ECONOMY needs Prudent Management

Come Wednesday, November 18, 2009 the Mills administration will be presenting its budget statement and economic policy for 2010 to the nation as the government struggles to meet its macroeconomic targets for the year.

Dr. Duffour

By now, Ghanaians can assume that the NDC government has finished with the house cleaning and has come to terms with the challenges that confronted them when they took office as it prepares to deliver to Ghanaians its second budget statement.

BUSINESS TODAY in retrospect of the 2009 realises that government made the attainment of macroeconomic stability an important goal in its maiden budget presented to Parliament on March 5, 2009 with the objective of reducing the broad budget deficit to 9.4 per cent of Gross Domestic Product-GDP at end-December 2009 from the end-December 2008. The 2009 budget also targeted cash management and expenditure monitoring as priority areas that should be strengthened.

This notwithstanding, and consistent with the social democratic agenda of the Mills-led government, the 2009 Budget also acknowledged the critical importance of broad-based economic growth in the fight against poverty and in improving the living conditions and welfare of all Ghanaians.

Razia Khan, Africa Researcher at Standard Chartered Bank, had said the 9.4 per cent fiscal deficit target was ambitious, but said Ghana had little choice but to tackle the payments gap. Ghana faced balance of payment financing gap of US$450 million in 2009 and $325 in 2010. Ghana’s fiscal policy deteriorated the Ghanaian economy in 2008 with a fiscal deficit rising to 22.4 per cent of GDP with inflation closing at 20.1 forcing the currency to depreciate by 50 per cent against the dollar whiles reserves fell to two months of import cover.

Fiscal performance in the first-half of 2009 was characterised by a revenue and grants outturn that fell short of the budgetary target by 7.8 per cent.

Total receipts including grants at end-June 2009 amounted to 13.9 per cent of GDP. The outturn missed the budget estimate of 15.0 per cent of GDP for the period and was below the 14.6 per cent of GDP for the corresponding period in 2008. The shortfall was both in respect of the domestic revenue a mid-year outcome of 11.1 per cent of GDP compared to a budgeted 11.9 per cent of GDP; and grants which registered an outturn of 2.7 per cent of GDP compared to the programme target of 3.1 per cent of GDP.

In response to the resource shortfall, payments (including principal repayment of external debt, tax refunds, and payments for outstanding commitments and arrears clearance) were restrained resulting in an outturn that was below the budget provision by 5.4 per cent. The major component, domestic primary expenditures (DPE) fell below the budget by 4.9 per cent. The period recorded a budgetary shortfall of 7.9 per cent in foreign-financed capital arising primarily from smaller inflows of project loans (17.0 per cent less) than programmed.

The expenditure programme was also encumbered by outstanding commitments from previous years, with payments exceeding the budget provision for the half-year by 5.5 per cent.

Interest payments overshot the budget by some 11.8 per cent, mainly due to a 29.4 per cent overrun in the domestic component. This latter development raises serious concerns about debt sustainability in the medium-term and the adequacy of the fiscal space required to fund pro-poor programmes.

Given the experience of persistent overshooting of inflation targets, the assessment of Center for Policy Analysis (CPA) had been that with no change in the monetary policy framework and target setting, the target for 2009 would prove unrealistic and go the way of its predecessors, missed by considerable margins. It was therefore not surprising indeed, somewhat a validation when the target for 2009 was revised upwards from 12.5 per cent to 14.6 per cent.

“In its July deliberations, the Monetary Policy Committee (MPC) of the Bank of Ghana had indications from its Composite Index of Economic Activity (CIEA) and elsewhere that the economy was slowing down rapidly, implying potential output and job losses. Consequently, in spite of the inflation rate remaining above the projected path, the MPC concluded that the prime rate should be kept unchanged at 18.5 per cent, for the reason that — “the risks in the outlook for disinflation and growth are balanced””, according to CEPA.

Projections from the May 2009 meeting of the MPC indicated that inflation could begin to decline from a peak of around 20 per cent early in the second quarter of the year and towards the target range of 12.6–16.6 per cent at the end of the year and then to a range of 6.7-12.7 per cent by the end of June 2010.

According to the MPC, the set of initial conditions which influenced the forecasts at its May meeting have all moved in directions that point to low inflationary pressures in the outlook.

There certainly are leads and lags in the monetary dynamics with changes in the growth rate of money supply impacting on inflation, some three to five months later, in the Ghanaian context. This suggests that the monetary surge in the second half of 2008, particularly in the fourth quarter, was expected to impact in the first half-year of 2009 and, therefore, sustain the surge in inflation which started in the fourth quarter of 2007.

Joe Abbey, Executive Director of the Centre for Policy Analysis (CEPA), took a swipe at the BoG’s Inflation Targeting framework, calling for a more flexible framework that could be more favourable to a developing economy. According to the CEPA boss, CEPA sides with the IMF in calling for a more flexible Inflation Targeting framework, describing the current as too rigid a framework.
“There is nothing to clap about the fact that we perhaps are the only developing country that has an IT framework since it is not conducive to our economy”. He said the global financial crises has revealed the fact that the IT framework as it is now can fail even in advanced countries that are already at low rates of inflation.

In the new model that is called for, the central bank should be able to project what the unemployment rate or GDP growth rate would be if we try to achieve a certain level of inflation, Dr Abbey noted.

“We need a model which will remind you of what it will cost you to achieve a particular target, and therefore you do not drive in the blind.

“You don’t just set such a target and try to chase it in the same year. You are more of a gradualist, because you have in mind the cost you are imposing on society. You have in mind that you are not just doing statistical modeling”, the renowned economist explained.

Business TODAY predict however that still under the guise of cautious optimism, new Governor, Kwesi Amissah-Arthur, might stick to the current 18.5% policy rate after the next MPC until a more favourable environment.

Given the national long-term goal of growth with Macroeconomic Stability, the key challenges over the medium-term are the following:  Priority needs to be given to the near-term policy challenges of pulling back from the current expansionary fiscal policies. Limiting the fiscal deficit would also make more room for private sector development through “crowding in” of the sector. In any case, fiscal policy must carry the brunt of the needed adjustments. Public financial management (PFM) reforms have continued but recent and on-going fiscal slippages have exposed recurring weaknesses which must be recertified

Further re-orienting fiscal priorities towards development , in terms of government expenditure, tax policy that leaves more resources in the hands of workers, entrepreneurs and investors (making it profitable to work and invest in Ghana), improved public service delivery, eliminating wasteful expenditure and insisting on value for money; and a sharper focus on the enhancement of productivity through technical and vocational training skills development particularly management, increased use of knowledge and improved technology in production, and efficient investment in infrastructure especially in transportation and energy.

There are high risks to the economic outlook especially of oil prices in 2010, high energy subsidy and wage bill, but this is expected to be cushioned by favourable terms of trade as the world market prices soar for Ghana’s main export of gold and cocoa. It is therefore imperative that Bank of Ghana holds monetary aggregates to tighten up inflation and also pursue tighter monetary policy stance by raising the prime rate in the near future, which can also affect industry.

SPECIAL NEWS ANALYSIS: BY SAMUEL AMPAH