The MPC of the BoG held the benchmark policy rate at 14.50% in line with our expectations at its Nov-2020 meeting. Macroeconomic conditions have largely improved since the last meeting. Inflation continues to ease towards the medium-term target band while economic growth has shown a faster than expected path to recovery. The exchange rate has also been broadly stable as FX reserves have been robust.

Headline inflation continues on a disinflation path, with a sharp decline to 10.10% y/y in Oct-2020 (from 11.40% in Jul-2020) as the COVID-induced spike in food inflation eased amid the staple harvest season. Core inflation has also sustained a downward trend after peaking in July. While inflationary pressures have been broadly contained, we believe some demand-induced price pressures could emerge during the yuletide period. However, inflation is expected to return to the medium-term target band by Q2-2021.

Economic indicators have shown faster than expected signs of recovery. After contractions in the real Composite Index of Economic Activity (CIEA) between Mar-2020 and May-2020, the index rebounded strongly to record a growth of 10.50% y/y in Sept-2020 – the highest expansion since Dec-2019 – against a growth of 4.20% y/y at the same time last year. The marked increase in economic activity was driven largely by an increase in construction and manufacturing activities and private sector credit growth. The easing of COVID-containment restrictions has also supported the rebound in economic activity. Consumer confidence remains firmly above pre-lockdown levels while business confidence levels continue to steadily recover as demand for goods and services and business prospects improve.

Although tax revenue collections improved as economic activity rebounded, government expenditures continue to overshoot targets. We believe COVID-related disbursements and CapEx ahead of the Dec-2020 polls are the main drivers of government expenses. Government revenue collections exceeded the revised target by 1.68% to GH¢36.3 billion (9.4% of GDP) while total expenditures and arrears clearance over shot the revised target by 1.29% to GH¢70.90 billion (18.4% of GDP) and exceeded revenue collections by 95.32%. Consequently, overall budget deficit for the 9-months to Sept-2020 amounted to 9% of GDP (vs. 8.9% target). The treasury continued to resort to borrowing to fund the budget. As a result of the increased financing requirement of government total public debt advanced by 30.07% y/y to GH¢273.80 billion (71% of GDP) of which domestic debt (GH¢135.30 billion or 35.1% of GDP) accounts for 49.42% while external debt (GH¢138.50 billion or 35.9% of GDP) represents 50.58% of total public debt. The increased borrowing has derailed the path of fiscal consolidation pursued by government over the last 3 years and elevates the risks to Ghana’s macroeconomic framework in the medium-term. We believe Ghana’s debt could rise to unsustainable levels if measures are not put in place to contain the rate of debt accumulation.