A PAPER PRESENTED By DR. (MRS) BIBIANA . C. OKEREAFOR
2. GLOBAL CONTEXT
3. OVERVIEW OF THE GHANAIAN ECONOMY
4. INFLATION CONCEPT, MERITS AND DEMERITS
5. GHANA IN CONTEXT,
• GROWTH DRIVERS,
• INFLATION DRIVERS
• MANAGEMENT BAILOUT STRATEGIES
6. COMPARATIVE POSITION OF GHANA WITH OTHER W/AFRICAN COUNTRIES FROM CONVERGENCE CRITERIA FOR WEST AFRICAN COUNTRIES MONETARY UNION
7. RECOMMENDATIONS AND CONCLUSION
In the natural course of economic and related activities, the economy may expand, contrast or even remain stagnant creating pains and hardship to individuals, families, corporations and the society at large. Such economic shocks may arise from high inflation, financial market crisis, wars, insecurity, unemployment and a decline in general output and services.
Consequently, as a measure to provide some stability and alleviate the pains among certain individual sectors of the economy, the governments employ either monetary or fiscal policy to fix the observed economic dislocation. The policy measure to be applied depends on economic objectives being pursued at any point in time (contractionary or expansionary).
One of the major problems facing the global economy especially the emerging economies is how to contain high inflationary pressure which makes price stability and economic growth unattainable. National governments have continued to adopt different approaches to fight high inflation rates based on factors found responsible and what they consider to be the most effective measure. In the case of a demand pull or cost push inflation, a government taking a classical economic approach would do nothing, because the idea is that the market will naturally work itself out and get back to normal without government intervention. A government may take the Keynesian view of the use of fiscal policy (capital injection / withdrawal and tax cuts/increase). Those that favour monetary approach will adopt changes in policy to control liquidity in the economy( involves changes in interest rates, cash reserve requirements, Open Market Operations, Moral suasion as well as prudential guidelines).
Fiscal policy involves spending while tax policy involves putting money or taking out of the economy. Essentially, the Keynesian school proponents of fiscal policy believes strongly that government intervention especially by surplus/ deficits budgeting and tax increases or cuts are necessary to smooth the bumps and keep economy on a healthy, steady and prosperous course. The government is the highest spender of money in any economy through its budgetary allocation and other forms of quantative easing measure where the economy requires expansion or reduction of its expenditure where a contractionary approach is being pursued. Government expenditure supports massive investments in infrastructure, road, housing construction etc. On the other hand monetary policy influences the economy through changes in the money supply and interest rates controlled by the central banks. The monetarist point of view is that money supply policy leads to economic stability in the long run at the possible expense of some short term pains. To the monetarist, money supply is more important than aggregate demand (increase money supply in small, careful increments to stimulate the economy rather than take more direct measures to stimulate the aggregate demand)
The Keynesian opposes the monetarist and argues that the apex banks inability to meet the demand for money normally results in liquidity squeeze while the monetarist critics asserts that the overuse of monetary stimulus will create inflationary pressure as a result of increases in money supply . Economic policies and theories behind why they should or should not work are consistently in conflict. One school of thought may explain a certain period well and then fail on future comparison.
However, the monetarist point of view on the control has always been embraced by policy makers who endorse tight control over money supply in addition to a more traditional fiscal stimulus and interest rate intervention in curbing high inflation.
The co-ordination of monetary and fiscal policies by the managers of the economy could be most effective to avoid over or under prescription remedies in addressing macroeconomic shocks, like inflation.
To approach the topic: CURBING INFLATION: FACTORS AND MANAGEMENT BAILOUTS FOR THE GHANAIAN ECONOMY, the paper starts with the concept of inflation, x-rays global macroeconomic environments, including the sub-Saharan Africa. It looks at Ghana’s economy: drivers and challenges, factors driving inflation northwards, and Compares Ghana’s economy with other countries in west Africa using criteria for the Zones monetary union agenda. It also examines efforts by the Ghanaian government to contain high and consistent inflationary trends with associated economic shocks. The paper is concluded with some recommendations.
CONCEPTUAL DEFINITION: Inflation is the rise in prices of goods and services overtime. In simple terms inflation is a steady increase in the prices of goods and services in a country and it is measured in terms of a specific annual percentage change. There are Four type of inflation, namely Demand pull/ excess demand. This occurs when the total demand for goods and services in an economy exceeds the supply inflation. Costs –push inflation, is associated with rise in the cost of production, e.g. wages increase, raise in the unit costs of production, thus leads to price increases. Others are pricing power inflation/ oligopolistic inflation and sector inflation. Inflation is usually measured by two indices tracked as “basket of goods and services –Consumer Price Index (CPI) or Producers Price Index (PPI). Inflation as measured by CPI shows the yearly changes in the cost to the average consumer paying for a basket of goods and services which may be fixed or changed at specific intervals such as yearly. The effects of inflation in an economy are usually evaluated from Headline and or Core inflation. Headline inflation measures the total inflation being experienced in an economy, while Core inflation excludes price fluctuations in food and energy sector due to their seasonal or volatile movements. When inflation is present, the purchasing power of a given sum of money can only buy fewer goods and services, i.e. the actual value of money is less. Inflation is seen as a monster because nobody wants to see a decline of the value of money in your possession, depending on the degree and consistency of inflation.
It can have positive or negative effects on the economy.
Peter Sander observed that high and consistent inflation discourage savings as the purchasing power of such amount saved will deteriorate. It may create shortages as people “stock up” in anticipation of rising prices. It leads to fears and uncertainties in the business world .Delay investment decision as no one is certain on cost of labour, inputs etc.
