Dr. Mahamudu Bawumia, former Deputy Governor of the Bank of Ghana and currently a Visiting Professor at the Central University has said that the economy of the country is in crisis and called for serious action and the right decisions to be taken quickly to salvage the situation and that anything apart from these would likely see Ghana returning to the International Monetary Fund for a bail out before the end of the year.
“The sad fact is that Ghana’s economy is in a crisis. I do not use the term “crisis” lightly. This is not some short term blip that will just pass over if we can just muddle through. The problem we have is that there appears to be an unwillingness to face the truth and admit that we are in a crisis. In fact, we appear to be in a state of denial. At this rate, one should expect much more depreciation of the cedi this year,” he said.
Dr. Bawumia made these statements after pointing out how weak the current fundamentals of the Ghanaian economy is, looking at various statistics and indicators, while delivering a lecture on ““Restoring the Value of the Cedi” at the Central University College, Miotso Campus.
Dr. Bawumia began his analysis on the weakening fundamentals of the economy by looking at the Real GDP Growth numbers.
““At the heart of any effort to transform the economy is accelerated and broad-based growth. The reality however is that, real GDP growth in Ghana, notwithstanding the onset of oil production, has declined significantly since 2011. Data from the Ghana Statistical Service shows that from a real GDP growth of 8.4 percent (without oil) in 2008, real GDP growth reached 15.0 percent in the year 2011 (amongst the highest in the world that year) as a result of oil production. Since 2011 however, real GDP growth has slowed down to 7.9 percent in 2012 and further down to a projected growth of around 5.0 percent for 2013. Mr. Chairman, the data for non-oil growth shows that real GDP growth has declined from 9.4 percent in 2011 to 3.9 percent in 2013. This means that Ghana’s economy (excluding oil) is growing at the same growth rate as the year 2000 and half the rate of economic growth in 2008,” he said.
Touching on fiscal developments, Dr. Bawumia observed that there was deterioration in the state of public finances with government unable to meet most of its statutory payments and payment to contractors in huge arrears and noted that the current situation had arisen because of the huge increases in government expenditure though revenues had not seen commensurate increases and remained largely constant.
He said, “while government tax revenue stayed constant at some 17.7% of GDP between 2011 and 2013, government expenditures increased by a whopping 6.6% of GDP from 20.1% of GDP in 2011 to 26.7% of GDP at the end of 2013. The bulk of the increase in government expenditure (94%) was in the area of recurrent expenditure. This has resulted in double digit fiscal deficits (12.0 percent in 2012 and 10.9 percent in 2013) over the last two years. This is the first time in the history of Ghana that we have we have had double digit fiscal deficits two years in a row. With the current fiscal policy stance, it looks most likely that we would record a double digit fiscal deficit by the end of 2014 to make it three successive years in a row, notwithstanding measures such as the removal of petroleum and electricity subsidies, and an increase in the VAT and other taxes. This is an indication that the fiscal quagmire in which the economy finds itself is not short-term one.”
Dr. Bawumia continued by looking at the continuous excess injection of liquidity (printing of money by the Bank of Ghana) to finance government expenditure.
““Excessive fiscal expansion creates problems in many developing countries because it tends to be largely monetized and the excess injection of liquidity results in exchange rate depreciation. This has been Ghana’s experience during this latest period of exchange rate depreciation. There has been a dramatic increase in central bank financing of government recently (i.e. equivalent to the printing of money), in addition to borrowing to finance the fiscal deficit. Central bank financing has increased from GH¢1,448 million in 2008 to GH¢11,327 million by 2013, a 700% increase.
An expansionary fiscal policy accommodated by increased central bank financing of government is a sure recipe for increased inflation and exchange rate depreciation,” he noted.
The former Deputy Governor then focused on the state of Ghana’s Debt which has increased from GH¢9.5billion(33% of GDP) in 2008 to GH¢49.9 billion (57.7% of GDP) at the end of 2013; an increase in the debt stock by 426% (GH¢40.4 billion) in a period of five years.
The renowned economist then proceeded to show the effects of the huge increase in the stock of debt on the economy. ““The increase in Ghana’s debt has placed a major burden on public finances with regard to interest payments on the debt. Interest payments on domestic and external debt declined from 7.5% of GDP in 2000 to 2.3 percent by the end of 2008. Since then, interest payment has increased to 5.1% of GDP in 2013 and would reach 6.5% of GDP by the end of 2014 (an increase of 2.8% of GDP)
Debt service alone absorbed 36.3 percent of total government revenue in 2013. With declining economic growth, the increase in interest payments has taken up the fiscal space or cushion that previously existed. We are in a very tight corner.”
Turning his attention to the Foreign Exchange reserves of the country, Dr. Bawumia told the audience that that the reserves are held to provide a buffer against severe external shocks and to enhance confidence in a country’s economic management and its ability to meet its international payment obligations and as such was a very important indicator to investors and all interested in accessing the state of the country’s economy.
He noted that Ghana’s gross international reserves increased from $2.03 billion in 2008 (equivalent to 2.1 months of import cover) to some $5.6 billion (equivalent 3.3 months of import cover including) at the end of December 2013 but had declined to $4.8billion by February 2014 equivalent to some 2.5 months of import cover.
““An examination of the more important net international reserves (NIR) position tells a more worrying story. The NIR is gross foreign reserves less outstanding short-term liabilities of the central bank and any credit advanced by the International Monetary Fund. It is a measure of what a country’s central bank effectively has available to make external payments. This is the measure that is of most concern to international investors.
Ghana’s net international reserves have declined from a peak of $4.4 billion in 2011 (equivalent to 3.1 months of import cover to some $1.5 billion in February 2014 (equivalent to some 0.6 months or about two weeks of import cover).
In terms of months of import cover, this is the lowest import cover for the NIR since 2000 and the lowest for any middle income or oil producing country in the world,“ he explained.
After analyzing the state of the economy and its fundamentals, Dr. Bawumia noted, “the question we should all ask ourselves is how can any country expect its currency to be stable after this economic outcome? The depreciation of the cedi that we are observing is the result of the weakening fundamentals of the economy. There is no mystery here. At the heart of the problem is the lack of fiscal and monetary discipline. In fact virtually all the episodes of cedi depreciation since independence can be traced to this issue of fiscal and monetary indiscipline.”
In ending Dr. Bawumia suggested a number of steps the government could take to address the problem. He urged government to admit that the economy is in crisis so it can carry the people of Ghana along the tough remedial measures it might need to take to salvage the situation. He also urged government to commit to serious fiscal discipline by ensuring there was value for money in the award of government contracts; reducing revenue leakages; expanding the tax net through the formalization of the economy; dealing effectively with corruption in the management of public finances; taking measures to restore the confidence of investors and the Ghanaian public that large fiscal excesses would not happen again by for example, passing a Fiscal Responsibility Act which unlike the current Financial Administration Act will be effective in enforcing fiscal discipline and have sanctions for governments that fail to commit to discipline.
He also suggested that government should reduce import duties on certain imports to stimulate local production and boost production and for government to reduce borrowing drastically.