ISSER 2018 post-budget analysis: Putting Ghana back to work

The Institute of Statistical, Social and Economic Research (ISSER) of the University of Ghana is pleased to issue its official opinion on the 2018 Budget Statement and Economic Policy presented by the Minister of Finance to the Parliament of Ghana on Wednesday 15, November, 2017.

The Akufo-Addo Government presented its maiden budget to Parliament on the 2nd of March 2017 with the theme: “Sowing the seeds for growth and jobs”, introducing a number of bold policy initiatives designed to restore macroeconomic stability and restore private sector confidence in an extraordinary tough economic environment.

On the 10th of March, 2017, ISSER presented its official analysis and views of the 2017 budget to the Ghanaian people at a media briefing at the Swiss Spirit Hotel & Suites Alisa, Accra. ISSER was motivated to provide this service when it was realized that there was not much informed and impartial discussions about Budget Statements and Economic Policies presented by successive governments to guide people make informed judgment about issues and also for decision making.

Minister of Finance, Mr. Ken Ofori-Atta, was in Parliament on Wednesday 15, November, 2017, to present the second budget of the Akufo-Addo Government with the theme: “From stabilization to growth: putting Ghana back to work again”. The broad agenda of the 2018 budget and the medium term is to create jobs leading to prosperity and equal opportunities for all Ghanaians. This will be driven by investments in Agriculture and Agribusiness, Strategic Infrastructure, Human Capital and Entrepreneurship and Innovation Programmes.

The economic philosophy behind the 2018 budget

The theme of the 2018 budget is important and particularly timely when economic growth and job creation are such high priorities around the world. The international community has a new set of development goals, the Sustainable Development Goas (SDGs), which reflect the aspirations of Africa much more closely than the Millennium Development Goals (MDGs). The single most important focus of the SDGs is to recognize that sustainable development, especially in Africa, means creating decent jobs – jobs that pay living wages and offer a chance to develop new skills (Goal 8).

Persistent jobless growth has reached crisis proportions, especially among the Ghanaian youth. Data from the recent Labour Force Survey conducted by the Ghana Statistical Service (GSS) show that the total unemployment rate for Ghana is 11.9 percent. According to the data from GSS, Ghana’s youth (15-24) unemployment rate has reached 25.9 percent – more than two times that of adults.

Vulnerable employment is also high at 68.6percent, indicating lack of decent work. When employment opportunities in the formal wage economy are scarce, people are compelled to settle for low paying jobs in the informal sector, often through self-employment in the services sector. About 90 percent of the currently employed population 15 years and older are in the informal sector.

The real sector

In 2016, the Ghanaian economy recorded its lowest growth in over 20 years, but there are encouraging signs that growth is strengthening again in 2017. In 2017, the overall GDP growth is projected to more than double to 7.9percent, from 3.7percent in 2016.

This rebound marks a welcome break from the prolonged period of deceleration in growth since 2011. However, it seems this turnaround was largely driven by the surprising performance of the oil sector, owing mainly to the larger than planned oil production, following delayed Jubilee FPSO Turret Remediation Project, which has now been deferred to 2018.

While we commend Government for turning the economy around in such a short time, we worry about how narrow, non-inclusive and unsustainable the sources of growth have been.

Whereas overall growth was driven by the non-oil sector in 2016, the current growth is largely a result of the oil sector. Non-oil growth has declined from 5.0percent in 2016 to 4.8percent in 2017. As such, the growth performance for 2017 is highly vulnerable to external shocks and could not have translated into meaningful job creation.

To achieve sustained higher growth, there are more fundamental, more radical transformation measures that are needed. Serious effort has to be taken to use the recent commodity-based growth to start a more sustainable growth based on the development of the manufacturing sector, including but not exclusively the processing of primary commodities.

In respect of the prospects for Ghana’s growth, compared with 2016, global developments have been and are projected to be on the whole favourable. Commodity prices generally, particularly oil prices (but not gold or cocoa), have been rising, and global GDP growth in 2017 is projected to be relatively high, with positive implications for Ghana’s exports and growth. Estimated growth in advanced countries is 2.2 percent in 2017, as compared to an outturn of 1.7 percent in 2016.

