Business News of 2014-07-24

Toughen up or go to IMF – IEA tells gov’t

The Institute of Economic Affairs (IEA) has warned that unless government shows greater fiscal discipline it would be forced to seek a bail-out from the International Monetary Fund (IMF) to restore economic stability.

Speaking at the IEA’s mid-year economic review in Accra, a Senior Economist of the think-tank, Dr. John Kwakye, said government must get tough on its expenditure and tackle head-on the domestic factors that created the challenges confronting the economy.

“This should include rationalisation of ministries and reduction in the size of government. In this era of a liquidity crunch, government must send a strong signal that it wants to take the lead in the needed belt-tightening and sacrificing by making serious cuts in spending on government,” he said.

“Unless we are willing to and able to implement a home-grown fiscal discipline regime, the alternative would be to have one imposed from outside, including from the IMF, so as to unlock much-needed donor support for the economy.”

Finance Minister Seth Terkper in his mid-year review of the 2014 budget announced a revision of some economic macroeconomic targets. Key among these were economic growth, revised downwards from 8 percent to 7.1 percent, and the budget deficit, which was increased from 8.5 percent of GDP to 8.8 percent.

“While the Minister has found it prudent to project lower growth, achieving it will still be challenging. The downside risks to the growth outlook include erratic energy supply, macroeconomic instability and rising credit cost,” Dr. Kwakye said.

He described as unfortunate government’s revision of the budget deficit target to 8.8 percent of GDP from 8.5 percent, saying it undermines policy credibility. He however said the upward adjustment of the inflation target from 9 percent to 13 percent is realistic since June inflation already reached 15 percent.

He warned that inflation is returning to historically alarming levels and is one of the highest in the world. According to him, achieving the new target remains a daunting task and would largely be dependent on stability in fuel, utilities and food prices.

“To tame inflation on a more durable basis, we need to address these driving forces and, in particular, close the demand-supply gaps in the economy.”

According to the economist, the first half of the year saw the country’s debt rise from GH¢52 billion (55% of GDP) to GH¢62 billion (59% of GDP), moving closer to unsustainable levels should government continue borrowing.

“The need for true, non-cosmetic fiscal consolidation cannot be stressed enough. This is necessary to safeguard debt sustainability and macroeconomic stability to regain investor and donor confidence,” he added.