The key structural characteristics of the economy of Ghana include the following: A highly open economy relatively well-integrated into the global trading system and critically dependent on three commodities namely cocoa, gold and oil. A standard measure of openness to international trade (the ratio of the value of trade for both exports and imports to the nominal GDP) stood at nearly 100 percent for Ghana compared to about 75 percent for la Cote d’Ivoire, just under 60 percent for Nigeria and less than 50 percent for Tanzania (using 2008 data). These statistics show why Ghana is often characterized as highly open and well-integrated into the global trading system.

Revenue from international trade constitutes a significant proportion of the total government revenue; tariffs are relatively low and so is the dispersion across import items.
The exchange rate and payment system has been described as a liberal one in the sense that the system is free from restrictions on payments and transfers involving merchandise trade, profits, dividends and labour incomes as well as official grants and private transfers such as remittances. A consequence of this freedom from payment restrictions, however, is that domestic prices of traded goods and the exchange rate are highly responsive to international market forces and domestic demand pressures.
A “freely floating” but “managed” official exchange rate regime co-exists with a retail market of forex bureaux (licensed and informal) operators. Exchange rates in the latter are particularly important in cross border transactions (smuggling activity).

The interest rate regime is essentially liberalized with the Bank of Ghana (BOG) prime rate, the policy rate, working through the interbank market and the weekly auctions of Treasury bills and Notes to determine money market and longer term interest rates.

Prices of goods and services are largely market-determined except for tariffs on public utilities (electricity and water) and prices of petroleum products which are determined by regulatory institutions – the Public Utilities Regulatory Commission (PURC) and National Petroleum Authority (NPA) respectively.
Ghana is surrounded by CFA franc zone countries which produce the same primary commodities for export. Unrecorded cross border trade or smuggling activity is active and significant with the forex bureaux exchange rates often playing a crucial role.

Smuggling has been blamed for significant movements of cocoa from Ghana to La Cote d’Ivoire. For the current crop year 2009/10, on account of intensified smuggling, CEPA projects that purchases will fall short of the total for the previous crop year by 8 percent and short of its target of 650,000 tonnes by 10 percent. The inducement for smuggling is a function of the official producer prices in the two countries and most importantly the forex bureaux rates in the border areas.

Beyond the structural characteristics, the current macroeconomic policy framework is a three year stabilization programme agreed with the International Monetary Fund (IMF) for the period 2009-12 under its Poverty Reduction and Growth Facility (PRGF) now the Extended Credit Facility (ECF). It is anchored on strong fiscal discipline with a supportive monetary policy regime. Consistent with the orthodoxy of the IMF, great reliance is placed on the sacrifice of output and jobs particularly for new entrants into the labour force — the youth — to achieve the ambitious, rigid and fast paced inflation targets in the stabilization programme.

With a sacrifice ratio, or opportunity cost — a measure of the economic growth foregone to achieve the inflation reduction — estimated at nearly one by the IMF Staff, the 4 percentage points reduction in the rate of inflation — from 20 percent to 16 percent per annum — achieved in 2009 cost the nation an economic slack equivalent to 4 percentage points of GDP. This also means the loss of the jobs that would otherwise have been created to produce this amount of lost output. Interestingly, the instrument for achieving this slack was the 4 percentage point reduction in the budget deficit/GDP ratio from 14.5 percent in 2008 to the CEPA estimate of 10.5 percent in 2009.

CEPA also projects that its forecast of a cumulative 5.7 percentage points reduction in the rate of inflation in 2010 — from 16 percent in December 2009 to 10.3 percent for December 2010 — would require a corresponding loss in output equivalent to 5.7 percentage points of GDP. This measure of output foregone will come with corresponding loss of jobs that would otherwise be used to produce that output. This will be particularly severe for new entrants into the labour force i.e. the youth, but also small-scale farmers may find themselves saddled with unsold produce with possible adverse effects on future consequences for investment and production.

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