Similarly, growth of emerging markets and developing economies is projected to increase slightly from the 4.3percent rate in 2016 to 4.6percent in 2017, with China, India, Brazil and Russia contributing to this favourable forecast.

Ghana’s estimated increased growth of 7.9percent in 2017, according to the budget statement, from its value of 3.7percent in 2016, seems consistent with this global evidence.

However, the fourth quarter is yet to weigh in, and the figures for 2017 are only projections. In this regard, while not doubting the budget figures, it is important to compare these figures with alternate ones from, say, the International Monetary Fund (IMF).

Although the global figures presented in the budget statement seem identical with those from the IMF for the global areas, including SSA, in the case of Ghana the budget and IMF figures seem at variance (see Regional Economic Outlook: SSA, IMF, April 2017). This alternate source presents the 2016 outturn as 4.0 percent and the projected figure for 2017 as 5.8percent. Thus, compared with the alternate-source IMF figures, the 2018 budget appears to overestimate the GDP growth rate for 2017.

Agriculture sector

Performance in 2017

Provisional estimates suggest that the agriculture sector expanded by 1.3percent points faster in 2017 than it did in 2016 (i.e., from 3.0percent to 4.3percent). While this performance is impressive, we note that the sector’s growth rate is the lowest among the three real sectors. Fishing is the only subsector for which growth slowed down in 2017 compared with 2016 – down by 2.2percent points from the 5.7percent growth record of 2016. The provisional estimates also suggest that agriculture’s contribution to GDP in 2017 dropped by a marginal 0.4percent points from the 18.9percent record of 2016.

Constraints, policy actions and policy proposals

The agriculture sector continues to face challenges that considerably slows down the transformational agenda. Key among them are low productivity and competitiveness. The former is a function of inadequate public and private investments. Private investments are constrained by the lack of affordable finance and policy direction in the presence of weather risks and vulnerabilities. The small-scale nature of production systems also limit technological innovation and scale economies. Do the policy actions in 2017 and the policy choices for 2018 adequately address these challenges? In 2017, the government introduced two flagship policies aimed at boosting agriculture sector performance: the ‘Planting for Food and Jobs campaign (PFJC)’ and the ‘One Village One Dam campaign (OVODC)’.

We raised some concerns about the prospects of these policies in our previous budget review. These included the rational for the PFJC, for example, given that many of the proposed activities under the initiatives already exist in previous policy statements. We were also concerned about a clear plan for evaluation of the impact of the policy, which is necessary for learning about what works or not and why. While some achievements have been reported under the two programmes these questions remain unanswered. The main areas of progress were the registration of farmers, the recruitment of extension agents and the distribution of seeds and fertilizers to farmers.

Our main concern is whether such handouts represent a sustainable medium to long-term approach to transforming agriculture. Do these measures address the fundamental reasons for low private investments in agriculture? Such government handouts have not proven to be a sustainable approach to agricultural transformation in the past and we do not see any strong reason to suggest that the situation could be different in the medium to long-term although it could address some short-term challenges.

The role of the state should be to formulate and implement policies that create the incentive for private investment in agriculture. The budget recognizes this to some extent as evidenced by the launching of the District Centre of Agriculture, Commerce and Technology (DCACT), which, according to the policy document is aimed at facilitating investment drives though linkages between the private and public sectors.

Our review of the 2017 budget and policy statement of the government bemoaned the lack of depth concerning the issues of agricultural technology application. This is more so when the policy agenda is one that seeks to modernize and transform the agricultural sector. There is still no new policy direction to address this in the present policy statement.

Cocoa continues to be Ghana’s most important agricultural export commodity. Although production increased during the 2016/17 season, productivity remains low. It is for this reason that measures such as the proposed re-introduction of compensation payments under the Cocoa Disease and Pest Control Programme (CODAPEC) and the plans to introduce artificial pollination aimed at increasing productivity by almost threefold, from the current average of 450kg/ha is welcome news.

