ࡱ> UWTY @bjbjWW u==<]  D``vvvvvvZT5 T $> vvvvv vvv`vvvvvvvvvv*Sv<$eK3v}HOW WE FARED: MID - YEAR REVIEW OF GHANAS ECONOMY Dr. J. L. S. ABBEY - EXECUTIVE DIRECTOR, CEPA (Delivered at Ghana National Chamber of Commerce) Macroeconomic Objectives and Policy Targets for 1995 The Government of Ghana's overall macroeconomic program for 1995 aims at promoting additional investment necessary for sustaining an increase in economic growth to 5 per cent for the year. The strategy envisaged is based on complementary fiscal and monetary policies aimed at dissipating inflationary pressures in the economy and improving the country's external position. The expectation is that these policies will ensure the attainment of a relatively more stable - at least in comparison to last year - exchange rate regime without losing international price competitiveness. Within this framework, the policies for 1995 aim at bringing inflation down to 19.5 percent (on a year-on-year basis), and reducing the overall narrow budget (excluding divestiture receipts) from 3.1 per cent of GDP in 1994 to 0.1 per cent by the end of the year. The Program also envisages, reducing growth in money supply to 14 per cent, and narrowing the external current account deficit from 4.9 percent of GDP in 1994 to 3.7 per cent. The strategy requires that domestic savings particularly government savings must increase far beyond the present low levels in order to finance the volume of investment necessary to meet the growth target, since the country cannot, in the post-Cold War era of cutbacks in aid and diversion to Eastern Europe, rely on any significant increase in foreign aid from the levels recorded so far. To establish an environment conducive to private sector initiative, therefore, the policy framework lays out a plan of action for the withdrawal of state from areas of economic activity that can be better handled by the private sector. International price competitiveness is however not sufficient to assure increased foreign exchange earnings or savings unless the production problems are solved. Specific programs including the Trade and Investment Program (TIP) and the Private Enterprise and Export Development Credit (PEED), are being developed and aimed at creating an enabling environment for the vigorous promotion of non-traditional exports. Table 1: Ghana - Macroeconomic Framework for 1995  Prov. Actual 1994 GoG Original Program 1995 GoG Revised Program 1995 CEPA Projections 1995 GROSS DOMESTIC PRODUCT: Nominal (in billion ) 5185.7 6719.9 6719.9 7260.0 Real Growth Rate 3.8 5.0 5.0 3.7 INFLATION (CPI) (%) Year on Year (December) 34.2 18.0 19.5 52.9 Average (December) 24.9 31.4 28.0 45.9 INTEREST RATES (%) Nominal Rate (91 - Day T- Bill) 29.5 39.0 39.0 40.6 Real Rate 0.2 0.2 0.4 -0.1 OFFICIAL EXCHANGE RATE (/$) Period Average 956.6 1135.0 1146.4 1265.8  End of Period 1050.9 1200.2 1255.0 1300.4 MONETARY POLICY (in billion )  Broad Money (M2) 967.4 1102.8 1102.8 1338.5 Percentage change 46.2 14.0 14.0 38.4 GOVERNMENT BUDGET (in % GDP) Total Receipts (Narrow coverage) 24.3 22.3 22.4 19.7 Total Expenditure & Net lending 22.2 21.1 21.1 22.3 Narrow Budget Balance 2.2 1.2 1.1 -2.5 Broad Budget Balance -4.0 -4.0  -7.8 BALANCE OF PAYMENTS Current Deficit /GDP Ratio (%) -4.9 -3.7 -3.7 -3.4 Overall Balance of Payments/GDP (%) 3.0 2.3 2.3 1.1 With regards to the GDP target, it is important to note the Ghanas economy heavily depends on the agricultural sector which is also dependent on the natural weather patterns such as rainfall (this is highly unpredictable and when it comes, it is either too light or heavy). Any shifts in the weather conditions may greatly affect agricultural produce and consequently may push the GDP growth rate off target. A Critique of the Framework and Instruments for attaining stated objectives Government economic policy has normally assumed that inflation can quickly be brought under control using orthodox aggregate demand management policies without any significant cost in terms of output and employment. There is the need for more explicit consideration of real sector issues beyond the general fostering of an enabling environment for private sector and export - led growth. The macroeconomic framework does not make any allowance as to how the growth objective will achieved. It rather assumes away existence of any production bottlenecks with the pretension that all that is needed is to get the market functioning. As a nation coming from a situation of large public sector with its unpleasant fiscal consequences, there is the need for private sector-led growth. The divestiture , privatization, redeployment and liberalization are all meant to provide enabling environment that ensures private sector-led growth. There is, however , the need for more explicit policies to bring about the required growth. Appropriate macroeconomic policies especially exchange rate policies also become crucial in ensuring effective competition at home and abroad. The need to maintain competitive edge