Moderate and predictable inflation could help to avoid recession and sharper business cycle reversals. It helps borrowers derive the amount for repayment with ease. The debt owed will be less in the future; this is easier to come by because most debt doesn’t get larger with inflation.
OVERVIEW OF THE GLOBAL ECONOMY:
According to the IMF WEO January update, global growth is projected at 3.7% in 2014, slightly higher than 3.0% at the end of 2013 to rise to 3.9% in 2015. In advanced economies, growth is projected to increase from 1.3 percent in2013 to 2.2 percent in 201 4 and 5.1 percent for emerging market and developing economies, from records of 4.7 percent in 2013 , supported by stronger external demand from advanced economies, although domestic weaknesses remain a concern. The major risk to the growth outlook in emerging economies is the adverse consequences of currency stability as the US tapering takes effect. However, the world Bank on the 10 th of June trimmed its forecast on world growth to 2.8 % from 3.2 % earlier projected due to Ukraine crisis and unusual cold weather in the USA that dampened economic expansion in the 1st of 2014 but maintained its global growth forecast for 2015 and 2016 at 3.4 and 3.5 percent respectively.
n the United States, real GDP grew by 1.9 percent in 2013, a drop from the 2.8 percent recorded in 2012. However, a decline in exports and private investment led to an annual 1percent decline in U.S. GDP in the first quarter of 2014, and reported to be USA worst economic performance since 2012.
For the euro zone, policy measures in the last 12monts have impacted positively on key downside risks and stabilized financial markets, and projected to spur growth of about 1.2 percent in 2014. However, lingering financial fragmentation, tight credit conditions, and high corporate and sovereign debt burdens remain key downside risks.
In Asia, Japan’s private investment and exports are expected to strengthen, especially in the face of substantial depreciation in the yen over the past year. The economy, which expanded by 1.5 percent in 2013, is projected to grow by 1.4 percent in 2014 a decline of 0.1% as a result of the contractionary fiscal policy stance in 2014–15 arising from two-step increase in the consumption tax rate—to 8 percent from 5 percent in the second quarter of 2014 and then to 10 percent in the fourth quarter of 2015.
China is projected to expand by about 7.5 percent in 2014, a modest decline from 7.7 percent recorded in 2013. The forecast for 2014 is predicated on the assumption of reduced credit growth and a rebalancing of domestic output. In India, real GDP growth is projected to grow at 5.4% and 6.4% in 2014 and 2015 respectively.
Generally in emerging and developing Asia, growth is expected to remain at 5.3 percent in 2014 because of tighter domestic and external financial conditions before rising to 5.7 percent in 2015, helped by stronger external demand and weaker currencies.
The Sub-Saharan Africa economic growth remains robust and is estimated to rise from 4.9 percent in 2013 to 5.5percent in 2014 reflecting gains from expansion of large megaprojects in infrastructure, natural resources, favourable agricultural production due to strong domestic demand.
The improvement in Africa’s medium-term growth prospects is attributed to democratic political changes and relative social stability in the region, rising domestic demand, value addition to African commodity export, waves of globalisation that has increased trade, increased FDIs inflows, increased trade and recovery from the global economic meltdown.
DOWN SIDE RISKS:
The downside risks to the region’s growth outlook include the fallouts from the US tapering , volatile commodity prices and slower investments by major emerging market economies
Other factors include: social unrest, political uncertainties / social unrest as seen in Ukraine and other developing countries absence of inclusive growth/high income inequality, vulnerability economic, social and environmental status and frequent breakdown of religious cum ethnic crises which has truncated regional peace and security in the Central African Republic, South Sudan and Nigeria, leading to huge loss of lives and livelihoods. In addition, the poor state of human development indicator poses a threat to African prosperity. Thus, achieving a lasting transformation requires concerted effort towards poverty reduction, improvement of physical infrastructure, and state of education and health sectors. It is important to note that, some countries are undergoing reforms to address these challenges to improve the life of the people in line with the Millennium Development Goals(MDG’s) a head of 2015 .
OUTLOOK ON GLOBAL INFLATION
On inflation, the global inflation is projected to remain subdued in 2014–15 with continued negative output gaps in advanced economies, weaker domestic demand in several emerging market economies, and falling commodity prices. In the euro area and the United States, headline inflation is expected to remain below longer-term inflation expectations, which could lead to adjustments in expectations and risks of higher debt burdens and real interest rates. Declines in the prices of commodities, especially fuels and food, have been a common force behind recent decreases in headline inflation across the globe.
Several economies with high unemployment have seen either inflation close to zero or outright deflation during the same period, this reinforces the Philip curve theory that higher inflation-prices and less unemployment vice –versa low inflation/price high unemployment. The implication is that the Phillips Curve, an economic theory that opined that high inflation rate and unemployment are inversely related, is not applicable to frontier markets.
In emerging market and developing economies, inflation is expected to decline from about 6 percent currently to about 5 percent by 2015. In low-income developing economies, softer commodity prices and sustained application monetary policy tightening have helped lower inflation from about 9.8 percent in 2012 to 7.8 percent in 2013 . Unemployment rate s remained high in these jurisdictions. Based on current strategies, inflation is expected to decline further to about 6 percent.
Inflation is expected to rise steadily to 1.7 percent in 2014 from 1.4percent in 2013 in advanced economies, and remain broadly contained at 5-6 percent in emerging markets.