Another policy proposal worth mentioning is the plan to operationalize the pending agriculture commodities exchange and warehouse receipt system. This, if properly implemented, has the potential of addressing not only commodity marketing challenges faced by farmers but also leveraging agricultural finance through commodity title transfers from the warehouse receipt system which could serve as an instrument for financing production activities for future production cycles.

In our 2017 budget review, we raised questions about the particularly high reliance of the agriculture sector on donor funding. Taking the ministry of agriculture alone, for example, after netting out compensation of employees, we note that approximately 24percent of expenditures allocated to the sector for 2018 are expected to come from development partner (DP) funding. We consider this high for a sector that is considered the most important for driving the job creation and economic transformational agenda.

This is particularly so because only 7percent of total government expenditures in general is expected to be funded by DPs (after netting out compensation of employees). Nevertheless, we note that this state of affairs represent an improvement over the previous year where more than 40percent of funding for MoFA activities came from DPs.

The broad objective for the agriculture sector in 2017 was to “reverse the recent low growth trend by boosting agriculture and industrial productivity”. The figures provided in the government policy statement suggest that this would be achieved by the end of 2017. The only exception is the fisheries subsector where growth slowed down.

It is reported that several foreign fishing vessels ply Ghanaian waters every year seeking to harvest Ghana’s rich fish stocks. Many of these vessels are believed to be exploiting our fisheries illegally. These problems are compounded by inadequate monitoring and surveillance efforts of the fishing sector by government as well as complicity between foreign fishing companies and the agencies responsible for regulating fishing. What is clear is that overfish­ing is depleting our fish stocks, calling for urgent measures to address the issues of overexploitation of the fish stock in order to reverse the trend in the medium to long-term.

The overarching agenda for 2018 is the creation of jobs, an agenda for which the sector is expected to play a role through “investments in Agriculture and Agribusiness”. The PFFJC and the OVODC are expected to play pivotal roles. Because Ghana’s agriculture is still largely rain-fed, most of the expected sector outcomes are still subject to climate variability, particularly rainfall. The slow pace of addressing the climate vulnerability issue is worrying.

Addressing the incentive structure in the agriculture sector to the extent that promotes private investments may prove more sustainable than programmes that essentially give handouts to farmers. There is no overwhelming evidence that such approaches have been successful in the past. At current market interest rates, it is impossible to invest profitably in agriculture.

Therefore, given government’s drive to boost investments in the sector, it would be necessary to bring back the debate on the role of agricultural development banks and financial institutions on the development agenda. To this end, one of the key instruments that could be utilized is strong farmer organizations (FOs).

The small-scale nature of agricultural production systems hinder certain levels of technology application as well as the ability to take advantage of market opportunities, including financial markets. This calls for a renewed effort at building strong FOs in a sustainable way rather than the often ad hoc approach that leaves such organizations redundant after the completion of programmes and projects.

Industrial sector

The estimated growth rate of industry in 2017 is 17.7 percent which is in sharp contrast to the -0.5percent in 2016. This is largely driven by a major turnaround in petroleum and mining sector sub-sectors, which are estimated to grow by 69.2percent and 52.3percent respectively by end of 2017, compared to the negative rates of -16.9percent and -7.9percent that these sub-sectors respectively experienced in 2016.

Industry is expected to grow by 9.4percent in 2018. Petroleum and mining sub-sectors will still be the major drivers of industry in 2018 although there are expectations that other sub-sectors such as manufacturing and construction will see moderate recovery as they did in 2017.

Given this background, it is important to appraise government

policies/programmes for the industry in 2018 and the medium term and to determine how the policies/programmes will ensure a broad-based growth within the industrial sector and continuous recovery and expansion of the manufacturing sector. A key question relates to the extent to which the policies/programmes are feasible particularly in the context of fiscal constraints.

One District, One factory

In August 2017, the government lauched the “One District, One factory” initiative. 191 projects have been appraised and selected for implementation. In 2018, government will allocate a minimum of GH¢2million to each district for the implementation of the 1D1F.

Since we are not privy to the selection criteria, we can only hope that the projects that have been selected will create significant linkages with the natural resource base or the agricultural producing sectors of each of the districts and generate high returns for both the entrepreneurs and their districts.

