The Bank of Ghana (BoG) has stated that it is crucial for the government to remove fuel subsidies in order to sustain the economic gains attained so far.
It argued that the high subsidies on fuel are unsustainable and risky to the economy, cautioning that the pressure related to fuel subsidies, utilities and wage/salary settlements could act to offset the gains made in macroeconomic stability.
The acting Governor of the BoG, Dr Henry Kofi Wampah, made the submission at a news conference in Accra yesterday, in the bank’s bleakest warning yet, after gauging the health of the economy for the last quarter.
Last year, the government spent close to GHc1.2 billion on fuel subsidies, and that amount is expected to climb to GHc2.4 billion this year if fuel subsidies are not removed.
That, coupled with a high wage bill of GHc7.5 billion against a target of GHc5.6 billion, presents a major challenge to the economy.
The Head of the International Monetary Fund (IMF) Mission in Ghana, Ms Christina Daseking, in 2012 urged countries across West and Central Africa to cut fuel subsidies because they were not effective in directly aiding the poor but did promote corruption and smuggling.
“We further urge the governments to cut the subsidies on fuel and energy consumption which are only benefiting high-income people,” she said.
The migration of 470,000 public sector workers onto the Single Spine Salaiy Structure (SSSS) has been fraught with discrepancies, leading to long strikes in some instances by health professionals.
According to Dr Wampah, “The magnitude of fuel subsidies and the negotiated wage increment in 2013 could, therefore, pose a risk to the consolidation process.”
The start of commercial oil production in the country in 2010 has helped promote Ghana into the ranks of the world’s lower middle-income nations, fuelling hopes of the country ending dependence on aid and forging a bright future as one of Africa’s star economies.
But pressure related to high fuel subsidies, wage and salary settlements, utilities and outstanding payments and commitments presents a major risk to the economy.
Despite those risks to the economy, the BoG maintained its prime interest rate at 15 per cent, as it has since last June, saying the economic outlook was positive and it expected inflation to stay in its target band.
According to Dr Wampah, forecast inflation would remain within its target band of two percentage points either side of nine per cent until the end of 2013.
He maintained that upside risks to inflation, including the possibility that the government could remove utility and fuel subsidies, were balanced by downside risks, such as the unwinding of fiscal imbalances.
“The Monetary Policy Committee judged the risk to inflation and growth as fairly balanced and, therefore, decided to maintain the policy rate at 15 per cent,” he said.
The acting governor added that the BoG would look at the implications of a planned rebasing of the inflation basket in March.
January inflation data released yesterday showed inflation in the rapidly growing economy was 8.8 per cent in January, the same as the previous month, due largely to stable fuel and transport costs and helped by the strength of the cedi which holds down local prices of imported goods.
“The committee views the growth outlook as broadly positive, underpinned by private sector expansion, improved business and consumer sentiment and increased oil production in the last quarter of 2012,” Dr Wampah said.
In December 2011, the government cut subsidies on fuel, but under pressure from the unions threatening to go on strike, it proposed a reduction in the price hikes.
The past months have seen governments in Nigeria, Guinea, Cameroon and Chad moving to cut state subsidies on fuel.