Inflationary pressures in Africa has continued to witness reactions with some experiencing easing rates on the backdrop energy and food prices decline, prudent fiscal policies and restrictive monetary policy that hikes interest rates. Others are battling rising inflation pressures as a result of lax fiscal policy especially associated high cost of running government and weakened exchange rate alongside high unemployment. Most countries in Africa have resorted to tightening liquidity using the instruments of monetary policy to stem inflationary pressure.
In sub-Saharan Africa inflation slowed to a rate 6.3 percent in 2013, compared with 10.7 percent in 2012 while end year inflation for the region in 2014 is projected at 5.8 per cent. The anticipated low inflationary rate for the region is anchored on the estimated external financial flows to Africa which is expected to surpass its 2000 level by four times over to USD 200 billion in 2014. With the recovery of world economy from the 2009 recession, foreign investment (direct and portfolio) to the region is projected to reach a record USD 80 billion in 2014.
GHANA IN CONTEXT:
Ghana is classified as lower middle income status with a total population of 25.4 million (World Bank) and a predominately agrarian society. In addition there are many established industries in Ghana ranging from automobile, textiles, manufacturers, producers of consumers goods etc. As the second largest economy in West Africa, African second largest producer of gold, and is on course to become one of sub-Saharan Africa’s largest oil producers, Ghana has been able to grow its financial sector to contribute in diverse ways to its growth and development.
Ghana maintained GDP growth rate of about 6.0% over the past six years. The growth rate declined to 4.4% (AEO) in 2013 due to severe stress from fiscal front against 7.9% recorded in 2012. However, growth rate for 2014 is projected at 7.7% on the backdrop of improved production in the oil and gas sector, private-sector investment, public infrastructure development and stable political environment. The strong growth recorded by Ghana’s economy is attributed to sound macroeconomic management policies, stable domestic system supported by observance of the rule of law, a competitive business environment and sustained reductions in poverty levels.
MACROECONOMIC DEVELOPMENT IN GHANA
2011 2012 2013
GDP Growth rate 15.1 7.9 4.4
CPI (y-o-y) as at Dec ended 8.6 8.8 13.5
Deficit/GDP ratio 3 7.4 N/A
Broad Money (M2) (in million of Cedi) 18,195.19 22,620.05 26,937.02
Gloss Int’l Reserve (US$ Million) 5,382.82 5,348.96 5,632.12
Import Covered (Months) 3.3 3 3.1
External Debt (in US$ Million as at Dec ended) 7,589.45 88,335.56* 11,341.95
Domestic Debt (in Cedi Million as at Dec ended) 11,841.12 18,535.21 26,665.75
SOURCE: Bank of Ghana, AEO
*Increase attributed to an excessive spending in 2012 elections, and Ghana was ranked as the fourth country in Africa with the highest public debt in relation the total value of the economy, others are Cape Verde, The Gambia, and São Tomé and Principe, World Bank Report.
As noted in the above paragraph Ghana is blessed with natural resources and agriculture which accounts for almost one-quarter of its GDP. This sector which places strong emphasis on export orientation employs a large percentage of the country work force especially from the hinterlands. Its export of Gold and cocoa contributed 62 to per cent to total export receipts in 2012. Individual remittances are major sources of foreign exchange for the country. Commodity term of trade for gold and cocoa was on a favourable note enabling the country to get higher prices on export commodity which helped the nation to maintain high economic growth from 2008-2012, despite the global meltdown during that same time period.
GDP GROWTH RATE
2005 2006 2007 2008 2009 2010 2011 2012 2013 (e) 2014 (p)
Gambia -0.9 1.1 3.6 5.6 6.3 6.1 -4.3 6.1 5.6 7.5
Ghana 5.9 6.4 6.5 8.4 4.0 8.0 15.1 7.9 4.4 7.7
Guinea 3.0 2.5 1.8 4.9 -0.3 1.9 3.9 3.9 2.0 4.2
Liberia 5.9 8.9 13.2 6.2 5.3 6.1 7.9 8.3 8.1 6.8
Nigeria 6.5 6.0 6.4 6.0 7.0 7.0 5.1 6.7 7.4 7.2
Sierra Leone 7.3 7.4 6.4 5.5 3.2 5.3 6.0 19.7 13.0 13.8
Africa 5.9 6.3 6.6 5.4 3.1 5.0 3.3 6.4 3.9 4.8
WORLD 3.6 4.1 4 1.4 -2.1 4 2.9 2.4 3 3.6
SOURCE: AFRICAN ECONOMIC OUTLOOK; ADFB and World Bank
Oil discovery and commercial exploration of oil has over taken agriculture as major foreign exchange earner though the agro allied sector is still the country highest employer of labour, comprising mainly of small landowners. The commencement of oil production in December 2010 made Ghana one of the highest growing economies in the world by 2011 with a rate of 14.4%. As of Q1 2013, Ghana has crude oil reserves of 660 million and 800 billion cubic feet of natural gas reserves (though not largely explored).
Other factors that have further spurred the growth of Ghana’s economy are: Ghana’s strong, stable democratic system, rule of law, and strong investor protections. Ghana “Doing Business” index was adjudged to be the best performer in West Africa according to the World Bank.
Entrepreneurship spirit of most Ghanaian has been on the upbeat with new business enterprises springing-up in the country from the 1980s; this has become a major potential source of accelerated growth.
The government of Ghana implemented different policy measures both in the domestic and foreign front to accelerate the country’s growth and development. Ghana is currently experiencing infrastructural funding gap of at least US$1.5 billion. The Government of Ghana in 2011 aimed to counter this huge funding need, approved National Policy on Public Private Partnership (NPPPP); a crucial economic reform that will increase infrastructure and public service/private sector fund under Public Private Partnership.