The National Industrial Revitalisation Programme

Government will providea stimulus package consisting of technical and financial support to 80 eligible companies that have already been screened for the support.

If well implemented this programme may be a major contribution to the effort to revamp the industrial sector. However, unlike 1D1F, no explicit allocation was provided in the budget for this, raising a critical concern about government’s real commitment to start this programme in 2018 or anytime soon. Electricity Tariff Reforms: A recommendation to reduce electricity tariff by 11-21percent for different categories of consumers including businesses has been made.

This remains a recommendation to PURC. It will be a helpful initiative and contribute to the revitalization of the industry especially the manufacturing subsector if the PURC implements the recommendation. However, the government could have shown more commitment by reducing some of the taxes on electricity and fuel.

Providing requisite financial market

Launch of a national development bank

Restructuring of the Ghana Infrastructure Investment Fund (GIIF) and anchoring it on private sector model

Enhancing the capacity of Ghana Exim Bank to support agriculture and industrialisation for export.

We are not sure about whether establishing new banks such as the proposed national development bank is the solution to the problems in a financial sector that appears to be highly profiteering and less innovative in terms of meeting the credit needs of the private sector. We already have the Agricultural Development Bank and the National Investment Bank, which have somehow drifted away from what their core business areas are supposed to be. Generally, all the policies/programmes appear ambitious and laudable. If well implemented, they will help stimulate growth in the industrial sector particularly the manufacturing sector which is currently struggling and has left Ghana’s industry at the mercy of the vagaries in a nascent oil sector. As to whether the policies will come to fruition and yield the needed impact depends on the extent to which government is able to achieve the level of domestic resource mobilization envisaged in the budget. Nearly all of the programmes or policies are to be funded with domestic resources. This means stepping up the domestic resource mobilisation efforts is critical.

We have already seen important initiatives such as the paperless system at the port and the introduction of VAT flat rate system but we would like to encourage government to do more particularly roping in the informal sector in the tax economy.

Unlike the 2017 budget, 2018 was silent on any programme to promote made-in Ghana goods. There was also no mention of the successes chalked on this front during 2017. Moreover, aside from the removal of duties on agricultural produce processing equipment and machinery, the budget did not mention conscious efforts in the form of using tariff and nontariff protectionist methods to shore up the competitiveness of local industries on the Ghanaian market.

Services sector

The Services sector grew by 4.7percent in 2017, well below its projected growth rate of 7.7percent and lower than its performance of 5.7percent in 2016. The sector’s real GDP growth has been consistently above those of the Agricultural and Industrial sector but for the first time in almost a decade, it has been overtaken by the Industrial sector. In spite of this, the services sector remains the largest contributor to GDP, accounting for approximately 55.9percent, a marginal decline from its GDP share of 56.8percent in 2016.

Key achievements in 2017

Reforming and strengthening the education system and institutions to provide education for all Ghanaians, including implementation of the free SHS and investment for Technical, Vocational and Agricultural Education and Training Roll-out of free SHS to ensure equal opportunities for all and enhancement of human capital for the country;

Restoration of teachers and nurses training allowances (43,570 trainees) Reviewing and strengthening the National Health Insurance Scheme (NHIS), LEAP, School Feeding and other social intervention programmes.

Education sector

By 2040, the world’s largest labour force will be in Africa with an estimated working age population of 1 billion. Unemployment among the youth (persons 15-24 years of age) remains much higher than among other cohorts of the labour force in most economies including Ghana’s. Finding productive jobs for young people is critical and with many employers bemoaning the lack of basic, technical and transferable skills of graduates, the need for strong education systems becomes very apparent.

This year’s budget emphasizes the importance of investing in education to alleviate poverty and improve standard of living. Under the 2018 Budget, Government will invest in improving the quality of teaching and learning across the country and feature prominently the teaching of Mathematics, Science, ICT and Technology.

To fulfill the government’s mandate of free secondary education, the government paid fees of 353,053 for first year Senior High School pupils in the September 2017/18 academic year. In addition, government supplied the full complement of core textbooks, supplementary readers and core English Literature books to all first year students. Government also released subsidy for continuing students in Senior High Schools. It is also significant to note the 100percent absorption of registration fees for BECE to ensure that all basic school students sit and justify their entry into SHS.

