Gov’t urged to lay foundations for self-reliant economy

The Institute of Economic Affairs (IEA) on Tuesday urged government to lay the foundations for an economy that is self-reliant and depends less on low-value products and external support. Dr J. K. Kwakye, IEA Senior Economist said: “This is how the nation can achieve sustained growth, poverty reduction and prosperity for all.”

He said the economy has faced serious challenges in the first-half of the year, which he classified as slowing growth, macroeconomic instability, liquidity crunch and structural weaknesses. Dr Kwakye was speaking at a news conference in Accra to present the IEA’s views on the state of the economy and the outlook following the Minister of Finance’s presentation of the 2014 mid-year review of the economy to Parliament.


In the review, the Minister highlighted the key challenges facing the economy and indicated measures being taken by government to address them. Mr Seth Terkper also revised key targets set in the 2014 budget, including the fiscal deficit, economic growth and inflation, based on the new developments in the economy.


He indicated that while the economy is facing challenges, it is not in “crisis.” This characterisation, however, has been disputed by many analysts and commentators. Dr Kwakye said the economy has been affected by some external factors, but many of the sources of the challenges are of domestic origin, adding that domestic policies therefore, have an important part to play in resolving the challenges.


He said fiscal adjustment is critical to consolidating macroeconomic stability. He said it is also necessary for the economy to regain investor and donor confidence in order to have a reflow of resources into the economy to alleviate the acute liquidity crunch.


“I must say that unless we are willing and able to implement a home-grown fiscal discipline regime, the alternative would be to have one imposed from outside, including from the International Monetary Fund, so as to unlock much-needed donor support for the economy,” he stated.


He said the first quarter real Gross Domestic Product (GDP) growth is reported to be 6.7 per cent for year-on-year, which is lower than the 9.0 per cent recorded in the same period of 2013. The Senior Economist said the Association of Ghana Industries had declared that business confidence in first quarter of 2014 was lowest for years, whereas the Bank of Ghana (BoG) confirmed low business and consumer confidence.

He said an economic growth target of 8.0 per cent was set for 2014, however, many analysts expect growth to be lower than targeted, to which the Minister conceded and has revised the target downwards to 7.1.


Dr Kwakye said the slowing economic growth is the result of erratic energy supply, other production bottlenecks, including poor and in some cases deteriorating infrastructure, high cost of utilities, and high cost of credit, low commodity prices, low public investment and macroeconomic instability.


On the financing side, he said a worrying development is the substantially-higher-than- budgeted BoG financing in the face of de-financing by banks and reduced financing by non-banks. BoG’s excessive financing of the deficit undermines monetary policy, fuels inflation, devalues the cedi, and prevents much-needed fiscal consolidation.


On public debt, he said during the first-half of the year, the public debt has risen steadily from GH? 52 billion (55 per cent of GDP) to GH? 62 billion (59 per cent of GDP), declaring that of the total debt, the domestic component was 45 per cent and the external component 55 per cent.


For the outlook for the second half of 2014, he said despite the Minister revising the target downwards for economic growth from 8.0 to7.1 per cent, achieving it would be challenging. Dr Kwakye said potentially higher oil output and gas production should give some impetus to growth.


He said inflation target had been revised upwards by the Minister from 9 to 13 per cent, adding that it is unfortunate that the country seem to be validating high inflation instead of trying to rein it in. He blamed the current inflation situation of the country partly on the redenomination of the cedi against the United States dollar in 2007, describing it as a political decision.

He observed that in order to tame inflation on a durable basis, we need to address these driving forces and, in particular, close the demand-supply gaps in the economy. The Senior Economist said the fiscal deficit has been revised upwards from 8.5 per cent to 8.8 per cent, which he described as unfortunate since the economy could not keep to original target and had to revise it upwards, thereby undermining policy credibility.


He said wage payments would likely be higher due to coming on stream of Cost of Living Allowance and payroll management challenges. Dr Kwakye said interest payments in general would likely be higher due to higher borrowing and higher interest rates, while capital spending might, as always, bear the brunt of any attempts to rein in expenditure.


He recommended to government to implement tax measures in the budget, broaden the tax bases, reduce spate of tax exemptions, tackle tax fraud and corruption, and recover misappropriated public funds. He called for the enforcement of spending limits for Ministries, Departments and Agencies and the implementation of public sector reforms to downsize the sector and increase productivity and value for money.


This, he said, could include rationalisation of ministries and reduction in the size of government. Dr Kwakye explained that in this era of liquidity crunch, government must send a strong signal that it wants to take a lead in the needed belt tightening and sacrificing by making serious cuts in spending on government, which he said would go a long way help in quelling the sprouting labour agitations.