The country from the external perspective has made significant strides in partnership with multilateral agencies to promote growth and development including Millennium Challenge Corporation (MCC) Compact in 2006 which aims to transform Ghana’s agricultural sector, Debt relief under the Heavily Indebted Poor Country (HIPC) program in 2002, Multilateral Debt Relief Initiative in 2006, three-year Poverty Reduction and Growth Facility in 2009 with the IMF and other international agreements, Grants and foreign loans.
Foreign Direct Investment (FDI) flows in 2013 to West Africa amounts to $16.8 billion out of which the country attracted US$3.3 billion as FDIs- UNCTAD Report.
EXISTANCE OF ROBUST FINANCIAL SYSTEM
Ghana has been able to grow its financial sector to contribute in diverse ways to its growth and development. It has an efficient robust capital and money markets that provides the short- term and long term funds for its development needs of the people. The market capitalisation as a percentage of GDP in selected African Markets and All shares Index as at 2012 are shown in the charts below.
In Ghana the large fiscal deficit was financed mostly domestically, though the government issued a Eurobond for $1 billion in August 2013. The spreads on the Eurobond maturing in 2017 have hovered between 650 and 700 basis points since February 2014. The country is due to issue its third Eurobond in july 2014.
The domestic financing of the deficit is possibly due to the Bank of Ghana’s (BoG) accommodative credit policy as it expanded net credit to the government and to public enterprises. Interest rates on 91-day Treasury bills reached 23.5% by mid-March 2014. The aim is to control inflation and arrest the depreciation of cedi.
CAPITAL MARKET INDICATORS IN THE WAMZ
MARKET CAPITALIZATION (billions) end of year-US$
2010 2011 2012 2013
Bourse Regionale des Valeurs Mobilieres (BRVM) 6.97 6.96 8.1 8.3
GHANA 6.97 6.96 8.1 19.66
NIGERIA 53.4 43.06 57.77 84.081
SIERRA LEONE 0.025 0.026 0.035
SOUTH AFRICA 981.44 845.58 998.34 942.81
AFRICAN MKTs CAP as % of GDP
2010 2011 2012
BRVM** 10.59 9.63 11.55
GHANA* 11 7.8 8.5
NIGERIA** 24.63 17.43 21.8
SIERRA LEONE** 5.26 5.1 5.48
SOUTH AFRICA* 174.9 130.2 159.3
Source: * World Bank
**ASEA 2013 Year book
2010 2011 2012 2013
BVRM COMPOSITE INDEX N/A N/A 166.58 232.02
GSE COMPOSITE INDEX N/A 969.03 1,199.72 2,145.20
NIGERIAN ASI 24,770.52 20,730.60 28,078.81 41,329.19
SIERRA LEONE N/A N/A N/A N/A
JSE 28,716.27 31,995.87 39,250.24 46,256.23
SOURCE: ASEA 2013 year book, BVRM, GSE, JSE, NSE and Bloomberg.
NUMBER OF LISTED COMPANIES
2010 2011 2012 2013
Bourse Regionale des Valeurs Mobilieres (BRVM) 70 67 66 76
GHANA 35 34 34 34
NIGERIA 217 198 194 199
SIERRA LEONE 1 1 1
SOUTH AFRICA 450 406 400 388
CHALLENGES TO GROWTH PROSPECTS
The downside to economic growth is not uncommon to Ghana’s economy but is more of an emerging market economies challenge. Despite the transformation of Ghana’s growth and development agenda, the government is grappling with certain challenges and risks.
Factors undermining growth rate include:
Downturn performance in the agricultural sector due to fall in export prices in cocoa and gold, lower oil production and power rationing experiences, leading to unsatisfactory performance of various sectors especially in manufacturing with provisional growth estimated at 6.3% in 2013, down from the growth of 6.9% in 2012.
HIGH EXPOSURE PUBLIC DEBT: The country fiscal scoreboard tilted to higher deficit as a result of sustained rise in public debt from 43% of GDP in 2011 to 48% in 2012, and further to 53.5% in September 2013. In 2012, deficit to GDP of about 12% is expected to ease in 2014 to about 9%. However, there are fears that the 2014 GDP to deficit would over shoot the estimated ratio, based on preceding year’s budget over run.
The nation’s challenge arising from the fiscal management is well captured by Seth Terkper, Minister of finance in a policy paper dated 1ST April, 2014. He noted that real GDP growth of 7.9 percent and an inflation rate of 8.8 percent were achieved in 2012. According to the minister, the Ghanaian economy had come under severe stress arising from fiscal front, a number of factors including:
implementation challenges associated with the single-spine wage policy initiated in 2007 to correct distortions and inequities in the public sector wage structure;
significant shortfall in grants from Development Partners;
non-realisation of projected revenue from the oil companies, due mainly to shortfall in projected output in 2011 and 2012;
larger-than expected petroleum and utility subsidies;
higher interest costs arising from the steep rise in short term domestic interest rates—
The continued disruption in gas supply to the country from the West African Gas Pipeline (WAGP) that led to a substantial increase in subsidies.
Therefore, rather than a 6.7 percent budget deficit originally targeted, we realized an actual deficit of 11.8 percent.
