total respectively.
Exchange Rate Developments
The Ghana Cedi lost ground against all the major currencies from the second quarter, partly as a result of
re-alignments of the major international currencies, a surge in demand for foreign exchange to meet higher oil bills and food prices, servicing of external debts, and high expenditures on infrastructural development.
On the inter-bank market, the Ghana Cedi was steady during the first quarter. However in the second quarter, it weakened sharply and by the end of the first half it had depreciated by 6.0, 4.6 and 11.7 per cent against the US Dollar, the Pound Sterling and the Euro, respectively. The Ghana Cedi continued to depreciate against the US Dollar and the Euro but traded strongly against the Pound Sterling in the second half of the year. On an annual basis, the Ghana Cedi depreciated by 20.1 per cent and 16.3 per cent against the US Dollar and the Euro,
respectively. Against the Pound Sterling it appreciated by 8.1 per cent.
122.
On the forex bureau market the movement of the Ghana cedi against the US Dollar and the Euro was similar to the movement on the inter-bank market. It recorded annual depreciations of 20.6 per cent and 16.1 per cent against the US Dollar and the Euro, respectively, but appreciated by 5.2 per cent against the Pound Sterling.
Financial Markets
Money Market Developments
123.
Interest rates generally moved upwards in 2008. The Prime Rate was increased on three occasions from 13.5 per cent at the beginning of the year to 14.25 per cent in March, 16.0 per cent in May and to 17 per cent in July. The decision to raise the policy rate upwards was informed by increased risks to price stability.
124.
In response to the prime rate trends, average interest rates on government securities and on the interbank market also went up during the year. The average interest rate of the 91-day Treasury bill gained 14.06 percentage points to 24.67 per cent, while the average interest rate on the 1-year and 2-year fixed rate notes also increased by 7.70 percentage points and 8.20 percentage points to 20.00 percentage points and 21.00
percentage points respectively. The interbank weighted average rate also gained 7.05 percentage points to close the year at 19.03 per cent.
125.
Commercial banks’ average deposit and lending rates also followed the general trend of increases in rates. Banks°o average savings deposit, 3-month time deposit and lending rates increased by 4.45, 7.38 and 3.00 percentage points, respectively, to record 9.00 per cent, 16.38 per cent and 27.25 per cent at the end of 2008.
The Stock Market
126.
The stock market performed well in 2008 against the backdrop of tumbling stock prices in major stock exchanges in the world. Ghana’s Stock Exchange was considered one of the best performers in the world in 2008.
GSE All-Share Index
The year began on a good note with the GSE All-share index recording a 1.8 per cent rise in January and expectations were rife that the index would track the record-breaking performances of 2003 and 2004 which recorded 154.7 and 91.3 per cent growth, respectively.
128.
By the end of 2008, the GSE All Share Index closed at 10,431.6 points from the previous year°os close of 6,599.8 points, gaining 58.1 per cent.
Sectoral Performance
129.
The strong performance of the Finance sector contributed significantly to the upward movement in the GSE-All Share index. The Finance sector index ended the year as the best performing sector on the exchange. From the previous year’s close of 455.2 points, the index moved up to 754.0 points, gaining an increase of 65.7 per cent.
130.
The Manufacturing sector followed with an increase of 63 per cent. The Food and Beverage sector index also increased by 50.6 per cent.
131.
The Distribution sector index gained 6.7 per cent (42.1 points) from 632.1 points at the beginning of the year to end the year at 674.2 points.
132.
The Agriculture sector index ended the year at 200.0 points from 98.0 points.
133.
The Mining sector made a gain of GH¢ 0.10 or 3.2 per cent. The index rose marginally from 113.9 points to 114.18 points.
134.
Severe turbulence on the world’s major financial markets appeared to have affected most African stock exchanges. Out of the 14 exchanges surveyed, Ghana and Malawi were the only exchanges that registered significant growth. South Africa, Tanzania and Tunisia made marginal gains while nine recorded declines.
External Sector Developments
Developments in the Balance of Payments
135.
Provisional estimates of the current account balance in 2008 indicated a deficit of US$3,473.47 million, equivalent to 20.87 per cent of the GDP, compared with a deficit of US$2,151.48 million, equivalent to 14.7 per cent of the GDP in 2007. The deficit was due primarily to widening of the trade deficit that more than offset an improvement in the invisibles (services, income and current transfers) account.
Trade in Goods
136.
Trade in merchandise goods for 2008 showed a significant increase in both exports and imports, compared to the growth rates recorded in 2007. Exports and imports increased by 26.4 per cent and 27.2 per cent year-on-year, respectively in 2008, compared with 11.9 per cent and 19.4 per cent, respectively, in 2007.
Export Performance
137.
Export earnings were provisionally estimated at US$5,275.33 million, up by 26.4 per cent from the 2007 level. With the exception of minerals, all the principal exports performed well. While minerals increased by 5.1 per cent, cocoa products recorded the highest growth of 66.9 per cent followed by gold, cocoa beans, and timber products with 30.2 per cent, 28.9 per cent and 24.1 per cent, respectively.
138.
Cocoa exports rose from US$975.7 million in 2007 to US$1,239.65 million in 2008, up by 66.9 per cent or US$262.0 million. This was mainly on account of increases in both volumes exported and realized export prices. The volume of cocoa beans exported increased by 4.2 per cent to 568,820 tonnes. Average prices realized from exports of beans increased by 21.9 per cent to US$2,179.34 per tonne in 2008.
139.
Gold exports were equally strong in 2008. Export earnings increased by 29.6 per cent from US$1,733.78 million in 2007 to US$2,246.25 million in 2008. The growth in value was due to the combined effects of price and volume as average realized prices went up by 25.8 per cent and the volume of exports
increased by 4.06 per cent.
