BANK OF GHANA MPC NOVEMBER MEETING – PART 2

MPC-Press-Release-Nov.-2019,

Summary_of_Economic__Financial-Data_November-2019

IN BANK OF GHANA MPC NOVEMBER MEETING – PART 2, I WILL DISCUSS FOUR SECTORS.

— FOREIGN EXCHANGE RATES (INTERBANK),

— COMMODITY PRICES,

— EXTERNAL SECTOR DEVELOPMENTS, AND

— GOVERNMENT FISCAL OPERATIONS.

AS USUAL, YOU CAN DOWNLOAD THE DOCUMENTS REFERRED TO FROM THE BEGINNING OF THIS ARTICLE.

FOREIGN EXCHANGE RATES (INTERBANK)

IF I UNDERSTOOD THE BANK OF GHANA MPC CORRECTLY, THE CEDI HAS SOMEWHAT STABILISED TOWARDS THE MAJOR CURRENCIES. (“The foreign exchange market has continued to remain calm since the sharp depreciations in the first quarter of the year.”; MPC PRESS RELEASE, NO.12).

I BEG TO DIFFER WITHE MPC IN THIS CASE. THE FIGURES SHOW INDEED THAT THERE WAS A SHARP DEPRECIATION IN THE FIRST QUARTER OF 2020. ANOTHER MAJOR DEPRECIATION THEN OCCURRED IN MAY 2019. BUT THE CEDI HAS IN NO WAY STABILISED SINCE THEN.

THE DEPRECIATION NOW IS NOT AS SHARP AS IT WAS IN THE FIRST QUARTER OF THE YEAR. BUR IT HAS BECOME CONSTANT. THEREFORE, THERE IS THE DANGER THAT WE WILL GET USED TO IT.

THAT THE REAL EFFECTIVE EXCHANGE RATE WAS IN LINE WITH THE FUNDAMENTALS, DOESN’T HELP MUCH IN THIS CONNECTION. GOVERNMENT AND OTHER INSTITUTIONS MUST TAKE MEASURES TO REALLY GET THE DEPRECIATION RATE DOWN. TO INCREASE LOCAL PRODUCTION AND CONSEQUENTLY LIMITING IMPORTS IS ONE MEASURE THAT MIGHT SHOW SUCCESS. IMPORTERS MUST USUALLY PAY FOR THEIR GOODS IN MAJOR CURRENCIES. THIS WILL PUT THE LOCAL  CURRENCY UNDER PRESSURE. LIMITING IMPORTS, AND THEREFORE LIMITING THE EXPENSE OF FOREIGN CURRENCY, WILL EASE SOME PRESSURE ON THE LOCAL CURRENCY.

COMMODITY PRICES

COMMODITY PRICES GENERALLY DEVELOPED POSITIVELY REGARDING THE LOCAL ECONOMY. GOLD AS WELL AS COCOA PRICES ARE NEAR TO LONG TIME HIGHS. THE PRICE FOR GOLD RETIRED A LITTLE RECENTLY, BUT NOT AS MUCH AS TO HAVE A LASTING IMPACT.

ONLY OIL SEEMS TO BE A LITTELE BIT DISAPPOINTING. IT WENT BACK SIGNIFICANTLY. THIS IS MOSTLY DUE TO FEARS ABOUT THE DEMAND SIDE IN THE  NEAR AND MEDIUM FUTURE. TRADE WAR CONCERNS BETWEEN THE U.S.A. AND CHINA AND TENSIONS BETWEEN MOSTLY THE U.S.A. AND IRAQ  HAVE A MAJOR IMPACT. THESE SITUATIONS AFFECT THE SUPPLY AS WELL AS THE DEMAND SIDE AND CAUSE INSECURITY AND UNCERTAINTY. BOTH OF THESE HAVE A NEGATIVE INFLUENCE ON THE OIL PRICE.

TAKING ALL THIS INTO CONSIDERATION, COMMODITY PRICES WILL HAVE A POSITIVE IMPACT ON THE GHANAIAN ECONOMY.

EXTERNAL SECTOR DEVELOPMENTS (CUMULATIVE)

WITHIN THE EXTERNAL SECTOR, THE TRADE BALANCE STABILISED ON A HIGH LEVEL, ALTHOUGH A LITTLE BELOW THE ALL TIME HIGH.

FORESEEABLY, GOLD, OIL AND COCOA EXPORTS ARE THE MOST IMPORTANT CONTRIBUTORS TO THE POSITIVE TRADE BALANCE. BUT, WE COULD SURELY ENHANCE EXPORTS BY ADDING VALUE TO THE RAW PRODUCTS. E.G., GHANAIAN CHOCOLATE IS ONE OF THE BEST IN THE WORLD. IMPROVING CHOCOLATE PRODUCTION ON THE LOCAL LEVEL WOULD GIVE THE OPPORTUNITY TO TAKE EXPOTYS YO A NEW LEVEL.

THE SAME APPLIES TO OIL. ENLARGING OIL REFINERY  WOULD BENEFIT BOTH DOMESTIC SUPPLY AND EXPORT OPPORTUNITIES.