The financial burden for free SHS can be enormous in ensuing years, as new cohorts join the stream and the added pressures on infrastructure increase. Issues on sustainability remain topical, and it is commendable to notice the preparations for other sources of funding, such as the proposed Educational Fund which is earmarked for implementation in 2018. Are there plans to monitor education over time? Are the plans to properly deal with any future ramifications on tertiary cycle education and youth unemployment?

Health Sector

Ghana’s performance with regards to the achievement of key health indicators has been mixed. There are gaps in access to health care caused by inadequate and unequal distribution of health infrastructure and personnel.Key steps undertaken in 2017, included the recruitment of 15,667 staff, comprising 11,573 nurses, 247 doctors, 1,883 support staff, 938 allied health staff and 14 physician assistants.

Efforts to revitalize the NHIS amidst rising concerns of its sustainability is at the forefront of the Government’s mandate to ensure that Ghanaians are financially protected from high health costs. Government paid GH¢600 million out of the total government indebtedness to the National Health Insurance Scheme (NHIS) and is reviewing the recommendations of the NHIS Review report undertaken in 2016.

Currently, child mortality constitutes a major public health concern in Ghana. Ghana has made significant progress towards reducing child mortality, however institutional infant mortality per 1000 live births increased from 5.8 to 7.5 from June 2016 to June 2017. The drivers could be many but chief among them are the challenges with the procurement of vaccines, resulting in lower than targeted immunization coverage in the first half of 2017.

The SDG process has reinforced how critical it is to secure the engagement of all sectors. Achieving the health objectives by 2030 and reducing maternal and child mortality in Ghana will require transforming the sectors that drive development, such as energy, industrial development, agriculture and transportation.

There is sufficient evidence that water, sanitation, and hygiene do impact maternal and newborn health (MNH). A stronger integration of environmental and health sector goals will therefore have the potential to accelerate the achievement of these goals. Significant progress has been made on extending access to water through the Community Water and Sanitation Agency, but less progress on sanitation. In 2018, the Ministry will provide 200,000 household toilets and 20,000 institutional latrines to selected communities under the ‘Toilet for All’ agenda in a bid to meet the SDG on ending open defecation. With the passage of the Law to establish the Zongo Development Fund, we expect that sanitation issues within inner cities and other communities most affected would be resolved.

Other Social Issues Missing in the Budget

Gaming and Betting Legislation

We expected to hear something about this long overdue control and regulation of the Gaming industry in Ghana, thus bringing order and stability to this largely unregulated industry. We cannot afford the expansion of an industry which remains largely illegal and unregulated with associated negative social effects, in particular on our young and vulnerable in our society. We expect government and parliament to bring all forms of betting and gaming activities under a comprehensive, robust and stringent regulatory framework.

Alcohol and Tobacco

We are of the view that government needs to curb the consumption and abuse of Alcohol and Tobacco in Ghana. Globally, tobacco use is the single largest cause of preventable death, killing around 6 million people every year, while over 3 million deaths every year result from the harmful use of alcohol. This brings significant social and economic losses to individuals and society at large. For far too long, our society has had to deal with the negative consequences associated with the high consumption of these products.

Reducing the impact of marketing, particularly on young people and adolescents, is an important consideration in reducing harmful use of alcohol. The exposure of children and young people to appealing marketing is of particular concern. Both the content of alcohol marketing and the amount of exposure of young people to that marketing are crucial issues.

A precautionary approach to protecting young people against these marketing techniques should be considered. In addition, government could adopt price-related policies in reducing harmful use of alcohol, including making sure that the state has an effective and efficient system for taxation matched by adequate tax collection and enforcement.

Fiscal developments

The 2017 budget had as its core objective, macroeconomic stability. There was therefore talk about leveraging 4 key areas to achieve this objective, namely: fiscal discipline, fiscal transparency, fiscal accountability, and fiscal clarity. The overall fiscal target was a primary surplus of 0.4percent of GDP and an overall deficit of 6.5percent of GDP. The latter was revised downward to a target of 6.3percent of GDP.

