Tracking Ghana's macroeconomic uncertainty
By Utche Okwuosah
With the cedi chipping off right from year-end 2011 to date on the back of a seemingly determined spiralling inflation, nobody is any longer in doubt that the economy is consistently heading down that discomforting slope to stormy waters. The Bank of Ghana (BoG) and the Ministry of Finance and Economic Planning (MoFEP) have been kept quite busy trying their hands on presumed effective options to get a reign on the slipping economy yet no long lasting success has been recorded so far and this has been the cause of all the frustration and panic rippling through the investor community and in the productive sector of the economy. As has always been the case, in a panic situation, a scapegoat would always be the closest to the frantic grasp of the desperate. This time, that scapegoat seems to be the “election year fiscal responsibility” which has become the punch bag of every economic review gathering in recent times.
Consequently, there lies the danger that stakeholders may be running the risk of distracting from the real issue on the ground and clouding all possible visions to getting a good and steady sight on the real and lasting solution to pulling Ghana’s slipping economy back on track again.
Economists are still insisting that checking government’s inclination to excessive spending in this electioneering year is only one amongst several temporary solutions, albeit, an important one. The main task still lies in finding that medium-to-long-term variable that can ensure that Ghana is reasonably insulated from minor shocks, such as have been enumerated as reasons for the current instability and, importantly, from the yet to be felt impact of the eurozone crisis which is going to be more devastating if the economy is left vulnerable for a long time.
In a report made available to a local media in Ghana about two months ago, IMF’s Ghana Representative, Wayne Mitchell, was quoted from a study that focused on some countries, including Ghana, that government should focus on developing and pursuing medium-term plans in its efforts to stabilise a possible stormy economy. “While there is a chance of a strengthened supply response...the possible costs of overheating could be serious, eventually requiring much stronger policy responses and potentially reversing many of the gains achieved in recent years,” Mr. Mitchell was quoted as saying.
“Against this backdrop,” he continued, “these countries (including Ghana) should focus squarely on medium-term rather than near-term growth considerations in setting fiscal policy, while tightening monetary policy wherever non-food inflation has climbed above the single digits or the balance of payments situation is weakened.”
Amissah Arthur, former Governor, Bank of Ghana
Ghana’s accelerating May and June inflation rates derived from the contribution of the non-food basket, is clearly over the single digits.
Rev. Daniel Ogbamey Tetteh agreed with the IMF’s recommendation saying that efforts being made so far should be seen as short-term, which they really are, and should be treated as that. “In the short-term, we can see the Central Bank’s policy tightening measures, in a certain sense, slowing down the rate of the cedi’s decline, but that is only what can be done in the short-term - like a first-aid - but, beyond that, we need to get to the bottom of the ailment and treat it. That is why I’d agree that we’ve got to look more at the medium-to-long-term measures because that is the only way we can avoid the situation whereby we’d come back to the same situation in three or four year’s time. Those responsible for our economy should ensure that the fiscal policy supports the monetary policy so that we can restore investor confidence in the macroeconomic framework of the economy,” he opined to GB&F in an interview at his office.
Clearly, the effect of the so called “first aid” measure is wearing off. Despite the initial interventions by the Bank of Ghana to stem the haemorrhage of the cedi, the local currency has continued on its downward slide (the cedi has depreciated by 15.1 percent against the dollar during the first five months of this year compared to the 1.9 percent depreciation in the same period of last year). How far the current measures (which include the directive to banks to keep the mandatory cash reserve requirement of 9 percent of total cedi-based and foreign currency-based deposits in cedi) would go is yet to be seen. But, even before then, the worrisome new development stems from the media report that the Bank of Ghana’s former Governor, Paa Kwesi Amissah Arthur, is projecting that the effect of their measures would not start being felt until after six months, that is, about December 2012. “Basically the nominal depreciation that has taken place in the last six months has put us back...there is going to be a short period of turbulence but in the next six months you are going to see some stability,” he was quoted as saying.
Of course, this was after the Finance Minister had earlier (four months back) assured that the cedi’s stability would start taking effect from the end of June 2012 which did not happen. The concern here is not that IMF has already said clearly the Bank of Ghana’s efforts did not commence early enough, but that the latest Bank of Ghana Governor’s projection eats deep into the anticipated trouble time of high probability of electioneering expenditure excesses (in addition to the seasonal Christmas spending) and that seriously questions the plausibility of the assurance that both the cedi and inflation would change their trajectory direction at this dicey period of the year.
Taking this concern further, economists worry that those planning the economy are not doing enough to convince stakeholders that their outlook is broad and far reaching enough to anticipate challenges beyond the domestic upheavals. It would appear that all expectations remain on the Bank of Ghana to fix the economy with its monetary policy solutions while the economic planning and implementation aspects, wittingly or unwittingly, are being downplayed. Again, this hardly sits well in an environment that is awash with the constant flow of the World Bank’s (WB’s) and the International Monetary Fund’s (IMF’s) fore-warnings of the impending economic tsunami from the ongoing European economic and financial crisis.
“If the government wants to help the economy, it should be clear that spending is going to be directed to the productive areas of the economy,” Rev. Tetteh stated and explained that is one of the medium-to-long-term measures capable of ensuring a robust economy with sufficient “muscles” to withstand shocks.
As Dr. Joe Abbey, the Chief Executive Officer of the Centre for Policy Analysis succinctly put it: “...The sovereign is the actor upon whom investors depend for rescue during systemic crisis. When this appears unlikely, doubt and fright turn to flights to safe heavens. The current rapid depreciation of the cedi is one such instance of a flight from the cedi into foreign assets.” Such flights are likely to continue if the result of the study of Andrew Burns, head of macroeconomics at the World Bank, is anything to go by. The economist told Emerging Markets that gross capital flows into developing economies fell “very sharply” in May. According to Emerging Markets’ report, Burns said that flows dropped by 44 percent between April and May, making it the steepest monthly drop since September 2010. The finding was further corroborated by the Institute of International Finance (IIF), which represents the world’s largest banks, when it said that the net private capital flows to emerging market economies remained “quite volatile and subject to disturbance from the euro area.” Continuing, Emerging Markets noted that flows fell in 2011 to $1.03 trillion from $1.09 trillion in 2010 and projected that they are expected to fall again this year to $912 billion before rising to $994 billion in 2013.
Acknowledging the real and present threat in the European situation to Ghana, the Bank of Ghana’s former Governor, at the last Monetary Policy Committee’s press briefing, had said that in a report issued in early June, the World Bank had warned of weak growth and tough times ahead for developing nations and advised that adequate long-term measures should be taken to ensure that economic growth is sustained. “Like other countries which rely on the export of primary commodities, Ghana’s economic prospects will be determined by the restoration of growth in the advanced and emerging economies, especially in the Eurozone and China,” the Central Bank’s Governor had further added.
Such a sobering perspective, according to economists and visionaries, is what should be informing Ghana’s strategic planning for the future. Such a planning must have a place for the development of regional markets so that a country like Ghana would not be stranded when Europe and China take a long time recovering from their crises. Today, intra-regional trade in the West African sub-region accounts for only 10 percent of Ghana’s total trade while its trade with Europe, for instance, is estimated at 30 percent. Any bubble busting in the European market would, therefore, have an impactful effect on the economy of Ghana. Opportunity like the present economic distress should be harnessed and used as a prompter to looking inward for the real development of the economy.