140.
The value of exports of timber products also improved considerably to about US$309.0 million, from the US$249.0 million recorded in 2007. While average prices increased by 17.64 per cent to US$554.09 million per cubic metre, the volume went up to 557,663 cubic metres, an increase of 5.5 per cent.
Import Performance
141.
Total import bill for 2008 rose by 27.2 per cent from US$8,066.11 million in 2007 to US$10,260.97 million. This was mainly boosted by a significant growth of 32.5 per cent in non- oil imports.
Oil Imports
142.
Total oil imports for the period under review is provisionally estimated at US$2,349.22 million up by 12.1 per cent compared with US$2,095.00 million in 2007. The bill for petroleum products in 2007 was mainly due to increased consumption of oil products following the electricity load shedding that the country experienced during most part of 2007. The 2008 bill on the other hand, was mainly accounted for by the increase in oil prices on the world market, which reached a high of US$147 per barrel in July 2008.
Non-oil imports
143.
There was considerable rise of 32.5 per cent in non-oil imports from US$5,971.11 in 2007 to US$7,911.75 in 2008. This was mainly due to increased consumption and continued investment activity within the economy. Imports of capital goods, intermediate goods and consumption goods grew by 34.3, 35.86 and 19.96 per cent, respectively.
144.
The increase in capital goods was reflected in the growth of capital goods, except transport equipment and industrial transport equipment, while the increase in intermediate goods was mainly on account of growth in food and beverages, primarily for industry, parts and accessories of capital goods, primary industrial supplies, parts and accessories of transport equipment; and foods and beverages processed for industries.
145.
The growth in consumption goods was underpinned by increases, mostly in food and beverages primarily meant for
consumption, non-durable consumer goods and semi-durable consumer goods. However, growth in durable consumer goods, was marginal. Other goods increased by 54.54 per cent to US$769.3 million due to an increase in importation of passenger cars which grew from US$443.12 million to US$756.24 million, up by 70.65 per cent.
Services, Current Transfers and Income Account
146.
The surplus on the services, current transfers and income account in 2008 amounted to US$1,512.17 million, a much lower figure than the US$1,742.5 million recorded in 2007. Services and investment income recorded more outflows in 2008 compared to 2007 due to higher freight and insurance charges associated with the higher import growth. Private transfers increased from US$1,833.8 million to US$1,921.92 million while official transfers increased from US$209.4 million to US$241.11 million.
147.
With the deterioration in the balance of trade more than offsetting the surplus on the services, income and current transfers account, the current account recorded a deficit of US$3,473.47 million, equivalent to 20.87 per cent of the GDP.
The Capital and Financial Account
148.
The balance on the capital and financial account recorded a surplus of US$2,666.05 million, a marginal increase over the 2007 surplus of US$2,591.42 million.
Private Capital Flows
149.
Net private capital inflows during the year were estimated to have increased by US$1,150.36 million to US$2,211.84 million. The main contributing factor to the increase in the account was a major improvement in divestiture receipts, mainly from the sale of Ghana Telecom, and a significant upward shift in direct
investment, which was estimated at US$1,220.41 million, compared with an inflow of US$855.38 million for 2007.
Official Capital Flows
150.
Net official capital inflows declined significantly by US$645.61 million from US$1,168.64 million to US$523.03 million in 2008 mainly on account of Government°os drawdown on the balance of the sovereign bond.
151.
In spite of the above developments, the balance on the financial and capital account was less than enough to finance the deficit on the current account, resulting in as overall balance of payments deficit of US$940.7 million, equivalent to 6.1 per cent of GDP. In the corresponding period of 2007, the overall balance of payments recorded a surplus of US$413.1 million, equivalent to 2.8 per cent of GDP.
International Reserves
152.
Gross international reserves also fell by US$800.4 million from a stock of US$2,836.7 million at the end of 2007 to US$2,036.2 million, mainly as a result of a drawn down in foreign bond proceeds to finance planned capital investments. The gross international reserves as at end 2008 translates into a cover for 1.8 months of imports for goods and services.
SECTION FIVE: MACROECONOMIC FRAMEWORK
Medium-Term Framework
The NDC Vision
153.
The vision of the NDC Government is to adopt carefully designed policies and programmes that will stimulate and develop the immense talents and resourcefulness of Ghanaians and make them the main drivers and beneficiaries of the national development agenda, with special emphasis on the rural and urban poor.
154.
In pursuit of this vision, the government will:
• make macro-economic stability an important goal;
• provide the policy and programme framework for enterprises to re-tool, adopt modern technologies, access capital, and
• overcome historical and structural constraints that impede competitiveness;
• forge a partnership between the government and the business sector, to enhance and promote national economic
growth;
• devise and implement an urgent national action plan for the modernization of agriculture at the production, harvesting and marketing levels. These will include rationalizing access to agricultural lands; making strategic investments to reduce the risks inherent in agriculture (irrigation and agro-processing); and expanding availability of agriculture-related infrastructure; and
• apply fair and equitable social distribution mechanisms that
enhance the welfare of all citizens, especially the weak and the vulnerable in society.
Economic Objectives
155.
Against the backdrop of the current economic situation, our main strategic policy objectives are outlined below.
156.
The broad policy objective of the NDC government is to lead this economy into middle income status that registers in the lives, livelihoods and incomes of ordinary people by the year 2020. We plan to accomplish this objective through the adoption of prudent policy measures, better policy coordination, and better management of the national economy.
Growth
157.
Growth will be pursued through proper coordination of related policy areas such as:
• improving and sustaining macroeconomic stability;
• resource mobilization to support accelerated economic
development
• expanded development of production infrastructure in,
among others, energy, transport, water and communications;
• creating employment, through support for micro small and
medium enterprises of various categories;
• modernizing agriculture and the rural economy;
• resuscitating manufacturing activities;
• developing the complement of human capital critical for
managing the various aspects of national development; and
• promoting Regional Integration.