The provisional outcomes suggest that the overall deficits target will be attained for 2017 even though the primary surplus target will be missed. In large part, the achievement of the fiscal target may not have been costless.

Particularly one notes that the domestic revenue target was missed by about one percentage point of GDP – 19.5percent of GDP as against a target of 20.6percent of GDP. It was probably for this reason that there was a missed domestic expenditure target by about the same margin – 16.2percent of GDP as against the target of 17.1percent of GDP.

Some of the key highlights of fiscal performance for 2017 can be summarized as follows:

First, we note that government is placing a high premium on macroeconomic stability and is willing to compromise on short term growth to achieve this fiscal targets. This is a deviation from what typically happens where government sets its expenditure targets and will accommodate higher deficits if revenue targets are not met. We see this as a positive development.

Second, the shortfall in the revenue target was largely on account of international trade taxes. Even though the provisional for 2017 is higher than the 2016 level, it still fell short of the 2017 target by about 24percent. This is largely on account of shortfalls in import duties and suggests that the government’s anticipated gains from the paperless port has not been fully met. It is important that the system is assessed early so that the country can reap the maximum benefits from the efficiency being injected by this paperless system.

Third, we note from the expenditure side that government did sacrifice capital spending in order to achieve the fiscal deficit target. Recurrent spending exceeded the target by about 2.4percent whilst capital spending fell short by about 29percent. Indeed, compared to the 2016 levels, recurrent spending increased by about 20percent whilst capital spending decreased by about 40percent.

Under the recurrent spending, the main item for which the target will not be met is spending on goods and services. This could mean one of two things: either there is an improvement in spending efficiency; or we had to sacrifice certain goods and services to achieve the reduction in spending. A bit more analysis needs to be done to make a definite pronouncement on the implications of this reduction.

It is however important to mention that given the programmes that have been started, particularly the free SHS, it is commendable that the government’s fiscal target was met. Note that this is not a judgement on the free SHS. Rather we are commending the government that it is able to implement this fiscally demanding programme and still keep within its overall fiscal target.

Fourth, we note that sacrificing expenditure in order to achieve reasonable overall fiscal outcomes is not always akin to sacrificing growth. Indeed, we have argued in pervious SGERs that fiscal space can be created by improving spending efficiency – associated with reduced spending at same levels of output and growth. Even though a bit more detailed analysis needs to be made here, we do see an adherence to the overall fiscal deficits that are associated with increased growth.

2018 Fiscal Projections

The government in 2018 seeks to further strengthen macroeconomic stability and has set a deficit target of 4.5percent of GDP and a primary surplus target of 1.6percent of GDP. These targets are set based on the assumption that tax revenue will increase by about 25percent relative to the 2017 provisional levels whilst expenditure will increase by about 19percent in 2018.

Also it is anticipated that capital spending will increase by about 50percent relative to the 2017 provisional levels. This is a good signal as it shows that the government recognizes the need to get back on track with respect to capital spending whilst remaining fiscally disciplined.

In general, the fiscal intentions of government as signaled by the 2018 projections is good and in the right direction. The realization of the broad fiscal objectives will, however, depend on two complementary factors.

First, the revenue performance must be good and targets met. Should revenue targets be missed, the government may again be forced to sacrifice capital spending and consequently medium-term growth.

Second, it is important that government remains disciplined with respect to its spending. Typically, we note that the immediate, post-election year is usually one that successive governments have done well fiscally. It is therefore important that the government continues to keep its discipline from a spending point so that the macroeconomic gains made in 2017 can be further consolidated.

Monetary developments

Monetary policy in 2017 focused mainly on re-anchoring inflation expectations and directing inflation towards the medium term target of 8 ± 2 percent. The outcome for the year showed some marginal gains though below expectations. The year recorded a downward trend in inflation from 15.4percent by end December 2016 to 11.6% in October 2017 but this was higher than the medium term target of 8 ± 2 percent.

Credit to the private sector expanded by 4.2percent in September 2017 compared to 3.6percent growth recorded in the same period last year in the midst of the rising non-performing loans. There was some marginal improvements in the share of credit to Agriculture and manufacturing, two major labour-intensive sectors of the economy.

