Full speech, Budget 2009 statement
Minister of Finance and Economic Planning, Dr. Kwabena Duffuor, March 5, 2009

From Page Two

DEVELOPMENTS IN PUBLIC DEBT AND AID MANAGEMENT

92. 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.

93. The policy also entails the development of the domestic capital market and access to the international capital markets.

Review of 2008 Public Debt Stock

94. Madam Speaker, 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 Investing in A BETTER GHANA 25
was mainly driven by about US$400.0 million and US$200.0 million increase in external and domestic debts, respectively.

95. 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.

96. 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

97. 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

98. 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.

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Currency Composition of External Debt

99. 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

100. 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

101. 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

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falling due within the next 12 months represents about 2.1 per cent of the external debt portfolio.

New Commitments Loans

102. 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

103. 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

104. 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.

105. 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).

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Domestic Debt Sale of Treasury Securities

106. In 2008 domestic borrowing supported the execution of the budget, refinancing of maturing government bills, and the development of the financial market.

107. 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.

108. 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.

109. 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.

110. 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

111. 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.

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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

113. 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.

114. 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.

Investing in A BETTER GHANA 30 0510152025JanFebMarAprMayJunJulAugSepOctNovDec2008 Inflation Combined2008 Inflation Food 2008 Inflation Non-Food

Figure 1: Combined, Food and Non-food Inflation: 2008

Source: Ghana Statistical Service

Contributions to changes in CPI

115. 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

116. 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

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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+

117. 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

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

119. 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

120. Madam Speaker, 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.

121. 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.

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125. Commercial banks‟ average deposit and lending rates also followed the general trend of increases in rates. Banks‟ 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

127. 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‟s 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.

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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.


 

he 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.

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