Fiscal Policy
158.
The NDC Government believes in funding development and the provision of essential services through efficient, effective, and equitable taxation of all citizens. We will seek to improve tax revenue collections by introducing reforms in tax administration, and enhancing tax incentives.
Government will reform the National Revenue Authority to ensure integrated tax administration. This will, among others, facilitate the sharing of information among the revenue agencies to achieve more accurate assessments, widen the tax net and avoid duplication of efforts.
160.
The administrative reforms will include adequate and reliable funding of the revenue agencies, a comprehensive
computerization of the direct and indirect tax systems, human resource capacity building, increased tax awareness and publicity programmes to enhance tax consciousness, to increase tax mobilization from the informal sector.
161.
Tax policy will be used to encourage people to work hard by creating adequate incentives for work and increased
productivity, in order to increase disposable incomes of individuals.
162.
In the medium term, emphasis will be placed on prudent expenditure management with the view to reducing
unproductive expenditures to the barest minimum.
Monetary Policy
163.
Monetary policy will support fiscal policy, focusing on sharply reducing inflationary pressures and stabilising price and exchange rate expectations on the market. The Bank of Ghana (BoG) will direct monetary policy towards reducing the end period inflation, and strengthen its inflation targeting framework.
164.
The flexible exchange rate regime will be maintained and foreign exchange interventions will only be used as an
instrument to smooth out volatility in the foreign exchange market.
165.
Measures will be introduced to encourage further development of the market for bonds and other long-term securities, mobilize savings for investment and restructure the financial system to enhance the flow of credit to the productive sectors.
Medium-term Macroeconomic Targets
166.
In line with the medium term policies, the following are the main macroeconomic targets:
• average real GDP growth of about 8 per cent;
• average consumer price inflation of a single digit;
• gross international reserves of not less than three months of import cover;
• overall budget deficit equivalent to 3.0 per cent of GDP;
• Stabilization of the total public debt at no more than 60 per cent of GDP.
Structural Policies
167.
Structural reforms will be pursued and strengthened in the medium term. In anticipation of revenue inflows from oil production, policies will be mapped out to ensure the maintenance of fiscal and debt sustainability.
Tax Administration
168.
One of the major challenges facing Ghana is how to broaden the tax net. The fact that the vast majority of Ghanaians are in the informal sector makes revenue generation a daunting task. Tax Administration will be strengthened to realize efficiency gains and broadening of the tax base.
169.
Tax exemptions constitute a significant proportion of about 9.0 per cent of total tax revenue. Revenue loss from exemptions granted in duties and taxes continue to rise. Government intends to review the exemptions regime as a whole to reduce the scope and to eliminate abuses in the administration and application of the facility. As a start, all exemptions resulting from the clearance of goods on “permit” will be curtailed. Work on the remaining types of exemptions will continue in order to achieve a comprehensive review in the medium term.
170.
Despite the above measures to rationalize and enhance revenue collection, government will look for opportunities to provide tax incentives to the private sector in key sectors of the economy.
Public Sector Reforms
171.
Government will review the reforms of the public sector and pursue an action plan to restructure subvented agencies that areno longer relevant to the government’s objectives. In this regard, there will be partial or full commercialization of selected subvented agencies.
Public Sector Wages
172.
Madam Speaker, the Government recognizes the wage issue as a major challenge and is, hence, committed to the public sector reforms that link wage settlement to increased productivity.
173.
These reforms are expected to solve the problems at the labour front, resulting partly from a distorted public sector salary structure which is also poorly administered.
174.
Significant progress has been made with the development of a draft framework for a comprehensive salary structure, the Single Spine, for all public sector workers (excluding Article 71 Constitutional Office Holders). The agreed processes will be discussed by all stakeholders, in order to arrive at a consensus
on implementation. The Single Spine structure aims to attain equity and transparency in public sector salaries while minimising leakages associated with the current pay system.
175.
We are committed to a programme for the distribution of the benefits of growth that will be targeted at providing the basic needs of the people. The programme will focus on the following:
• adequate nutrition and access of every person to potable water;
• access to preventive and curative medicine;
• affordable and adequate housing for low income workers and residents of rural and peri-urban communities;
• employment opportunities for all those who are willing and able to work;
• sustainable pension options for all citizens;
• a fundamental reform and restructuring of the economy through the modernization of agriculture and processing of agricultural and mineral products.
176.
We will invest in local communities as part of our rural modernization and urban regeneration strategy to cover the following:
• construction and rehabilitation of rural roads;
• provision of clinics and health posts;
• provision of schools and community libraries;
• extension of electricity to all communities with a population of over 500; construction of houses for teachers and health workers in the rural areas; and provision of social amenities in urban communities with high
levels of poverty.
Short-term Macroeconomic policies
177.
Our policy in 2009, will be reinforced to ensure macroeconomic stability in the context of a deteriorating
international environment so as to provide a temporary cushion to the domestic economy. Subsequently, the stable economy will enhance accelerated growth which will ensure the attainment of a middle income status by 2020. This strategy will be accomplished through fiscal discipline hinged on prudent public expenditure management, strict adherence to public procurement rules, efficient and effective domestic revenue mobilization, and encouraging the private sector to participate in our accelerated growth agenda through Public Private Partnerships (PPPs).
178.
The fiscal outlook is very critical to Government in achieving its objective of maintaining long-term fiscal and debt sustainability. There will be a decisive policy to improve expenditure management, enhance public financial management, restructure State-Owned Enterprises (SOEs) particularly the utility companies and ensure the success of the public sector reforms.
