Ghana’s Economy Heating Up

There is an impressive amount of evidence that Ghana’s economy is losing a lot of steam. Aside from the rise in imports, there is a developing downturn in cocoa and gold export receipts, which declined by $1.3 billion in the year (2013). The overall balance of payments deficit of $1.2 billion thus remained the same as in 2012.

The Bank of Ghana (BoG) at its maiden emergency Monetary Policy Committee (MPC) meeting admitted that all is not well with Ghanaian economy.

According to the bank, the domestic economy continued to experience fiscal pressures, exchange rate depreciation and cost-push effects from higher petroleum and utility prices.

Inflation expectations have heightened and headline inflation ended 2013 at 13.5 percent, above the target band of 9±2 percent.

Fiscal consolidation for 2013 was slower than anticipated. The overall budget deficit was provisionally estimated at 10.2 percent of Gross Domestic Product (GDP) against a target of 9.0 percent, following a deficit of 11.8 percent in 2012.

Expenditures were broadly on target, however, revenues were significantly below target, resulting in the fiscal slippages.

The fiscal imbalances and the external pressures resulted in a current account deficit of 12.3 percent of GDP up from 12.1 percent in 2012.

This was on account of worsened terms of trade, and a significant decline in net current transfer receipts.

In particular, individual remittances declined by 4.3 per cent year-on-year to US$1.7 billion.

Gross international reserves as at the end of 2013 amounted to US$5.6 billion (3.1 months of imports) compared with US$5.3 billion (3 months of imports) at the end of 2012.

These developments in the fiscal and external sector, together with the global pressures, resulted in a depreciation of the Cedi by 14.6 percent against the US Dollar in 2013 compared to 17.5 percent in 2012.

Additionally, the country is experiencing a much faster pace of depreciation since end-December 2013.

As at the end of January 2014, the Cedi had depreciated by 7.8 percent against the US Dollar compared to 0.2 percent in the corresponding period in 2013.

In an attempt to stabilize the rapid fall of the cedi, the central bank injected $20 million to shore up the Cedi, it has also revised the rules governing the operations of Foreign Exchange and Foreign Currency Account in the country.

/wp-content/uploads/2014/02/Kofi-Asamoah.jpg However, importers and exporters in the country are unhappy with the measures introduced by the BoG to rescue the depreciating value of the local currency, the cedi. According to them, the directive is inhuman and impracticable.

While as a short term, the central bank had also increased the policy rate by 200 bases points, as result of the depreciation of the cedi against the US dollar, which is the major currency for import in the West African second largest economy.

The two percent increment from 16 to 18 was arrived at after the emergency meeting. The Policy rate is the rate at which commercial banks can borrow from the central bank. It also has effect on interest rates.

With the increased in the policy rate, all the commercial banks in the country are expected to increase their base rates within the shortest possible time. This will automatically increase the cost of doing business in the country.

Among the copious reasons cited by the Governor of the Bank of Ghana, Dr Henry Kofi Wampah for increasing the rate by 2% are weakening of some global economies which has resulted in a constriction of capital inflow, as well as domestic fiscal pressures, such as exchange rate fluctuations and price volatility.

Many economists are disturbed by the above situation which indicates that the Ghanaian economy is heating up.  When economy is heated, there is typically inflation. When demand outstrips the economy’s productive capacity, an economist, Dr. Kwaku Danso explained.

He stated: ‘Typically there is an economic dilemma between internal balance (stable prices) and external balance (exchange)… any time there is a problem with one and attempts are made to correct it, the other is compromised.

So BoG has put in place measures to arrest cedi value. In affect, business men are hit. They cannot import the goods as most financial transactions in foreign are largely for imports. Supply will outstrip current demand. Hence inflation (heated economy).’

Dr. Danso noted that the current measures introduced by the BoG to arrest Cedi depreciation would adversely affect public confidence in banking system, and black market may thrive, adding ‘I find the measures a bit draconian…’

An economist at the University of Ghana, Emmanuel Nii Abbey told the Business Chronicle that high levels of aggregate demand tend to be the cause of overheating.

If short run aggregate demand exceeds long run aggregate supply, then the excess demand for goods must be met via the over-employment of resources, he added.

Nii Abbey explained: ‘This may be achieved by employing workers for extra shifts or using machinery beyond their recommended working hours. This type of production is considered unsustainable because the over-employment cannot be supported indefinitely’.

/wp-content/uploads/2014/02/setho.jpg In the last three decades, present and successive governments’ economic policies have been heavily neo-liberal in character – privatization of strategic national assets, unbridled liberalization of international trade, and the ruthless deployment of market forces as evidenced by the removal of subsidies on utilities and fuel.

