In brief
- In line with the general market expectations, the Monetary Policy Committee (MPC) of the Bank of Ghana (BOG) maintained the policy rate at 29.5% at the May 2023 MPC meeting. The Committee found comfort in the strong return to the path of disinflation while ongoing liquidity management operations and the agreement on zero budget financing provides the basis for a hawkish pause on the policy rate hikes.
- The banking sector faces rising risk to asset quality and capital buffers despite rebound in profitability ratios. Given the DDEP-induced shock to capital buffers, the IMF has set a target date of end-September 2023 for banks to submit a timebound capital restoration plan to the BOG for approval. With the rebound in profitability indicators on the back of higher net interest margins, we expect the suspension of dividend payments to support capital buffers.
- Fiscal adjustment is underway with the help of expenditure containment. We attribute the GHS 19.4bn (2.3% of GDP) spending suppression to the impact of the Domestic Debt Exchange (DDE) and the suspension of external debt service. However, excluding the impact of lower interest payment, we opine that the lower-than-targeted primary deficit indicates fiscal adjustment is underway.
- External debt service suspension helped the current account balance into surplus. Given that ongoing negotiations with external creditors could stretch into late 2023, the suspension of external debt service should anchor the current account balance in 2023. However, a potential resumption of external debt service in 2024 will revive pressure on the current account balance if debt restructuring is not secured ahead of debt service resumption.
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