179.
In spite of the fiscal outturn for 2008, Government is committed to managing the macroeconomic situation to ensure that the macroeconomic targets change in the right direction in the short to medium term.
MACROECONOMIC POLICIES, STRATEGIES AND TARGETS FOR 2009
180.
In the 2008 Manifesto of the NDC, we pledged that an NDC Government would “establish a lean but effective and efficient government by cutting out ostentation and profligate expenditure; rationalizing ministries and ministerial appointments; and promoting service, humility and integrity as canons of government”.
181.
This is one of the main policy directions that this Budget seeks to achieve. As a first step towards the creation of a lean government, the total number of Ministries has been rationalized, reducing them from 27 to 23.
182.
Madam Speaker, based on the 2008 fiscal outturn, and the world economic outlook already outlined in Chapter Two of this Statement, our broad economic and financial objectives for 2009 include:
• real GDP growth of 5.9 per cent;
• average inflation target of 15.3 per cent;
• end period inflation of 12.5 per cent;
• an overall budget deficit equivalent to 9.4 per cent of GDP;
• gross international reserves of more than two months of
• import cover of goods and services.
183.
Considering the harsh global environment, these macroeconomicof multilateral and bilateral debt, accounted for over 75 per cent of the public debt. The percentage share of external debt fell to 41 per cent in 2006 before rising to 48 per cent in 2007, mainly due to the inflow of US$750.0 million from Ghana’s maiden sovereign bond issued on the international capital markets.
The ratio of Gross public debt to GDP declined from 142.6 per cent in 2001 to 41.4 per cent in 2006 under the dual impact of the Highly Indebted Poor Country (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI). Unfortunately, the ratio has since 2007 risen to 52.1 per cent (as recorded in December 2008) as result of renewed borrowing on non-concessional terms and mostly for economically unproductive projects.
Developments in External Debt
External Debt Strategy
External debt strategy in 2008 focused on seeking grants and highly concessional loans, with minimal funds from commercial sources.
External Debt Stock and Creditor Categorization
Ghana’s total external debt (including IMF debt) stood at US$3,982.6 million by end December, 2008, representing 24.7 per cent of GDP. By creditor categorizations, multilateral debt continued to dominate, constituting about 49.2 per cent of total external debt despite the substantial debt relief under the Multilateral Debt Relief Initiative (MDRI).
Bilateral and commercial debts constitute 27.5 per cent and 23.3 per cent, respectively. On creditor basis, the World Bank continues to hold the largest share, contributing about one third of the total external debt.
Currency Composition of External Debt
The Special Drawing Rights (SDR) transacted in US Dollars continued to dominate the currency composition of external debt portfolio. By the end of 2008, it accounted for about 41.6 per cent with the US Dollar and the Euro accounting for about 35.4 per cent and 16.5 per cent, respectively. The Chinese Yuan, Japanese Yen, and others constitute about 2.0 per cent, 1.0 per cent and 4.0 per cent, respectively, of the external debt portfolio.
Interest Rate Composition of External debt
Interest rate composition of the external debt is distributed in the ratio of 90.1, 8.4 and 1.5 per cent for fixed, variable and interest-free rates, respectively. The high proportion of the fixed interest rate is as a result of the high share of multilateral,bilateral and the Euro bond debt which bear fixed interest rates.
The variable interest rates mainly emanate from the export credit facilities and commercial loans while interest free facilities are mainly from the Chinese Government and some bilateral creditors.
Maturity Profile – Loan Term and Repayment
The average term to maturity (ATM) of the external portfolio is about 23 years, indicating that, largely, the external debt is of a long term profile. The principal repayment profile shows that about 2.6 per cent of the total outstanding debt falls due within the next 12 months and 19.7 per cent and 77.6 per cent fall due within the 5 years and 20 years and beyond, respectively. Over 75 per cent of the external obligations fall due in the long term, indicating a high concentration of external obligations in the long term. In terms of cost profile, interest and other charges falling due within the next 12 months represents about 2.1 per cent of the external debt portfolio.
New Commitments: Loans
Traditional creditors remained the preferred source of borrowing, with cautious move to tap resources from
commercial sources to support growth catalytic sectors. During the year, about 46 loans were contracted totaling about US$2,630.9 million. About 20 per cent of the total committed amounts were from multilaterals, with 22 per cent and 58 per cent from bilateral and export credits sources, respectively. In terms of sectoral allocation, 37 per cent went to energy and the rest went to health, roads, water, defence, interior and finance.
Grants
In 2008, 36 grants amounting to US$455.9 million were committed as development assistance. In terms of use of
funds, General Budget Support under the Multi Donor Budgetary Support (MDBS) constituted 23 per cent with the remaining as project grants.
Developments under Debt Relief Initiatives HIPC and MDRI Receipt Account
In 2008, a total of GH¢236.99 million (US$241.9 million) was received as debt relief, comprising GH¢170.2 million and GH¢66.87 million for HIPC and MDRI respectively.
About 49.7 per cent and 50.3 per cent of the HIPC relief came from multilateral and bilateral sources respectively. Of the MDRI,about 66.3 per cent came from the World Bank (IDA) and 33.7 per cent from the African Development Bank (AfDB).
Domestic Debt
Sale of Treasury Securities
In 2008 domestic borrowing supported the execution of the budget, refinancing of maturing government bills, and the development of the financial market.
In 2008, the Government„s debt strategy was geared primarily at:
• the reduction of debt servicing costs; and
• extending the maturity profile of the debt stock.
A key component of the strategy was to shift from the heavy reliance on short term domestic financing to longer term maturity bonds open to non-resident investors. This was to help diversify the investor base in government securities and to avoid bunching up of maturing debt in the short term.