These bad economic policy choices have been exacerbated by pervasive corruption, cronyism, incompetence and extreme partisanship, according to the Secretary-General of the Ghana Trades Union Congress (TUC), Kofi Asamoah.

The chickens have now home to roost. After religiously sticking to this economic management philosophy for over thirty odd years, the jury is still out there.Views are converging that the economy is failing or has failed and times are really hard for ordinary citizens.The economic indicators, as robust as Ghanaians are being told, but have failed to make any significant impact in the lives of Ghanaians.

He lamented: ‘Good jobs are disappearing faster than they are being created even as the economy registers what is claimed to be ‘impressive’ growth rates. Incomes are falling in real terms for most Ghanaians as inflation rises’ thereby causing hardship and economic despondencies in many homes across the length and breadth of the country.

The trade deficit has been growing at an alarming rate as imports saturate Ghana’s markets and stores and as the nation continues to export its natural resources including gold, manganese, cocoa, and crude oil in their raw state.

Ghanaian journalists who attended oil and gas, and minerals training course in Tanzania were impressed to know that the East African country processed 95% of its gold locally before exporting. This processing stage alone provides thousands of jobs to youth Tanzanians.

Another shocker is that Uganda is setting up an oil refinery to refine the country’s crude oil, while in Ghana the Tema Oil Refinery (TOR) is fallow, as the country continues to import refined oil from Europe and the United States (US).

The national debt has ballooned and continues to soar. As at the end of August last year, Ghana’s stock of public debt increased to GH¢43.9 billion (49.5% of GDP) from GH¢35.1 billion in December 2012.

Of this, the domestic component amounted to GH¢24 billion, compared to GH¢18.5 billion in December 2012. External debt stood at US$10.2 billion, up from US$8.8 billion in December 2012.  The increase in the external debt was mainly due to the sovereign bond issue, the Governor of BoG attributed.

The Cedi has now found itself in the slaughterhouse, having fallen in value against all the major international currencies. And it continues to fall after several measures put in place to arrest it.

Out of desperation the Mahama-led government cruelly increased the Value Added Tax (VAT) after hue and cry. The 17.5% VAT, economists say is regressive form of taxation.

Currently, the VAT affects all bank transactions and utility consumption. Fuel subsidies have been abolished; government is fully taxing fuel products now, Mr. Asamoah stated.

Road tolls have gone up by more than a thousand percent in the last five years. And more roads are being tolled even as our road network deteriorates.

At the beginning of this year, nearly all government charges and fees have been increased.

Government has abolished the payment of allowances to Teacher and Nursing Trainees at the time Ghana need more teachers and health professionals to take care of 25 million Ghanaians.

Public services are deteriorating. Many schools are operating at the margins because government bursaries are in arrears.

Hospitals are stretched to their limits. Private hospitals may soon have to close down because of the huge indebtedness of the National Health Insurance (NHIS).

All this have occurred in the context of additional resources from the commercial production of oil, which has added about half a billion Dollars annually to the national purse since 2011.

But as members of the TUC noted in their July 2013 statement, they are gravely ‘concerned that government and its agencies are not efficiently managing the oil resources for the benefits of Ghanaians.

With barely three years into the production of oil in commercial quantities in Ghana, renowned economists say revenue accrued from the oil sector has been spent on non-priority areas including art and culture, adding that oil revenue which went into road projects was spread.

This is contrary to the Petroleum Revenue Management Act (PRMA) which in accordance with Sector 21(5), named four priority areas approved by Parliament for the Annual Budget Funding Amount (ABFA) expenditures for the period 2011-2013.

These areas are: expenditure and amortization of loans for oil and gas infrastructure; road and other infrastructure; agric modernization; and capacity building including oil and gas.

However, oil money was spent on art and culture, and other non-priority areas especially in the year 2013, a Professor of Economics at the University of Queensland, Australia, Prof John Asafu-Adjaye said this at a roundtable on the Petroleum Transparency and Accountability Index (P-TRAC Index) 2012 Report in Accra.

The P-TRAC Index is a project undertaken by the IEA to promote transparency and accountability in the management of Ghana’s oil and gas resources, and to enhance the level of responsibility on the part of policy markers.

The report was based on four aspects of the oil and gas value chain, namely; Revenue Transparency Expenditure, Expenditure Transparency, Contract Transparency, and the Ghana Petroleum Fund.

To this end, Prof Asafu-Adjaye and oil economist, Dr. Mohammed Amin Adam, believe there has not been efficient management of the country’s oil revenue yet.

