The fiscal and monetary policy framework of the 2003 Budget and wage settlements in the public and private sectors effectively served to return the economy to the path of disinflation and relative exchange rate stability.
The remarkable gains in reducing inflation and restoring macroeconomic stability must be seen in the context of the consistent implementation of the fiscal and monetary policy framework underpinning the 2003 Budget, Dr Paul Acquah, Governor of Bank of Ghana (BoG), said on Saturday.
Dr Acquah, who was speaking at the annual dinner of the Chartered Institute of Bankers held at the Banquet Hall, State House in Accra to round off activities of the week-long banking week, said the Budget also undertook some structural reforms.
He said the Budget set public finances on the course of fiscal consolidation, which called for a robust revenue mobilization and prudent spending, to cut the budget deficit and stabilize the domestic debt.
It set a target of zero net domestic financing of the public sector borrowing requirement for 2003, he said, adding: "The fiscal outturn through the third quarter indicates that revenue has surpassed targets.
"Indeed. Actual tax revenue of 14.2 of GDP was some 62 per cent above the full year's collection for 2002. Indicators have been pointing in the right direction and the results are in the economic statistics", he said.
He said that expenditure was contained within the budgetary limit, though these were set significantly at 40.6 per cent above the 2002 level.
The theme for this year's celebration was: "Financing Small and Medium Scale Enterprises (SMEs)- The Role of the Ghanaian Banking System, Relevance and Realities".
Dr Acquah said that with improved donor inflows, organized mostly around the multi-donor budget support arrangement, the budget has been on course to meet the net domestic borrowing targets and other fiscal policy objectives for 2003.
He said that in coordination with the fiscal stance, monetary policy instruments were deployed to reduce the rate of growth of the monetary aggregates and diffuse inflationary expectations.
"And we have seen the growth of the monetary aggregates slowed down in the first half of the year especially as the seasonal liquidity associated with the cocoa crop began to unwind."
The BOG Governor noted that the combination of this monetary tightening and the reduced domestic borrowing requirement of the Central Government Budget had been the source of downward pressure on prices and interest rates.
The challenge however, he said, was how to sustain the progress made thus far and build a solid foundation for private-sector led growth in a globally integrated economic system.
He said the search for macro stability came with a few lessons that should serve as a guide for the future because recent experiences had shown that ending an inflation surge was difficult and costly and that there was the need to develop a culture that truly placed premium on price and macroeconomic stability.
Dr Acquah stressed that it would be important to practice the traditional values in economic management and firmly establish a culture of fiscal and monetary prudence and transparency.
He noted that maintaining stability in the current circumstance required staying on the path of fiscal deficit and public debt reduction and turning debt dynamics in support of a virtuous cycle of investment and growth rather than stifling it.
Dr Acquah said the search for macro stability would also mean the restructuring and privatisation of state owned enterprises into sound commercial entities, placing them under hard budgetary constraints and preventing undue build-up of contingent liabilities such as guarantee for public enterprises and agencies and avoidance of arrears as expedients in the resolution of problems.
He said that essential to building a good financial foundation were the reforms in the energy sector, which began with the announced deregulation of the petroleum sector to allow for the liberalized import and pricing of petroleum products along with full-cost recovery pricing in the electricity and water sectors.
These reforms would be key to eliminating the potential quasi-fiscal deficits emanating from these sectors, raising productivity and releasing resources for investment in the rest of the economy, he said.
Dr Acquah noted that another burden on the economy was the cost of doing business, which needed to be reduced; especially the expensive value-destroying chain of bureaucratic and time-consuming practices that complicated planning and sapped the appetite of investors.
He said a review of the exchange control Act and the existing regulations and procedures governing foreign exchange and payments transactions must clearly be a priority in the reduction of the cost of doing business.
Dr Acquah said BoG would be advocating the required legislation, while streamlining its own approval procedures to facilitate expeditious transactions, and place emphasis on monitoring for analytical and balance of payments purposes rather than control.
He said the revised regulatory framework should encourage access to capital, preserve the liberal system that had served the country well and protected its integrity against abuses such as money laundering and other illegal transactions.
He announced that BoG would soon be setting up a Central Securities Depository (CSD) in the country.
The CSD would have the capacity to bring together in one location, securities listed on the Ghana Stock Exchange, over the counter securities, government securities, mutual funds and unit trust.
He said that BoG was also introducing a number of reforms in the wholesale market for government securities, including primary dealers code of conduct.
These reforms are expected to bring to the domestic financial market increased efficiency and transparency, reduce transaction cost and ensure broad-based participation of individuals on both competitive and non-competitive basis with greater security of title.
Dr Acquah said the economy was making a transition to a stable low inflation regime and low interest rate environment with relative exchange rate stability, adding that the lessons that have been learnt in the process should lay a solid foundation for robust growth and wealth creating for all to benefit.
