The Centre for Policy Analysis (CEPA) has drawn attention to the fact that the current stabilization programme emphasizes Macroeconomic Stability with Growth rather than Growth with Macroeconomic Stability. There are indications that the economy is currently operating below its potential. The sluggish pace in economic activity has implications for economic growth in the non-oil sector in 2010. The anticipated slow growth in 2010 following that of 2009 implies that the process of fiscal consolidation — the driving force in the stabilization programme — may not be sustainable since tax revenue targets set on assumptions of higher growth may not be achieved. It is important to keep an eye on debt sustainability in order to avoid getting back to the heavily indebted poor country (HIPC) status. The economy must therefore grow to signify its ability to service Ghana’s public debt (internal and external) obligations. Currently, Ghana’s public debt is high compared to countries of similar characteristics.
Among other things, CEPA’s Mid-term Report on the Economy for 2010 discusses the following findings and concerns:
Fiscal Operations: The ‘ambitious’ budget deficit target set for 2010 under the stabilization programme is proving difficult to achieve on account of lower expected revenues and increased expenditure outturns. Compressing expenditures in the short-run is nearly impossible because of downward rigidities in the nature of expenditures that are contractual (wage-related expenditures, development projects), mandatory (interest rates - domestic and external), and statutory (because the constitution and law require payments to certain Funds). Failure to fulfill such expenditure obligations may result in delays in payments, stoppage of projects, payment arrears or even the bouncing of government cheques.
Monetary Sector Developments: In the Ghanaian context, monetary policy gets ‘overwhelmed and ineffective’ when budgetary policy is too expansionary. If fears or concerns about inflation would mean restrictions on the availability of credit, then the borrowing requirements of government (if big), would imply that the private sector could be crowded out, resulting in high interest rates and lending rates. For the indigenous small-to-medium scale enterprises (SMEs) such high lending rates and interest rates could have implications for economic growth in terms of output and job losses. On the other hand, if the Bank of Ghana (BOG) tries to accommodate by increasing the availability of credit, then the inflation rate is likely to pick up - as experienced between mid-2008 and mid-2009 when inflation increased from 15 percent to 20 percent. If this is not controlled, then interest rates would increase some more. Unfortunately, ‘monetary policy easing’ since November 2009 has not produced the desired impact on the economy. This is because challenges still remain with respect to the transmission of continued reductions in the monetary policy rate to lending rates of commercial banks. Moreover, high stocks of the non-performing loans (NPLs) - currently estimated at about 20 percent of outstanding loans - have been impairing commercial banks’ delivery of credit to the private sector, contributing to slower private sector credit growth.
External Trade and Payments: Prices of Ghana’s key exports - gold and cocoa - have been favourable, enabling Ghana to withstand the increases in oil prices witnessed since the first quarter of 2009. Over the first half of 2010, Ghana’s balance of payments is reported to have been in surplus enabling the BOG to build its foreign reserves position. Reduced aggregate demand on account of the slowing economy also helped contain non-oil imports. Nonetheless, Ghana’s international trade competitiveness was undermined by rising domestic costs, increasing the country’s dependence on imports with the potential of reducing domestically-produced import substitutes. The slowdown of economic activity in the developed world on account of global recession, particularly North America and Europe, has not helped the non-traditional-export (NTE) sector. These tendencies raise concerns about the role of international trade as the engine of growth as Ghana enters the oil era.
Get a copy of the “The Economy of Ghana, 2010: Mid-Term Report” at GH¢12.00. Also available will be the Selected Issues Paper titled: “Ghana’s Stabilization Programme, 2009-2012: Some of the Emerging Issues in the Current 3-year Stabilization Programme” at GH¢5.00. All the documents will be available for sale at the seminar and then after at the:
CEPA ERASMUS LIBRARY
Centre for Policy Analysis (CEPA)
No. 4 Prempeh II Street,
GIMPA Campus, Greenhill
Telephone: (0302) 420054/5/7/8
Date : 20th October 2010 -
Venue : British Council Hall, Accra