Vulnerability to changing terms of trade in international market. The current slid in the prices of Ghana’s major export earners such as cocoa and gold is widening the country’s current account deficit. The Ghanaian trade structure is dependent on exported raw materials like cocoa, gold, timber and oil traded for imported manufactured goods like processed foods and machines. Consequently the declines in world prices for Ghana’s primary export such as was seen in the late 1990s, 2008 and 2011 impacted negatively in the country fiscal and monetary policies stances on macroeconomic stability amid economic headwinds.
High unemployment rate particularly of the youthful population age (i.e. 18 – 35 years of age).
Infrastructural funding gap of at least US$1.5 billion to keep the growth rate in the positive region. The structure of the economy in line with production and consumption pattern of the citizens cannot really spur growth but increases dependency rather than self-reliance.
• The structural dependence on the manufacturing sector especially on imported inputs such as capital, skilled manpower, technology as well as spare parts and even raw materials is anti-development. Shortage of skilled personnel is as a result of the low level of scientific and technological application, sub- optimal industrial productivity, poorly designed school curriculum particularly on science and technology and government policies that is indifferent to invention and innovation.
• Neglect of the informal sector is attributed for the current state of underdevelopment despite high growth rate. The feature of Ghanaian private sector is low productivity, poor inter-linkages with the modern formal sector, unhealthy competition from imported goods, low internationally competitive goods and limited access to superior productive resources. This sector is dominated by a few major multinationals at one extreme and a mass of small enterprises at the other with obvious absences of medium sized indigenous industries which are referred to as the back-bone of development.
• Inefficient public sector continues to make policies that place the private sector at a competitive disadvantage in global markets and is not tailored to meet developmental challenges of the state. The size of the public service and the cost of servicing its personnel when compared to its productive level are not commiserating. The absence of transparency and accountability of governance practices, distorts the attainment of stronger economy that would be recognised as a potential regional contender.
• The problem of consistent and sustained high inflationary pressure during the period of this review 2005 to 2013 being spurred by ineffective fiscal and monetary measures. The next part of this paper covers factors responsible for high inflationary trends in Ghana, bail-out measures and recommendations.
INFLATIONARY PRESSURE IN GHANA AND THE INFULENCING FACTORS
Rates of inflation in Ghana have continued to witness double digit or upper single digits during the period covered in this paper. This trend has remained worrisome to governments, economic managers, analysts, and the public at large. As financial analyst we need to contribute our quota, towards achieving moderate inflation that can support economic growth and development in Ghana.
According to the Bank of Ghana, Monetary Policy in the international market prices of Ghana’s major commodity exports declined in 2013 and is projected to remain south end in 2014. The average gold price is projected at $1,292 an ounce in 2014, lower than$1,411 an ounce in 2013, Brent crude oil prices are likely to average $104 in 2014, compared to $108.4 per barrel in 2013, while Cocoa prices improve in 2014 after moderating in most of 2013. These developments in the external environment are expected to significantly influence on the domestic economy through trade and exchange rate channels and in turn on inflation outlook.
In brief, factors to be driving inflation northwards in Ghana include, petroleum subsidies removal, gradual increase in electricity and water tariffs the parity of the dollar to cedi and reduction in export earnings have been identified etc.
AGGREGATE DEMAND PRESSURE: The headline inflation exceeded the monetary policy target of 9% ±2 for 2013. The CPI (Y-o-Y) increased from 10.1 % in January 2013 to reach 13.5% in December 2013 and 14.7 % in April 2014. The rise in inflation was driven by the combined effects of the aggregate demand pressures especially non -food; effects of the upward-adjustments in petroleum (25–22%) and utility (58–78%)prices; some marginal upward effects from rebasing of the consumer price basket as well as pressure on the exchange rate resulting in higher prices of imported goods.
FISCAL AND EXTERNAL SECTORS: The imbalances in the fiscal and external sectors resulted in foreign exchange market pressures particularly during the last quarter of 2013. The cedi depreciated by 14.6 per cent against the US Dollar in 2013 compared to 17.5 per cent in 2012 and 4.9 per cent in 2011. Fitch rating agency noted on the 9th June 2014 that Central Bank of Ghana is printing money to finance the deficit which could worsen the country fiscal problems and weaken the Cedi currency. Also it was reported that the Cedi has depreciated by 28 per cent this year, and the country faces low import cover and high bond yields- BusinessDay 13th June 2014 page 35.
• Revaluation of the cedi i.e. 1 Cedi to 1USD: The increasing Inflation pressure is tied to the value of the cedi and the “dollarization of the Ghanaian economy” . The situation is further compounded by the downward trend in prices commodities in the international market. The 1cedi to 1USD discourages export and encourages imports of goods and services which in turn affect revenue generation, foreign reserve stock, exchange rate and inflation. It must be noted that weak currency per se, may not be bad especially where a country has a comparative advantage for export of goods and services with their foreign partners. Also it can be used as a strategic export policy to spur economic growth.) In this time of high inflation that has characterized Ghana in the last few years, the cedi loses its role as store of value even though it is still the official medium of exchange. Consumers being rational hedge against inflation by dealing (saving) in a more stable currency (in this case the US dollar) hence “dollarizing the Ghanaian economy. Similar practices exist in Nigeria.
As analysts, the knowledge of price drivers will enable you to effectively do your bit by checking price increases and support appropriate price levels. In simple terms, the items below sustained high inflationary pressure in Ghana and you must monitor them in the course of your job :
• Food prices: Changes in food prices pressures inflation (demand pull or cost –push) hence economic watchers must pay attention to agricultural sector on which output level directly affects price and inadvertently inflationary level.
