Business News Tue, 17 Feb 2004

Economy Still Fragile, Despite Modest Gains

An Economist of the Institute of Economic Affairs (IEA), Dr Robert Darko Osei, has said that in spite of the modest gains made in the economy in terms of sustained macro-economic stability and wealth creation last year, the economy was still fragile.

He pointed out that the gains came mainly from cocoa and donor inflows which are mostly unpredictable and indicated that should the country fail to sustain the boom achieved last year, targets set for this year are likely to tumble.

Dr Osei in an interview in reaction to the 2004 budget and fiscal policy of government, said it was against this background that the government needed to focus much of its attention on the industrial sectors particularly the manufacturing sectors of the economy, which did not perform satisfactorily.

He said it was necessary to cushion the economy against shocks so as to remain on target for the year, particularly this election year because, as he said ?in my view the gains in the economy where largely driven by the remarkable performance of the cocoa sector and the inflows from donors.

?We should not lose sight of the fact that the minister mentioned categorically that the economy was still in a hopeful state, which means there is a lot to be done,? he added.Dr Osei disagreed with the critics of the government who claim the boom from cocoa was as a result of smuggling. ?I believe strongly that it was as a result of the mass cocoa spraying exercise.

?It is inconsistent to suggest that both the decline in cocoa production in 2002 and the increase in 2003 were due to smuggling, when in both years the expected profitability of smuggling was on the decline?, he argued. Dr Osei described as good the government?s policy to achieve full recovery from the utilities. ?That is, it is not going to subsidise the utilities and, therefore, would be able to save some more funds for the economy.

He observed that ?should we allow the government to subsidise the utilities, we would be asked to pay for it through other means?.On the declaration of this year as a business friendly year, he said the move by the government in that direction was a positive one as the government had to reduce corporate tax by about 2.5 per cent.

However, this would have to be complemented with other factors that affect the cost of production. He noted that for the export sector, the apparent stability in the exchange rate was doing more harm than good because the real value of the cedi was not being quoted.

He said the price differential between Ghana and its trading partners in relation to the exchange rate shows that the exchange rate is rather falling, thereby making Ghana?s exports less competitive, ?so on the world market prices of our exports would be higher compared to those of our competitors.?

?This may explain why exports did not grow very much last year?, he added. Mr Osei also expressed doubts about the government?s target of achieving a single digit inflation by the end of the year.He said the government could put in place very prudent measures to control its expenditure but expenditure from other areas cannot be controlled added that this year is an election year and the aggregate demand pressure that is outside the control of the government would make it difficult to keep to its target of single digit inflation.

According to Dr Osei ?the political parties would spend more money which the government would not be able to control.?On the other hand the introduction of the national health insurance levy, which he said was obviously a VAT, was also going to put upward pressure on prices.

He remarked that there is no reason to assume that when VAT goes up, there will not be price increases. He indicated that this is the simple reason why the single digit may be hard to achieve.?One other disappointment with the budget is the lack of a concrete policy to encourage banks to do more savings mobilisation. There are more funds in the informal sector which need to be harnessed.

People have the money but do not save in the country because it is not attractive to save monies in Ghanaian banks.He observed that the banks need more incentives to make mobilisation attractive because we need to increase savings within the domestic economy.Dr Osei said there was no doubt that the economy made some modest gains but warned that there is no need to be complacent but work hard to ensure that the gains are consolidated and sustained.

Source: --