ON THE IMPORT SIDE, INCREASE OF NON-OIL IMPORTTS IS A LITTLE BIT WORRYING. THIS CERTAINLY APPLIES TO WHAT I SAID BEFORE UNDER THE CURRENCY POINT. TNCREASING IMPORTS MEAN INCREASING USE OF FOREIGN CURRENCY. THIS IN TURN MEANS INCREASING PRESSURE ON THE LOCAL CURRENCY. INCREASED LOCAL PRODUCTION OF NEEDED GOODS IS THE ONLY FITTING ANSWER TO THAT.

THE BALANCE OF PAYMENT IS STILL IN POSITIVE TERRITORY. THIS IS ALTHOUGH THE NEGATIVE CURRENT ACCOUNT BALANCE INCREASED SIGNIFICANTLY.  A BALANCED CURRENT ACCOUNT MEANS THAT THE INHABITANTS OF A COUNTRY HAVE ENOUGH FUNDS TO BUY ALL PURCHASES IN THE  COUNTRY. (SEE: https://www.thebalance.com/current-account-definition-and-4-components-3306265 )

THAT IN TURN MEANS THAT IN A NEGATIVE CURRENT ACCOUNT THIS IS NOT THE CASE. CONSEQUENTLY, THIS IS AN AREA THE GOVERNMENT MUST ATTACK VIVIDLY.

ON THE OTHER HAND, GROSS INTERNATIONAL RESERVES HAVE INCREASED, WHICH IS A GOOD SIGN. IMPORT COVER IS CONSTANT WITH 3.9 MONTHS.

ADDITIONALLY, NET INTERNATIONAL RESERVES HAVE ALSO INCREASED, ALTHOUGH MARGINALLY.

GOVERNMENT FISCAL OPERATIONS (CUMULATIVE)

HERE WE GET TO THE MOST CRUCIAL AND ALSO THE MOST WORRYING PART OF THE SUMMARY. DOMESTIC REVENUE AND TAX REVENUE HAVE INCREASED, BUT STILL NOT ENOUGH. THE OVERALL BALANCE ON CASH BASIS IS STILL – AND EVEN MORE – IN THE NEGATIVE.

TOTAL PUBLIC DEBT – IN GHC – IS CONSTANT COMPARED WITH LAST MOTH – ALTHOUGH ON A HIGH LEVEL. THERE ARE ONLY TWO POSITIVE ISSUES.

— DOMESTIC DEBT IS NEARLY AS HIGH AS THE EXTERNAL DEBT. THOSE DEBTS ARE EASIER TO HANDLE THAN EXTERNAL ONES.

— DOMESTIC DEBT INCLUDES THE FINANCIAL SECTOR RESOLUTION BOND. THE EFFECTS OF THESE DEBTS WILL SOON EVAPORATE. FURTHERMORE, THIS BOND HAS A POSITIVE IMPACT ON THE ECONOMY THROUGH THE STABILISATION OF THE FINANCIAL SECTOR.

WHEN LOOKING AT THE FISCAL OPERATIONS, THE ONLY MEASURE THAT CAN BEAR FRUITS IS TO BROADEN THE TAX BASE. THIS THE GOVERNMENT CAN ACHIEVE BY USING TECHNOLOGY. THERE ARE ALREADY SOFTWARE APPLICATIONS THAT ASSIST IN TAX COLLECTION.

AND OF SUPERIOR IMPORTANCE IS THE COOPERATION OF THE CIITIZENS. NO GOVERNMENT CAN SUCCESSFULLY FIGHT A REVENUE DEFICIT WITH CITIZENS TRYING TO AVOID TAX PAYMENTS. REMEMBER ONE THING: GHANAIANS ARE OFTEN COMPLAINING ABOUT LACKING INFRASTRUCTURE, ESPECIALLY ROADS. GOVERNMENT CAN ONLY COMPLETE INFRASTRUCTURE IF THERE IS ENOUGH REVENUE TO FINANCE IT.

REMEMBER THE FOLLOWING “EQUATION”: INFRASTRUCTURE IS SIMILAR TO REVENUE CREATION AND CONSEQUENTLY LESS DOMESTIC AND EXTERNAL DEBT.

APART FROM BROADENING THE TAX BASE, THERE ARE A COUPLE OF OTHER MEASURES. GOVERNMENT CAN RAISE TAXES ON CIGARETTES AND ALCOHOLIC PRODUCTS BY 50% TO 100%. THAT WOULD LEAD EITHER TO MORE TAX REVENUE OR LESS SPENDING ON HEALTH ISSUES.

WHATEVER MEASURES ARE TAKEN, AND BY WHICH GOVERNMENT, EVERYTHING NEEDS THE COOPERATION OF THE CITIZENS.

THIS WAS BANK OF GHANA MPC NOVEMBER MEETING – PART 2.

THE LAST PART OF THE ARTICLES SERIES ON THE RECENT ECONOMIC AND FIMANCIAL DATA CONTAINS THE FOLLOWING:

— MONETARY INDICATORS,

— BANKING SECTOR INDICATORS,

— STOCK NARKET PERFORMANCE, AND

— CONCLUSION AND OUTLOOK.

STAY TUNED!

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