• Petroleum prices: Periodic increases in fuel prices such as the 20% hike in petroleum prices in September 2013 and related price increases had multiplier effect on the transport sector through fare increases which will ultimately be transferred to the citizens in form of higher prices which further fuels inflationary pressure.
• Adjustments in utility price: increases in essential goods consumed by majority of the country’s citizens such as power and health bill drives inflation higher. For instance, in October 2013 government authority hiked utility tariffs – 78.9% for electricity and 52% for water; this move will certainly increase inflationary expectation.
WHAT ARE THE MANAGEMENT BAIL OUT STRATEGIES?
The above challenges pose threats to the attainment of the Ghana’s economic programs and other deliverables as contained in the short, medium and long terms. The government therefore resolved to strengthen the economy through its annual budgets .Thus the 2014 budget targets to achieve its on-going projects and short term agenda as follows:
Capturing of Eligible Tax Payers
There is renewed government’s effort to widen the tax base so as to mobilise more revenue needed to offset the huge wage bill resulting from the implementation of the Single Spine Pay Policy in 2012. It is noted this is not an attempt to increase burden on existing tax payers, but bring them into a tax net on all eligible tax payers to increase revenue. These include:
Environmental tax 10% on plastic to broaden the base
Special import levy of 1 and 2 per cent on some imported goods.
Import duty of 20% and VAT imported mobile handsets.
Levy of 5% of profit before tax of financial services.
The contractionary fiscal measures have yielded revenue equivalent to about 0.2% of GDP in 2013 and it’s expected to increase to 0.6% of GDP in 2014.
Introduction of Expenditure Rationalization Measures to Deal with the Fiscal Issues, they include:
Regular adjustment of fuel and utility prices to achieve the expected target and thus reduce related subsides to the barest minimum.
Minimizing waste in expenditure on goods, services and capital
Refinancing of short term expensive debt with a view of extending the maturity dates and reducing interest cost.
Fiscal Deficit Target As A Percentage Of GDP: 2013 ended with a provisional fiscal deficit of 10.8% GDP against a target of 9%, due to:
Shortfall in tax revenue and decline in commodity prices on the world market(especially gold and cocoa)
Overrun in subsidies due mainly to payment of arrears
Overrun in interest cost, due mainly to financing of the deficit and past issues of bonds to complete capital projects.
The action the government took to reduce fiscal deficit in 2013 had consequences on inflation. The rate of inflation surged mainly on account of the adjustment prices on petroleum and utilities, exchange rate depreciation resulting in high inflation rate of 13.5% against the 9% at end of 2013.
New Initiatives to Strengthen Revenue, Expenditure Regimes and to Address Inflationary Pressure As Contained in the 2014 Budget.
Increase of VAT rate by 2.5% points and broadening of the VAT base to cover fee-based financial services and real estate- to reflect its essence as a tax on all consumption expenditures.
change in petroleum excise tax from specific to ad valorem
Increase in the withholding tax on commercial properties from 8% -15% to encourage the provision of residential accommodation.
Increase in the withholding tax on management and technical services from 15%- 20%- to make overall tax regime fairer to all tax payers.
Increase in corporation income tax rate of free zones companies selling on the local market from 8%-25%- this is to discourage discrimination from foreign firms operating in the domestic market.
Proper implementation of the foregoing is estimated to bring additional revenue of 700 million cedis or 0.7% of GDP in 2014.
Expenditure rationalization measures include:
• Continuation of the policy on bringing utility and petroleum subsidies within the budget estimates and making them more targeted towards our social intervention goals.
• Continuation of the policy of net freeze on employment into some sectors of the public service.
• Proposed moratorium on public sector wage increase in 2014 via the public sector negotiation process. These are in line with the 2014 theme which emphasizes the realignment with respect to compensation , interest payment, other recurrent expenditure and capital or development expenditure.
• Re-anchoring inflation expectations and exchange rate stability to prevent a second round effect of the deregulation of petroleum and utility prices on the economy.
• Cash reserve requirement (CRR) of banks has been revised upwards to 11% from 9%, 2% rate in increase by the MPC from 16% to 18% and issuance of foreign exchange regulation( to ensure transparency, streamline activity and reduce leakages in foreign exchange markets.) The MPC aims at delivering an inflation target of 9.5% within a band of+/- 2 percent and gross international reserves. All these aim to address excess liquidity, improve supply of foreign exchange in the markets and lower inflationary pressure.
• Planned improvement on non-traditional exports and oil production as well as possible decline in the oil import bill and create conditions for gradual recovery of output and foreign exchange reserves.
COMPARATIVE ASSESSMENT WITH OTHER WEST AFRICAN COUNTRIES FROM THE PROSPECTIVE OF FINANCIAL MARKET INTEGRATION CRITERIA
Currently five (5) countries in Anglo West Africa ,the Gambia, Ghana, Guinea, Liberia and Nigeria along with Sierra Leone and their Franco phone counterparts have mapped out plans to promote regional cooperation. ECOWAS’s French- speaking countries already have a common currency, the CFA, and the plan was that the English-speaking side would first introduce the Eco by 2015 before being joined by their Francophone neighbours. Towards this end a body called West Africa Monetary Zone (WAMZ) was established to achieve a monetary Union by 2015. Participating countries agreed to a set of criteria and targets for which member countries must meet to become a member of the union; these criteria comprised of primary and secondary criteria. The criteria and the targets are:
WEST AFRICAN MONETARY ZONE (WAMZ)CONVERGANCE CRITERIA
• Budget Deficit/GDP Less than or equal to 4 per cent
• Inflation Single digit
• Central Bank Financing/previous year’s tax receipts Less than or equal to 10 per cent
• Gross Reserves Greater than or equal to 3 months
• Domestic Arrears 0
• Tax revenue/GDP Greater than or equal to 20 per cent
• Wage Bill/Tax revenue Less than or equal to 35 per cent
• Public Investment/Tax Revenue Greater than or equal to 20 per cent
• Nominal Exchange rate Plus or minus 15 per cent
• Real Interest rate Greater than zero
Source Central Bank of Liberia’s 2013 Annual Report
Ghana is set to miss primary convergence indicators necessary for a common currency in the West Africa Monetary Zone (WAMZ) by 2015 preparatory to 2020 when currency known as the Eco will be put into use in the region. This is because Ghana is projected to miss the ceiling on inflation target and budget deficit criterion while the floor on foreign exchange reserves – which was below the targeted three(3) months of import cover may not be attainable due to demand pressure for foreign exchange arising from domestic and external shocks .