with our trading partners could also be an incentive to exporters and hence boost export promotion efforts. Absorption, as a key focus variable without fundamental distinction between components may be alright in the short-run but quantity and quality of investment expenditure may be down played in the process. Absorption is made up of consumption (private and government) and investments (private and government). The splitting absorption into its consumption and investments components could serve a notice of favouring investments or consumption in a country's fiscal discipline efforts. An indiscriminate cut in absorption as a fiscal policy measure may in the short run reduce aggregate demand and hence inflation. This may however impair the long term growth of the economy if the investment component of the reduced absorption is not at a level that could sustain the warranted growth of the economy. It is important to point out that mere quantitative investment does not guarantee growth. The role of fiscal and monetary policies in Ghana is to restrain the rate of increase of total consumption both government and private sufficiently to make adequate resources available for the needed investment. Consistent monetary and fiscal policies would enable savings, foreign loans, credits and grants to be adequate enough to finance the investment required to sustain Ghanas growth, balance of payments and inflation targets. One fundamental principle associated with open economies is that achieving sustainable equilibrium requires that fiscal, monetary and exchange rate policies be mutually consistent and reinforcing. Few countries leave their exchange rate systems simply and exclusively to market forces; nor are there many that run rigidly fixed exchange rate regimes. An important point to note is that whatever exchange rate regime prevails at any time, has important implications for both fiscal and monetary policies. If the required consistency is violated, severe disequilibrium situations such as real exchange rate misalignments result with well-known adverse consequences for the economy. The internal consistency required for a macro-framework in the country calls for a much more conservative fiscal policy than what seems to be prevailing at this time. For instance, consider the mode of financing government budget deficit in the country. A budget deficit which is not financed by net external borrowing or non-bank domestic borrowing has implications for monetary policy. In an internally consistent macroeconomic framework, monetary policy may place limits on the size of the budget balance. For example, a targeted budgetary surplus of a given magnitude may be put up. If this surplus is not realizable, the required consistency in macroeconomic policies will be violated. Indeed, a surplus not of the required order of magnitude would still violate the consistency requirement. Thus, fiscal policy would be judged to be unduly expansionary even though the overall budget is in surplus. Cutting back on government expenditures may be called for without this implying or resulting from a budget deficit. Thus, the appropriateness of say the fiscal stance is determined solely by the requirements of macroeconomic consistency not by the sign or magnitude of the budgetary balance. Policy inconsistency through either expansionary fiscal policy or restrictive monetary policy may generate large imbalances which in a liberalized market regime like ours, results in higher than programmed inflation targets, nominal interest rates and rates of depreciation of the Cedi or balance of payments outcome or a combination of all of these. There is the need therefore to ensure that policies implemented are consistent and are geared towards stabilization and growth. To achieve this kind of growth, Ghana must learn to overcome several major obstacles to private sector development and public sector reform. One important strategy to promote private sector growth in the country is to build private sector confidence. This could justify privatization, liberalization and re-deployment objectives of the government which were meant to provide an enabling environment that ensures private sector growth and help remove the short-term problems facing the private sector. In addition, efforts must be directed at reducing the balance of payments disequilibrium and the rate of inflation to desired levels by reducing aggregate demand and by increasing aggregate supply. Failure to promote supply-enhancing policies is likely to result in an economic crisis. For a developing country like Ghana, conscientious efforts to remove bottlenecks such as infrastructure, communication etc. becomes more crucial than pure aggregate demand approach. In promoting growth, bottlenecks normally associated with the foreign exchange constraint or institutional weaknesses and cost/price distortions (often associated with regulations and controls) which adversely impact on productivity as well as the supply of factors of