Due to the commodity crisis in 2008, which triggered high inflation, the shift to longer term securities was unsuccessful as there was strong preference for short term instruments by domestic investors. The financial crunch also discouraged the re-opening, and new issuance, of medium term securities to non- resident investors.
The total sale of Government of Ghana securities from January to December 2008 amounted to GH¢3,848.27 million, while maturities were GH¢3,012.10 million, resulting in a net borrowing of GH¢836.17 million. For the same period in 2007, a total sale of GH¢3,969.31 million with maturities of GH¢3,107.53 million was done, resulting in a net sale of GH¢861.72 million.
Domestic Debt Stock
The stock of marketable debt resulting from the issuance of Government of Ghana securities stood at GH¢3,370.70 million as at end December 2008.This constitutes an increase of 34.11 per cent over the 2007 stock of GH¢2,513.46 million.
The short term debt now constitutes about 52.01 per cent of the marketable debt, whilst the 5-Year Treasury bond and the Golden Jubilee Savings bonds issues represent about 9.95 per cent.
Monetary Developments
Price Developments
Headline Inflation
Inflationary pressures built up rapidly in the first half of 2008, reflecting the impact of higher international food and crude oil prices on the domestic market. In the second half, however, inflationary pressures softened on the back of good food harvests and falling crude oil prices, but firmed up slightly in November and December 2008.
Headline inflation measured as year-on-year changes in the consumer price index increased from 12.8 per cent in January 2008 to 18.1 per cent in December 2008, after peaking at 18.4 per cent in June 2008. Food inflation increased significantly from 10.6 per cent at the beginning of the year to 16.7 per cent at the end of 2008, peaking at 17.7 per cent in June 2008.
Similarly, non-food inflation also increased from 14.4 per cent to 19.1 per cent over the same period.
Contributions to changes in CPI
The national consumer price index for 2008 increased by 38.98 points compared with 23.71 points in the corresponding period in 2007. The food and beverages sub-sector contributed 46.67 per cent towards the upward movements in the national index while the non-food inflation contributed 53.33 per cent. Monthly changes in inflation registered an average increase of 1.41 per cent in 2008, higher than the 1.00 per cent average increase in 2007.
Money and Financial Markets
Broad money including foreign currency deposits (M2+) grew by 40.20 per cent in December 2008 to reach GH¢8,061.2 million, compared with 35.9 per cent in December 2007 and 38.8 per cent a year earlier. Currency with the public increased by 27. 8 per cent, demand deposits by 31.2 per cent, savings and time deposits by 33.7 per cent, and foreign currency deposits by 83.0 per cent during the year. The change in the composition of money holdings during the year was a reflection of developments in the rate of inflation and depreciation of the domestic currency.
Sources of Change in M2+
Net Domestic Assets (NDA) of the banking system was the main source of growth in M2+ during the review period. It increased by 82.5 per cent mainly on account of the banking system’s net claims on Government, claims on the private sector, mainly from Commercial banks. The growth in M2+ was, however, moderated by a drop of 13.7 per cent in Net Foreign Assets of the banking system.
Credit Developments
Credit to the private sector recorded an annual growth of 48.1 per cent, reflecting a slowdown from the annual growth of 59.6 per cent in 2007. At the end of the year, credit to the private sector amounted to GH¢4,887.1 million.
Distribution of Credit by Sector
The top three beneficiaries of banks’ outstanding credit to the private sector continued to be the Services (23.18 per cent), Commerce & Finance (26.15 per cent) and Manufacturing (11.88 per cent). By holder, the Indigenous Enterprises and Household sectors also continued to dominate in banks’ allocation of credit to the private sector, accounting for 66.8 per cent and 21.6 per cent, of the total respectively.
Exchange Rate Developments
The Ghana Cedi lost ground against all the major currencies from the second quarter, partly as a result of re-alignments of the major international currencies, a surge in demand for foreign exchange to meet higher oil bills and food prices, servicing of external debts, and high expenditures on infrastructural development.
On the inter-bank market, the Ghana Cedi was steady during the first quarter. However in the second quarter, it weakened sharply and by the end of the first half it had depreciated by 6.0, 4.6 and 11.7 per cent against the US Dollar, the Pound Sterling and the Euro, respectively. The Ghana Cedi continued to depreciate against the US Dollar and the Euro but traded strongly against the Pound Sterling in the second half of the year. On an annual basis, the Ghana Cedi depreciated by 20.1 per cent and 16.3 per cent against the US Dollar and the Euro, respectively. Against the Pound Sterling it appreciated by 8.1 per cent.
On the forex bureau market the movement of the Ghana cedi against the US Dollar and the Euro was similar to the movement on the inter-bank market. It recorded annual depreciations of 20.6 per cent and 16.1 per cent against the US Dollar and the Euro, respectively, but appreciated by 5.2 per cent against the Pound Sterling.
Financial Markets
Money Market Developments
Interest rates generally moved upwards in 2008. The Prime Rate was increased on three occasions from 13.5 per cent at the beginning of the year to 14.25 per cent in March, 16.0 per cent in May and to 17 per cent in July. The decision to raise the policy rate upwards was informed by increased risks to price stability.
In response to the prime rate trends, average interest rates on government securities and on the interbank market also went up during the year. The average interest rate of the 91-day Treasury bill gained 14.06 percentage points to 24.67 per cent, while the average interest rate on the 1-year and 2-year fixed rate notes also increased by 7.70 percentage points and 8.20 percentage points to 20.00 percentage points and 21.00
percentage points respectively. The interbank weighted average rate also gained 7.05 percentage points to close the year at 19.03 per cent.