A Senior Fellow of the Institute of Economic Affairs, Dr. J.K. Kwakye, said the Ghanaian economy requires bold decisions to bring the convergence criteria in line to make a common currency feasible. “High inflation is a persistent problem in Ghana. We have long been in breach of the WAMZ convergence criterion…it will take fundamental transformation of the economy to address supply constraints, and sustained macroeconomic stability to tame inflation in the country..—–‘.
Ghana, which is the second-biggest economy in the WAMZ, achieved three of the four primary convergence criteria at the end of 2011 with single-digit inflation of 8.6%, international reserves covering 3.2 months of imports, and a central-bank deficit financing ratio within the 10% limit. It’s performance worsened in 2012 when it achieved only two – inflation and international reserves – of the primary criteria, and it is set to meet only one of the criteria in 2013.
From the data in tables below, it appears there is low political will among ECOWAS governments to actualise its monetary union agenda on the assumption that the euro-zone’s problems may dampen the aspiration to have the Eco at 2020 deadline for the region .
It is worthy to note that central banks in member-countries have been asked to re-strategies to avoid a situation similar to the recent euro-zone crisis – ( inability to re-finance sovereign debts without the assistance of third parties, and liquidity problems faced by undercapitalised banks.
Similarly, plans are underway to promote the West African Capital Markets Integration Council (WACMIC) which is to spear head the integration of capital markets in West Africa and promote strong relationship among the member countries. The aim is to see an evolution of an integrated regional trading floor for all the capital markets in the zone. Towards this end, it is required to harmonise platform for listing and trading of securities, market rules and practices within the region, issuance of common passport to and accord a mutual recognition of capital market operators. In addition they are expected to harmonise the process of clearing and settlement of trade. In simple terms WACMIC is a designed policy framework and it is managing the implementation process. The economic objective of the integration would provide more choices of financial products to regional and foreign investors. It will also increase opportunities for risk diversification and result in more effective price discovery. Above all, the ease of capital movement within the region will create flexibility for issuers seeking to increase capital and investors seeking to invest across member states- According to Goddy Egene
Status of compliance with the Primary convergence criteria
Target of Inflation Rate < 10% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec June Gambia 8.1 13.0 17.6 8.0 4.9 0.4 6.0 6.8 2.7 5.8 4.4 4.9 5.8 Ghana 21.3 15.2 23.6 11.8 13.9 10.9 12.8 18.1 16.0 8.6 8.6 8.8 11.2 Guinea 1.1 6.1 14.8 27.6 29.7 39.1 12.9 13.5 7.9 20.8 19.0 12.8 12.0 Liberia n.a n.a n.a n.a n.a n.a 11.7 9.4 9.7 6.6 11.5 5.5 7.0 Nigeria 16.5 12.2 23.8 10.0 11.6 8.5 6.6 15.1 14.0 11.8 10.3 12.0 8.4 Sierra Leone 3.4 -3.1 11.3 14.4 13.1 8.3 12.2 13.2 12.2 17.8 16.9 11.4 10.8 Nber of Countries meeting criterion 3 2 0 1 1 3 2 2 3 3 2 3 3 Target of Fiscal Balance (excluding grants ) as per cent of GDP < 4 %* 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Gambia 10.0 9.1 7.6 8.3 7.4 2.7 1.0 3.3 7.2 6.7 9.0 13.5 Ghana 13.2 8.3 7.5 8.1 6.9 7.0 9.5 10.6 7.0 8.2 3.0 7.4 Guinea 5.2 8.0 10.5 5.9 0.8 1.8 0.5 1.7 6.8 14.4 4.7 5.5 Liberia n.a n.a n.a n.a n.a n.a -12.2 -2.7 -2.0 -6.4 0.2 1.8 Nigeria 3.2 3.9 2.0 1.2 1.3 0.6 0.6 0.2 3.3 5.0 3.1 2.5 Sierra Leone 16.5 11.7 10.0 8.6 9.6 8.5 5.0 6.3 8.6 10.6 10.0 8.1 Nber of Countries meeting criterion 1 1 1 1 2 3 3 4 2 0 3 2 * (+) deficit; (-) surplus Central Bank financing of fiscal deficit Target of Central Bank Financing of fiscal deficit ≤ 10% of previous year's Tax revenue 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec June Gambia 30.7 76.1 63.1 0.0 0.0 0.0 0.0 0.0 0.0 27.3 0.0 0.4 17.1 Ghana 0.0 12.1 0.0 27.7 0.0 0.0 0.0 38.7 0.0 0.0 8.8 9.4 8.6 Guinea 9.9 27.1 16.1 23.1 0.0 81.6 0.0 16.6 40.1 82.9 0.0 0.0 1.0 Liberia n.a n.a n.a n.a n.a n.a 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Nigeria 0.0 0.0 37.