production must be removed. To the extent that distortions had reduced the country's ability to earn foreign exchange or had led to the misuse of the foreign exchange available, their removal should, over time increase foreign exchange earnings. The removal of distortions thus has the same effect as an increase in foreign lending to the country. The major factors that affect growth in Ghana, particularly from the agricultural sector, are the low degree of utilization, inferior productivity of land and labour resources and finally the weather-dependent kind of farming activities which prevail in the country. Low degree of utilization of resources occurs in the presence of a high level of open and disguised unemployment of large areas of potentially arable uncultivated land and of unexploited water and mineral resources. Inferior productivity is reflected in the relatively small yields of cultivated land and in low per capital output of labour in urban occupations. The Record of Performance to first half of 1995 Available data over the first half of the year indicates that the Government's anti-inflationary policy does not seem to have been fruitful. The record is that the escalating rates of inflation and depreciation of the cedi has meant that the cost of production of domestic import-competing enterprises and non-traditional exporters have been rising faster. The rate of inflation as measured by the year-on-year change in the CPI over the June CPI for last year is currently recorded to be 61.9 percent. At this rate there are indications that the end-period rate of 19.5 per cent and the average rate of 28 percent programmed for 1995 would not be achieved. There are also indications that tradeable goods producers have suffered steady and significant declines in relative prices during the first half of 1995. As indicated in Table 3 below, the real exchange rate (RER) appreciated by 13 percent, if the average value of the RER through June is compared with the average 1994 level. This has occurred because the nominal depreciation of the Cedi has failed to keep pace with steadily rising rates of inflation in domestic prices. To restore Ghana's international competitiveness, Government must get inflation under control and must allow the nominal value of the cedi to depreciate. Getting inflation under control will require Government balancing its budget. The failure of the cedi to depreciate in response to rising rates of inflation in 1995 is troubling. It will appear that the Bank of Ghana may have resorted to moral suasion or running down its reserves to intervene in the foreign exchange market, and so supplied more than the target of international reserves build-up would have called for. Attempting to maintain a "stable" nominal exchange rate in the face of persistent increases in the money supply and rising prices will not stabilize the price level; rather it undermines the government's strategy to promote export-led growth by reducing the real profitability of producing for export. CEPA Projections of Likely Outcome by End of Year It is important to point out from the outset that the projections of CEPA are not what CEPA expects to be the best outcome for the nation, but rather what CEPA considers to be the likely out turn considering recent developments. CEPA projected an end of year inflation of 52.9% for the year on year and 45.9% for the average . Inflation has been galloping since January and by June 1995 has reached 61.9% for the year on year (double the rate of January 1995) and an average rate of 38.5% . CEPA's projections which seemed initially on the pessimistic side, now looks more optimistic considering recent figures of inflation. The price increases that were associated with the VAT episode seem to have resulted in higher inflationary expectations and higher recorded inflation figures. The high rates of inflation are, as may be expected affecting interest rates, exchange rate and the balance of payments position especially the trade balance. Real interest rate which was about 3% in January 1995 had fallen to -5% by June 1995 - a value consistent with CEPA's projected -10% by the close of 1995. The real interest rate are turning negative because the nominal rate has not risen in line with rising inflationary trends. The consequences of large negative real interest rates include discouragement in financial savings mobilization, acceleration of inflation and faster depreciation of the cedi. CEPA projected an average official exchange rate 1265.8 per US$ and bureaux rate of 1324.3 per US$ by the end of the year expecting the cedi to depreciate more than projected by the government because we also expected higher inflation. Though the government target has been exceeded the cedi seemed not to have depreciated to the extent warranted by trends in inflation. The reason may be that the BoG have been intervening in the forex market or using moral suasion to keep the cedi stable. 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