Commercial banks’ average deposit and lending rates also followed the general trend of increases in rates. Banks°o average savings deposit, 3-month time deposit and lending rates increased by 4.45, 7.38 and 3.00 percentage points, respectively, to record 9.00 per cent, 16.38 per cent and 27.25 per cent at the end of 2008.
The Stock Market
The stock market performed well in 2008 against the backdrop of tumbling stock prices in major stock exchanges in the world. Ghana’s Stock Exchange was considered one of the best performers in the world in 2008.
GSE All-Share Index
The year began on a good note with the GSE All-share index recording a 1.8 per cent rise in January and expectations were rife that the index would track the record-breaking performances of 2003 and 2004 which recorded 154.7 and 91.3 per cent growth, respectively.
By the end of 2008, the GSE All Share Index closed at 10,431.6 points from the previous year°os close of 6,599.8 points, gaining 58.1 per cent.
Sectoral Performance
The strong performance of the Finance sector contributed significantly to the upward movement in the GSE-All Share index. The Finance sector index ended the year as the best performing sector on the exchange. From the previous year’s close of 455.2 points, the index moved up to 754.0 points, gaining an increase of 65.7 per cent.
The Manufacturing sector followed with an increase of 63 per cent. The Food and Beverage sector index also increased by 50.6 per cent.
The Distribution sector index gained 6.7 per cent (42.1 points) from 632.1 points at the beginning of the year to end the year at 674.2 points.
The Agriculture sector index ended the year at 200.0 points from 98.0 points.
The Mining sector made a gain of GH¢ 0.10 or 3.2 per cent. The index rose marginally from 113.9 points to 114.18 points.
Severe turbulence on the world’s major financial markets appeared to have affected most African stock exchanges. Out of the 14 exchanges surveyed, Ghana and Malawi were the only exchanges that registered significant growth. South Africa, Tanzania and Tunisia made marginal gains while nine recorded declines.
Developments in the Balance of Payments
Provisional estimates of the current account balance in 2008 indicated a deficit of US$3,473.47 million, equivalent to 20.87 per cent of the GDP, compared with a deficit of US$2,151.48 million, equivalent to 14.7 per cent of the GDP in 2007. The deficit was due primarily to widening of the trade deficit that more than offset an improvement in the invisibles (services, income and current transfers) account.
Trade in Goods
Trade in merchandise goods for 2008 showed a significant increase in both exports and imports, compared to the growth rates recorded in 2007. Exports and imports increased by 26.4 per cent and 27.2 per cent year-on-year, respectively in 2008, compared with 11.9 per cent and 19.4 per cent, respectively, in 2007.
Export Performance
Export earnings were provisionally estimated at US$5,275.33 million, up by 26.4 per cent from the 2007 level. With the exception of minerals, all the principal exports performed well. While minerals increased by 5.1 per cent, cocoa products recorded the highest growth of 66.9 per cent followed by gold, cocoa beans, and timber products with 30.2 per cent, 28.9 per cent and 24.1 per cent, respectively.
138.
Cocoa exports rose from US$975.7 million in 2007 to US$1,239.65 million in 2008, up by 66.9 per cent or US$262.0 million. This was mainly on account of increases in both volumes exported and realized export prices. The volume of cocoa beans exported increased by 4.2 per cent to 568,820 tonnes. Average prices realized from exports of beans increased by 21.9 per cent to US$2,179.34 per tonne in 2008.
139.
Gold exports were equally strong in 2008. Export earnings increased by 29.6 per cent from US$1,733.78 million in 2007 to US$2,246.25 million in 2008. The growth in value was due to the combined effects of price and volume as average realized prices went up by 25.8 per cent and the volume of exports
increased by 4.06 per cent.
140.
The value of exports of timber products also improved considerably to about US$309.0 million, from the US$249.0 million recorded in 2007. While average prices increased by 17.64 per cent to US$554.09 million per cubic metre, the volume went up to 557,663 cubic metres, an increase of 5.5 per cent.
Import Performance
141.
Total import bill for 2008 rose by 27.2 per cent from US$8,066.11 million in 2007 to US$10,260.97 million. This was mainly boosted by a significant growth of 32.5 per cent in non- oil imports.
Oil Imports
142.
Total oil imports for the period under review is provisionally estimated at US$2,349.22 million up by 12.1 per cent compared with US$2,095.00 million in 2007. The bill for petroleum products in 2007 was mainly due to increased consumption of oil products following the electricity load shedding that the country experienced during most part of 2007. The 2008 bill on the other hand, was mainly accounted for by the increase in oil prices on the world market, which reached a high of US$147 per barrel in July 2008.
Non-oil imports
143.
There was considerable rise of 32.5 per cent in non-oil imports from US$5,971.11 in 2007 to US$7,911.75 in 2008. This was mainly due to increased consumption and continued investment activity within the economy. Imports of capital goods, intermediate goods and consumption goods grew by 34.3, 35.86 and 19.96 per cent, respectively.
144.
The increase in capital goods was reflected in the growth of capital goods, except transport equipment and industrial transport equipment, while the increase in intermediate goods was mainly on account of growth in food and beverages, primarily for industry, parts and accessories of capital goods, primary industrial supplies, parts and accessories of transport equipment; and foods and beverages processed for industries.
145.
The growth in consumption goods was underpinned by increases, mostly in food and beverages primarily meant for
consumption, non-durable consumer goods and semi-durable consumer goods. However, growth in durable consumer goods, was marginal. Other goods increased by 54.54 per cent to US$769.3 million due to an increase in importation of passenger cars which grew from US$443.12 million to US$756.24 million, up by 70.65 per cent.
Services, Current Transfers and Income Account
146.