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Sierra Leone 0.0 0.0 24.3 0.0 0.0 17.9 0.0 0.3 21.2 66.7 1.1 0.0 5.9 Nber of Countries meeting criterion 4 2 1 3 5 3 6 4 4 3 6 6 5 Target of Gross External Reserves ≥ 3 months of imports cover 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Gambia 8.2 5.2 4.6 5.5 5.2 6.4 6.5 4.4 4.7 6.8 6.1 4.8 Ghana 1.4 2.7 5.0 4.6 4.0 3.7 3.9 2.2 4.4 4.8 3.2 3.4 Guinea 4.4 3.7 1.8 1.1 0.9 0.6 0.4 0.6 2.2 1.9 4.3 3.1 Liberia n.a n.a n.a n.a n.a n.a 0.7 2.1 3.6 4.3 3.3 2.3 Nigeria 8.9 6.2 4.9 11.6 11.0 17.3 14.8 17.2 16.6 7.9 6.3 9.5 Sierra Leone 2.4 2.7 1.7 3.8 4.0 4.2 5.3 4.3 6.2 5.4 2.4 3.1 Nber of Countries meeting criterion 3 3 3 4 4 4 4 3 5 5 5 5 Number of Primary criterion met by Country and by year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec June Gambia 2 1 1 3 3 4 4 4 3 2 3 3 2 Ghana 1 0 2 1 2 2 2 0 2 3 4 3 2 Guinea 3 2 0 0 2 1 2 1 1 0 2 2 2 Liberia n.a n.a n.a n.a n.a n.a 1 3 4 4 3 3 3 Nigeria 3 3 2 3 3 4 4 3 3 2 3 3 4 Sierra Leone 2 2 0 2 2 2 2 2 1 1 1 2 3 Source: WAMZ Authorities & WAMI staff RECOMMENDATIONS 1. Effective implementations of Ghanaian proposed bailout strategies: The greatest challenge to Ghana is managing its deficit position bearing in mind that the Cedi has depreciated by 28% in this years low import cover and high bond yields. Therefore every effort should be geared towards improving the country’s fiscal deficit. Thus, sincere commitments to the bailout strategies outlined in this paper are imperative in order to reduce the volume of Money supply at this point in time. Liquidity level has a direct relation to inflation in a country. As noted by Milton Friedman, Inflation is everywhere and prominently a monetary phenomenon. 2. Development of infective national debt management strategy 3. Need for effective Coordination of the administration of monetary and fiscal policies: Arising from the above effective, coordination of debt management with fiscal and monetary policies is crucial , maintaining separate responsibility for each is an important aspect of debt management. Since the attainment of macroeconomic stability is a prerequisite for economic growth and development, monetary and fiscal policies stances of the managers of the economy are equally necessary to stabilize prices of goods and services in order to limit the adverse effect of unchecked high prices of goods and services on the common citizenry. 4. Injection of project tied funds: In its absence or with poor coordination, it will be difficult to implement sound /effective macroeconomic policies of the government. In this light, borrowing policies should ensure the long term sustainability of the fiscal deficit, additionally the monetary authority and related bodies should tie funding to viable development projects to assuage inflationary pressure. 5. Improvement in the efficiency of public expenditure: investing in strategic and carefully selected projects to develop energy supply not at the expense of agriculture and critical infrastructure; and implementing structural reforms aimed at promoting economic diversification, private investment, and competitiveness to improve on foreign exchange revenue. 6. Regular engagement by economic managers: Regular discussion and consultations should be encouraged at operational levels such as on the liquidity needs of the government to ensure that the different agencies are not operating in the same market simultaneously and at cross purposes when important issues are being made. 7. Deeping of the capital market by encouraging domestic companies to seek listing and issuance of Eurobond against short term borrowing from international banks bearing in mind the associated costs (high rates and service charges). To avoid pressure on foreign reserves, exchange rate and pass through inflation. The capital market has contributed significantly to the GDP of most African countries where such exist as shown above. 8. Promotion of regional co-operation: Ghana must intensify effort to commit to regional co-operation in the areas of trade, investments and financial sector. Ghana is yet to meet the four convergence criteria for the creation of monetary union in the west Africa English speaking countries which started as far back as early 2000. 9. Establishment of a national debt management office where non exist. REFERENCE 1. African Securities Exchange Association Year book 2013. 2. Business day Newspaper 13th june 2014 pg 35 3. National economic management contemporary tools presented at CIFIAN 6th induction Abuja by chris kaka 4. Peter sander mba, 101 things everyone should know about economic 2009 published by avon, massatchusetts USA 5. Policy statement on the Ghanaian economic presented to paraliament on Tuesday 1st april 2004. 6. Unitary training programmes in the tegal aspects of debt and financial management. Institutional framework for public sector borrowing document no17 geneva 2002. 7. Walter J. Wessels business review book economics 2006 edition published by barrons. 8. Websites consulted: IMF- World Economic Report 2014, WEST AFRICAN MONETARY INSITITUTE, Ghana stock exchange , Nigerian stock exchange, Johannesburg stock exchange,Bourse Regionale des Valeurs Mobilieres(BRVM), SEC Nigeria, Bnak of Ghana, investopedia. 9. West Africa monetary zone(WAMZ) macroeconomic Development and coverage report 2009.