Dr Amin who is also the Executive Director of the Africa Centre for Energy Policy (ACEP), an energy think-tank organization noted that in 2013 for instance, ‘$24 million was spread over 64 road projects, covering 2,124 kilometers; this is not efficient spending because each of these projects, if we maintain this rate of disbursement, will take not less than 30 years to complete and in some cases the cost of the projects has to be doubled or tripled.’

Similarly, many projects being funded with oil revenues have suffered time and cost-overruns in some cases the costs have doubled or tripled, he added.

Dr Amin indicated that the Asankragwa road, which was awarded on contract at GH¢24 million in 2011, had ballooned to 42 million Euros.

In latest report on the management of oil revenue entitled, ‘The two sides of Ghana – How good oil revenue law do not stop oil revenues from going down the drain,’ conducted by the ACEP, added that some of the road infrastructure which were partly funded from oil revenues and were at different stages of completion with a few actually completed were; emergency works on the upgrading of the Ho-Adidome and the Adaklu Xelekpe-Aduadi roads; reconstruction of the Navrongo-Tumu road; reconstruction of Asankragwa-Enchi road; emergency rehabilitation works on Dansoman main road in Accra; and reconstruction of the Berekum-Sampa road.

Dr. Amin stated: ‘While the projects funded from oil and gas revenues may have long-term economic prospects in project communities, the short-term social and economic impacts during the construction phase have been severely limited, as contractors mostly bring workers, food and materials from non-project communities.’

‘Ghana is, therefore, not deriving value for money from the infrastructure projects funded with oil revenue, as most of the projects had been delayed, operating under costly extensions and leading to cost overruns. The money is supposed to be used for investment to improve living conditions of the people’, he stressed at training workshop for journalists held recently

For instance, in 2012, an amount of GH¢ 232,403,269 out of the oil revenues was committed to road infrastructure.

But they are yet to be told exactly which roads the funds were applied. Again, in 2012, while an amount of GH¢72,471,824 (14 per cent) was committed to agricultural modernization we used GH¢111,959,738 for so-called capacity building.

In its 2012 annual report, the Public Interest and Accountability Committee (PIAC), the committee charged with monitoring compliance with the Petroleum Revenue Management Act, called on government to indicate how the funding for capacity building was utilized.

They still hold the view that the economic and social challenges that the country faces are rooted in the nature of economic policies and the manner in which governments over the years have chosen to conduct national affairs.

The economic woes Ghanaians are facing can be attributed to the hands-off neoliberal economic policies and failure on the part of the leadership to do the right things for the country.

The policy of unbridled trade liberalization or more appropriately import liberalization has compelled Ghanaians to live virtually on imports from China, US, UK, among others.

The country imports practically everything as the manufacturing sector gradually, but surely, grinds to a halt. Ghanaians increasing appetite for imports means that our demand for foreign currency particularly the US Dollar is growing exponentially, the TUC boss said.

More than two-thirds of our exports revenues are generated from Gold, Cocoa, Oil and Timber. And Ghanaians continue to export these in their raw forms earning very little.

Policymakers have failed to address the monumental challenges that confront domestic industry compelling many exporters to convert their factories into warehouses as they join the lucrative import trade.

The problem has been compounded by the over-liberalization of our external payment system allowing for transfer of foreign currency of any amounts out of the country by foreign companies operating in Ghana.

The head of the organized labour and economists believe that the country requires immediate short-term remedial measures to ameliorate the plight of Ghanaians.

It is important that government rolls back some of the many taxes it has imposed on the people, including the downward review of charges and fees.

Also, government must consider re-introducing subsidies on utilities and fuel because the rate at which government is raising fuel prices and utilities is neither sustainable nor socially desirable for the country.

The government must check and rid itself of corruption and corrupt elements to ensure that government services and programmes reach their intended beneficiaries in a timely manner.

In the long-term, a radical overhaul of economic and social policy is warranted. There is need to strengthen the state and its agencies to allow for effective conduct of government and state policies and programmes.

This means that while market forces are recognized as important in mediating economic exchanges, the state represented by efficient government institutions must retain the right and possibilities to intervene in a strategic way to achieve national objectives.

Economic policies must emphasize the centrality of adding value to natural resources and being able, as a country, to produce some of the basic necessities of life.

This, the Minister of Finance, Seth Terkper, assured Ghanaians the government is pursuing a multi-sectoral approach to implementing a number of policies and measures to stem imbalances in the economy and put the economy on a sound footing.

In addition to this, he said the government was keyed in reducing the fiscal deficit and it was also supporting industry and deploying other policies to boost domestic productivity, increase exports, especially non-traditional exports (NTEs), and reduce the external deficits.

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