The surplus on the services, current transfers and income account in 2008 amounted to US$1,512.17 million, a much lower figure than the US$1,742.5 million recorded in 2007. Services and investment income recorded more outflows in 2008 compared to 2007 due to higher freight and insurance charges associated with the higher import growth. Private transfers increased from US$1,833.8 million to US$1,921.92 million while official transfers increased from US$209.4 million to US$241.11 million.
147.
With the deterioration in the balance of trade more than offsetting the surplus on the services, income and current transfers account, the current account recorded a deficit of US$3,473.47 million, equivalent to 20.87 per cent of the GDP.
The Capital and Financial Account
148.
The balance on the capital and financial account recorded a surplus of US$2,666.05 million, a marginal increase over the 2007 surplus of US$2,591.42 million.
Private Capital Flows
149.
Net private capital inflows during the year were estimated to have increased by US$1,150.36 million to US$2,211.84 million. The main contributing factor to the increase in the account was a major improvement in divestiture receipts, mainly from the sale of Ghana Telecom, and a significant upward shift in direct
investment, which was estimated at US$1,220.41 million, compared with an inflow of US$855.38 million for 2007.
Official Capital Flows
150.
Net official capital inflows declined significantly by US$645.61 million from US$1,168.64 million to US$523.03 million in 2008 mainly on account of Government°os drawdown on the balance of the sovereign bond.
151.
In spite of the above developments, the balance on the financial and capital account was less than enough to finance the deficit on the current account, resulting in as overall balance of payments deficit of US$940.7 million, equivalent to 6.1 per cent of GDP. In the corresponding period of 2007, the overall balance of payments recorded a surplus of US$413.1 million, equivalent to 2.8 per cent of GDP.
International Reserves
152.
Gross international reserves also fell by US$800.4 million from a stock of US$2,836.7 million at the end of 2007 to US$2,036.2 million, mainly as a result of a drawn down in foreign bond proceeds to finance planned capital investments. The gross international reserves as at end 2008 translates into a cover for 1.8 months of imports for goods and services.
SECTION FIVE: MACROECONOMIC FRAMEWORK
Medium-Term Framework
The NDC Vision
153.
The vision of the NDC Government is to adopt carefully designed policies and programmes that will stimulate and develop the immense talents and resourcefulness of Ghanaians and make them the main drivers and beneficiaries of the national development agenda, with special emphasis on the rural and urban poor.
154.
In pursuit of this vision, the government will:
• make macro-economic stability an important goal;
• provide the policy and programme framework for enterprises to re-tool, adopt modern technologies, access capital, and
• overcome historical and structural constraints that impede competitiveness;
• forge a partnership between the government and the business sector, to enhance and promote national economic
growth;
• devise and implement an urgent national action plan for the modernization of agriculture at the production, harvesting and marketing levels. These will include rationalizing access to agricultural lands; making strategic investments to reduce the risks inherent in agriculture (irrigation and agro-processing); and expanding availability of agriculture-related infrastructure; and
• apply fair and equitable social distribution mechanisms that
enhance the welfare of all citizens, especially the weak and the vulnerable in society.
Economic Objectives
155.
Against the backdrop of the current economic situation, our main strategic policy objectives are outlined below.
156.
The broad policy objective of the NDC government is to lead this economy into middle income status that registers in the lives, livelihoods and incomes of ordinary people by the year 2020. We plan to accomplish this objective through the adoption of prudent policy measures, better policy coordination, and better management of the national economy.
Growth
157.
Growth will be pursued through proper coordination of related policy areas such as:
• improving and sustaining macroeconomic stability;
• resource mobilization to support accelerated economic
development
• expanded development of production infrastructure in,
among others, energy, transport, water and communications;
• creating employment, through support for micro small and
medium enterprises of various categories;
• modernizing agriculture and the rural economy;
• resuscitating manufacturing activities;
• developing the complement of human capital critical for
managing the various aspects of national development; and
• promoting Regional Integration.
Fiscal Policy
158.
The NDC Government believes in funding development and the provision of essential services through efficient, effective, and equitable taxation of all citizens. We will seek to improve tax revenue collections by introducing reforms in tax administration, and enhancing tax incentives.
Government will reform the National Revenue Authority to ensure integrated tax administration. This will, among others, facilitate the sharing of information among the revenue agencies to achieve more accurate assessments, widen the tax net and avoid duplication of efforts.
160.
The administrative reforms will include adequate and reliable funding of the revenue agencies, a comprehensive
computerization of the direct and indirect tax systems, human resource capacity building, increased tax awareness and publicity programmes to enhance tax consciousness, to increase tax mobilization from the informal sector.
161.
Tax policy will be used to encourage people to work hard by creating adequate incentives for work and increased
productivity, in order to increase disposable incomes of individuals.
162.
In the medium term, emphasis will be placed on prudent expenditure management with the view to reducing
unproductive expenditures to the barest minimum.
Monetary Policy
163.
Monetary policy will support fiscal policy, focusing on sharply reducing inflationary pressures and stabilising price and exchange rate expectations on the market. The Bank of Ghana (BoG) will direct monetary policy towards reducing the end period inflation, and strengthen its inflation targeting framework.
164.
The flexible exchange rate regime will be maintained and foreign exchange interventions will only be used as an
instrument to smooth out volatility in the foreign exchange market.
165.
Measures will be introduced to encourage further development of the market for bonds and other long-term securities, mobilize savings for investment and restructure the financial system to enhance the flow of credit to the productive sectors.
Medium-term Macroeconomic Targets
166.
In line with the medium term policies, the following are the main macroeconomic targets:
• average real GDP growth of about 8 per cent;
• average consumer price inflation of a single digit;
• gross international reserves of not less than three months of import cover;
• overall budget deficit equivalent to 3.0 per cent of GDP;
• Stabilization of the total public debt at no more than 60 per cent of GDP.
