It is probably an understatement to say that Ghana is facing one of the most serious economic crises in its history. Economic growth has been slowing. The budget deficit has been at double digit for two years running, with a stockpile of payment arrears. The external current account deficit has been at double digit as well.
The public debt has been rising rapidly. The Cedi has seen rapid depreciation in the past 15 months. Over the same period, inflation has risen steadily back to double digit. And above all, the underlying structure of the economy remains weak.
After posting a record high growth of 15 per cent in 2011 (the first full year of oil production), and 7.9 per cent in 2012, economic growth is estimated to have slowed to less than six per cent in 2013. Slowing growth is the result of normalisation of the oil impact, low export commodity prices, slow agricultural growth, erratic power supply, and low public investment, in part due to revenue shortfalls and low donor disbursements. For this year, growth may probably slow down further, unless many of the dampening factors improve.
The fiscal deficit was 11.8 per cent of GDP in election year 2012 compared with a (revised) target of 6.7 per cent. A substantial amount of arrears was accumulated. In 2013, the deficit was 10.8 per cent compared with the target of 9 per cent. Meanwhile, a substantial amount of arrears was again accumulated.
The public debt reached 58 per cent of GDP at the end of 2013. So far this year, it must have already exceeded 60 per cent, a level many analysts consider to be the sustainable threshold. In retrospect, the public debt that had risen above 100 per cent of GDP was reduced to around 26 per cent in 2006 when Ghana benefitted from HIPC and MDRI reliefs.
The pace of recent debt accumulation has alarmed many analysts who warn that Ghana could return to HIPC status sooner than later.
The external current account deficit was above 12 per cent of GDP in 2012 and 2013. Import demand has been growing rapidly as a result of inadequate domestic industrial production in the face of a multitude of bottlenecks, including poor infrastructure, erratic energy supply and high cost of credit.
On the other hand, export receipts have been stifled by continued dependence on low value-added products. The Cedi depreciated by 15 per cent in 2013; and this year, it has already depreciated by 20 per cent.
The Bank of Ghana responded to the crisis by tightening monetary policy and regularising existing regulations in the foreign exchange market. The pace of depreciation and volatility has reportedly slowed so far. Far-reaching measures may, however, be required to stabilise the currency on a long-term basis.
Inflation that had been kept at single digit for two-and-a-half years between June 2010-December 2012 rose steadily from 8.8 per cent in December 2012 to 14.5 per cent in March 2014. This is the result of the currency depreciation, periodic upward adjustments in fuel and utility prices, and rising food prices.
Given its limited coverage and other measurement inadequacies, the official measure of inflation may not even fully capture the much higher general cost of living.
Finally, the underlying structure of the economy remains weak, with a narrow production base and heavy dependence on primary, unprocessed export products. The persistence of a “colonial economic structure” has stifled economic growth and development, and manifested in general economic and financial imbalances.
The need for a major transformation of the economy has been widely acknowledged, with the President reiterating it in his last State of the Nation Address to Parliament.
As a matter of urgency, the budget gap has to be closed by increasing the tax effort and reducing expenditure. The tax effort can be increased, not by raising existing rates which are already high but by expanding the tax base, strengthening tax administration, and reducing the spate of exemptions, evasion, fraud and corruption.
Meanwhile, expenditure has to be reduced. To that end, it may be necessary to revisit the Single Spine Pay Policy (SSPP) to consider its long-term viability. Public sector reform should also be carried out as a matter of priority.
This may have to involve downsizing, including the government sub-sector. Reform should also aim to increase productivity commensurate with remuneration. Closing the fiscal gap will help stem the emerging debt crisis by slowing the pace of borrowing.
Further, it is critical that loans are used to develop the economy to enable it ‘grow out of debt.’ It will be a fatal mistake to divert loans to fund recurrent spending such as wages, interest, subsidies and other goods and services that do not have a direct bearing on growth.
The widening external imbalance can be narrowed by increasing domestic industrial production by addressing the several bottlenecks mentioned above. It is also important to add value to our exports through more processing.
These policies will also help stabilise the cedi on a long-term basis. Meanwhile, fiscal consolidation will also ease demand pressure on the cedi. Fighting inflation on a durable basis also requires increased industrial and agricultural production.
Food alone has a weight of 44 per cent in the CPI basket. If we are able to produce enough food to feed ourselves, the cost of living in the country will be cut nearly by half.
There is no gainsaying the fact that the economy is cash-strapped. It has become obvious that the large financial deficit cannot be funded in a manner that does not further exacerbate the public debt or cause more inflation and further currency depreciation.
The deficit has to be reduced through serious austerity or adjustment in the form of cutting expenditure and increasing tax collection. However, it has been difficult in the past to undertake strong fiscal adjustment on our own watch without the umbrella of an IMF programme.
This is because of entrenched expenditures and difficulties with increasing taxes. The choice for us is quite clear: we have to undertake the needed fiscal adjustment on our own or in the context of an IMF programme.
Closing the financing gap will send the right signal to investors and donors and ensure a reflow of resources into the country.
Finally, the need to transform the economy from its colonial structure cannot be overemphasised since that is at the core of many of the other problems facing the economy.
In this regard, there is the need to move from rhetoric to concrete policy action. Industrialisation should be promoted as a matter of urgency through state policies that address impediments to domestic businesses which stifle competitiveness, including the large infrastructure deficit, high cost of credit and unfriendly trade policies. Adding value to our exports should be a policy priority so as to increase foreign receipts.
The bottomline to addressing the economic crisis facing the country is clearly fiscal adjustment in the short-term and structural transformation over the medium to long term. We should boldly and vigorously pursue this agenda without pandering to the interests of any particular constituencies. “There should be no hesitation and no turning back.”