Ghana 2010 budget statement : Thoughts
In the following discussion, I wish to share my thoughts on some of the issues raised in the statement. May I however begin by stating that projections are projections, whilst actuals are actuals. Projections would not necessarily materialize, especially when words are not deeds.
Inflation and Fiscal Discipline
End of October, 2009 inflation stood at 18%, and we are happy? I am often of the conviction that our leaders should concentrate on what they have to do; fixing the economy and making life better for us, and at least, eschew making reference to what their predecessors did “wrong”. But since it is a norm in our political terrain to make such references, I would quickly compare some figures from the recent past.
In this decade, our highest end-of-year inflation had been 32.9% in 2001. The figure was 26.7% in 2003, but 12.6% in 2004, 15.1% in 2005, under 11% in 2006, and 2007. It was 16.5% in 2008! (World Bank Development Indicators Online).
One would appreciate the fact that the NDC government took over power in a bad time in the face of the global economic meltdown. That does not undermine the fact that the rate of inflation of 18% is very high. More has to be done to curb inflation if the target of less than 10% inflation rate in the medium term has to be realized.
In this regard, the government would need to continue with the fiscal discipline that it started which, apparently has chalked some successes.
The reduction in deficit from 15% of GDP in 2008 to about 10.2% in the first three quarters of the year is indeed commendable. We do not have to engage in “profligate spending”. However, if this reduction in budget deficits would stifle our growth, then such fiscal discipline is needless. I say this because in spite of the burgeoning budget deficits in the recent past, GDP grew consecutively from 4% in 2001 to 6.4% in 2006, and stood at
approximately 6.2% in 2007 and 2008. It is consensual among (macro) economists that the quantum of the budget deficit or national debt is immaterial. The pertinent concern is how and where we do the spending we do.
If these deficits are accompanied by real growth of the economy as witnessed in the previous regime, then we should not be all too jumpy! We had not recorded a GDP growth rate of up to 6% since 1984 until 2005, and this was sustained until 2008. As Richard Cooper (2008) indicated, the US accounts for about 70% of the total deficits if we summed up all current account deficits of all the nations in the global economy. I do not think that it has taken centre stage in political deliberations, which is because their economy sustained robust growth until the great recession.
Our central bank raised the prime rate to 18.5% in the first quarter of this year. The justification offered was that inflationary pressures were mounting, and they needed to reduce monetary aggregates. How much of a difference has that increment made in reducing inflation so far? Whilst such an action was appropriate, alternative but cost-effective measures could achieve the same goals of reducing money supply and inflation. For instance, the Bank of Ghana could have increased the reserve requirements of commercial banks, which would achieve monetary reductions. I do not think that there is evidence that the Ghanaian public is satiated with government treasury bills. This means that an open market sale could also achieve the same goal. Neither of these alternatives would have increased commercial banks’ lending rates, if at all, in the way the prime rate did, which has made the cost of doing business very high. So if the government is hopeful that commercial bank interest rates would decline in the near future, making credit readily available for the private sector, then it should liaise with the Bank of Ghana so that the prime rate is reduced considerably.
Whilst I was preparing this article, I read from the media that the Central Bank has reduced the prime rate to 18% which is still unbearably high. It is killing businesses. It would even turn out to be a self-defeating policy as increased costs of production results in cost-push inflation, which is what the Bank sought to solve in the first place!
Part of the problem we have with inflation is petroleum price hikes. Until we actually start producing oil in the near future, we have to dance according to the music played by market forces on the world market. If only our politicians would stop telling us that they would reduce oil prices for us no matter what, the public would hold them accountable for their words. In fact, we appreciate that we do not have control over the prices of oil. Economists describe this as exogenous! So when the world prices go up, domestic prices must adjust upward; and we should not cry foul because we have no control over these prices.
According to the statement, the cedi has been appreciating against the US dollar in the last three successive months. On the surface, the cedi is doing well, right? Well, the US dollar has been struggling to find its feet against other major currencies such as the British Pound, the Euro, and the Canadian Dollar. So if the cedi is gaining value in terms of the US dollar (which is depreciating anyway) but losing its strength to these other currencies, then we cannot unambiguously say that the cedi is getting stronger.
Very often, we tend to think that depreciation is a bad thing. Of course, depreciation makes imports expensive, but exports get cheaper (to foreigners who demand our exports). So a depreciating cedi would tend to discourage imports whilst encouraging exports. This should improve our current account, and increase output and employment, which are desirable. The People’s Bank of China for instance has over the years kept the Chinese renminbi (yuan) artificially low against this backdrop. And it has worked magic for them. Their growing trade surplus is largely explained by their refusal to allow the renminbi to appreciate. If no one is interested in the Chinese allowing their currency to fluctuate according to market forces at all, the United States is!
The problem we have, though, is that on net basis, we are importers, that is, we import more than we export. A depreciating cedi therefore hurts us domestically because our export sector is unable to take full advantage, whilst we tend to be insensitive to import price increments. Our penchant for imported products is so high that no matter what, we would continue to import. Irrespective of the price of “perfumed rice” for instance, we generally prefer it to our local rice. If only we could develop taste for our domestic products, we could improve our lot in the face of the depreciation of our currency.
Trade economists, in general, frown on protection. So the government’s decision to impose import duties on poultry and fish imports would be opposed by many. But many would also concur with me that, as the mainstay of our economy, the agricultural sector needs shielding by the government against unfair competition, especially from countries where agricultural subsidies are heavily provided to their producers. Indeed, this would stem the much talked about dumping.
Our hope is that domestic producers would take full advantage of these efforts by the government to expand production and create jobs, among others.
A caveat to this, however, is that domestic demand has to support domestic production. We would not realize the benefits if we continue to prefer imports to domestic products. In such instances, the import levies would rather hurt us more because consumers just end up paying higher prices without production and employment improving.
I wish to say that the Budget Statement is a “Ghana Budget Statement”, not an NDC budget statement. Let us help the government to move Ghana forward.
After all, neither economic hardship nor economic improvements would
recognize us as NDC, NPP, CPP or PNC. They would always hit us as Ghanaians!
God Bless Ghana!