Structural Policies
167.
Structural reforms will be pursued and strengthened in the medium term. In anticipation of revenue inflows from oil production, policies will be mapped out to ensure the maintenance of fiscal and debt sustainability.
Tax Administration
168.
One of the major challenges facing Ghana is how to broaden the tax net. The fact that the vast majority of Ghanaians are in the informal sector makes revenue generation a daunting task. Tax Administration will be strengthened to realize efficiency gains and broadening of the tax base.
169.
Tax exemptions constitute a significant proportion of about 9.0 per cent of total tax revenue. Revenue loss from exemptions granted in duties and taxes continue to rise. Government intends to review the exemptions regime as a whole to reduce the scope and to eliminate abuses in the administration and application of the facility. As a start, all exemptions resulting from the clearance of goods on “permit” will be curtailed. Work on the remaining types of exemptions will continue in order to achieve a comprehensive review in the medium term.
170.
Despite the above measures to rationalize and enhance revenue collection, government will look for opportunities to provide tax incentives to the private sector in key sectors of the economy.
Public Sector Reforms
171.
Government will review the reforms of the public sector and pursue an action plan to restructure subvented agencies that areno longer relevant to the government’s objectives. In this regard, there will be partial or full commercialization of selected subvented agencies.
Public Sector Wages
172.
Madam Speaker, the Government recognizes the wage issue as a major challenge and is, hence, committed to the public sector reforms that link wage settlement to increased productivity.
173.
These reforms are expected to solve the problems at the labour front, resulting partly from a distorted public sector salary structure which is also poorly administered.
174.
Significant progress has been made with the development of a draft framework for a comprehensive salary structure, the Single Spine, for all public sector workers (excluding Article 71 Constitutional Office Holders). The agreed processes will be discussed by all stakeholders, in order to arrive at a consensus
on implementation. The Single Spine structure aims to attain equity and transparency in public sector salaries while minimising leakages associated with the current pay system.
175.
We are committed to a programme for the distribution of the benefits of growth that will be targeted at providing the basic needs of the people. The programme will focus on the following:
• adequate nutrition and access of every person to potable water;
• access to preventive and curative medicine;
• affordable and adequate housing for low income workers and residents of rural and peri-urban communities;
• employment opportunities for all those who are willing and able to work;
• sustainable pension options for all citizens;
• a fundamental reform and restructuring of the economy through the modernization of agriculture and processing of agricultural and mineral products.
176.
We will invest in local communities as part of our rural modernization and urban regeneration strategy to cover the following:
• construction and rehabilitation of rural roads;
• provision of clinics and health posts;
• provision of schools and community libraries;
• extension of electricity to all communities with a population of over 500; construction of houses for teachers and health workers in the rural areas; and provision of social amenities in urban communities with high
levels of poverty.
Short-term Macroeconomic policies
177.
Our policy in 2009, will be reinforced to ensure macroeconomic stability in the context of a deteriorating
international environment so as to provide a temporary cushion to the domestic economy. Subsequently, the stable economy will enhance accelerated growth which will ensure the attainment of a middle income status by 2020. This strategy will be accomplished through fiscal discipline hinged on prudent public expenditure management, strict adherence to public procurement rules, efficient and effective domestic revenue mobilization, and encouraging the private sector to participate in our accelerated growth agenda through Public Private Partnerships (PPPs).
178.
The fiscal outlook is very critical to Government in achieving its objective of maintaining long-term fiscal and debt sustainability. There will be a decisive policy to improve expenditure management, enhance public financial management, restructure State-Owned Enterprises (SOEs) particularly the utility companies and ensure the success of the public sector reforms.
179.
In spite of the fiscal outturn for 2008, Government is committed to managing the macroeconomic situation to ensure that the macroeconomic targets change in the right direction in the short to medium term.
MACROECONOMIC POLICIES, STRATEGIES AND TARGETS FOR 2009
180.
In the 2008 Manifesto of the NDC, we pledged that an NDC Government would “establish a lean but effective and efficient government by cutting out ostentation and profligate expenditure; rationalizing ministries and ministerial appointments; and promoting service, humility and integrity as canons of government”.
181.
This is one of the main policy directions that this Budget seeks to achieve. As a first step towards the creation of a lean government, the total number of Ministries has been rationalized, reducing them from 27 to 23.
182.
Madam Speaker, based on the 2008 fiscal outturn, and the world economic outlook already outlined in Chapter Two of this Statement, our broad economic and financial objectives for 2009 include:
• real GDP growth of 5.9 per cent;
• average inflation target of 15.3 per cent;
• end period inflation of 12.5 per cent;
• an overall budget deficit equivalent to 9.4 per cent of GDP;
• gross international reserves of more than two months of
• import cover of goods and services.
183.
Considering the harsh global environment, these macroeconomic targets may look rather ambitious. However, we believe that
Ghana’s situation could be more favourable than other sub- Saharan African countries and emerging economies in general. We are, therefore, optimistic that these targets are achievable.
Fiscal Policy Challenges
184.
For 2009 in particular, and the medium term in general, the Government will be committed to correcting the large fiscal imbalance experienced since 2006 by focusing on, among others, tackling underlying issues to enhance domestic revenue mobilisation; rationalizing subsidies to State-Owned Enterprises (SOEs), particularly, in the energy sector; and rationalizing public sector wages and other expenditures.
GDP GROWTH FOR 2009
Outlook for 2009
185.
The GDP growth for 2009 is targeted at 5.9 per cent. This is informed by the global economic meltdown with a
resultant forecast of 0.5 per cent growth and 3.5 per cent foremerging economies. Our relatively higher GDP growth target is driven in part by our commitment to the agricultural sector which is relatively more insulated against global developments.
The private sector is als
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