The share of Domestic Money Bank credit to Agriculture increased from 3.7percent in December 2016 to 3.9percent in September 2017 while the share of DMB credit to manufacturing also increased from 7.7percent to 8.5percent over the same period. These developments if sustained and coupled with other policy initiatives, can stimulate the growth of the private sector to create jobs.

The Monetary Policy Rate declined to 21percent during 2017 while the money market rates (Treasury bill rates) also declined; for instance, the 91-day TB rate declined by 3.6 percentage points. Average lending rates on the interbank market declined to 28.97percent in September 2017 from 31.68percent in December 2016.

The relative stability in the exchange rate, coupled with the downward inflation trend and the marginal decline in the lending rate, is likely to translate into improvements in the cost of doing business and can stimulate the private sector.

The macroeconomic target for 2018 aims to restore and sustain macroeconomic stability. Also consistent with the medium term development policy framework, the specific target for 2018 is an inflation rate of 8.9percent. This if achieved will make Ghana improve on the number of ECOWAS convergence criteria indicators the country has met. It will be recalled; that Ghana and Gambia recorded the lowest number of indicators (2) met in 2016 compared to other ECOWAS counterparts who met 4-6 indicators in 2016.

External balance

The budget statement projects a significant narrowing of the current account deficit, underpinned by substantial surplus in the trade balance and higher private transfers. The trade balance, according to the statement, shows a surplus of US$707.6million (1.5percent of GDP), as compared to a deficit of US$1.8 billion (4.3percent of GDP) in the same period in 2016.

And, the present outcome was “largely driven by improved export earnings arising from significant increases in production volumes for cocoa and gold, as well as increased world market prices for crude oil.” Meanwhile, there have been favourable private transfers. Thus, the current account deficit has narrowed considerably: an estimated US$1.1billion (2.4percent of GDP) in the first three quarters of 2017, as compared to a deficit of US$2.1 billion (4.9percent of GDP) for the same period last year.

Also, according to the budget presentation, the capital and financial accounts improved due to higher portfolio investments inflows. These developments “resulted in an overall balance of payments surplus of US$379.3million (0.8percent of GDP) for the first three quarters of 2017, compared to a deficit of US$1.4 billion (2.9percent of GDP) for the same period in 2016.”

The alternate-source IMF figures corroborate the improved picture for exports (of goods and services), which show the values of 40.2 percent and 43.5percent, respectively, for 2016 and 2017, but then also respective imports of 47.2 and 50.7percent in 2016 and 2017, suggesting that the trade balance may not be as rosy by year’s end.

Furthermore, according to this alternate source, the current account in 2016 was in a deficit of 6.4percent of GDP, and is projected to decrease slightly to 6.0percent for 2017.  These figures are consistent with the budget figures, with both sets of figures showing an improvement in the current account deficit between 2016 and 2017; however, these alternate figures suggest that the final narrowing may not be as considerable and, hence, we must await the outcome of the final quarter of the year.

International Reserves

Similarly, the budget statement states that the “above developments led to additional buildup of reserves,” which provide 3.9 months of import cover, compared with 2.5 months of import cover in the same period of 2016 and 3.5 months of import cover at the end of December 2016.

The alternate IMF figures show 2.7 months of import cover for both 2016 and 2017, both much lower than what the budget figures suggest; so, again, we must await the actual outturn of the last quarter, though it is doubtful that the 3.9 months can be maintained, or even approximated, without major additional external borrowings.

Exchange Rate Developments

According to the budget statement, “the Bank of Ghana has continued to moderate volatilities in the foreign exchange market.” The evidence with respect to the US dollar seems spot on; however, the dollar has been depreciating against other major currencies over the last year, by about 10 percent against the euro for instance. Compared with the euro or British pound, the cedi has not fared as well.

Nonetheless, the currency has held steady against the euro since September, but has fallen about 6 percent as of the beginning of the third quarter, and by 15 percent since the start of the year. Besides, a considerable part of the relative stability might be attributable to improvements in foreign exchange holdings resulting from significant external borrowings.  Thus, the actual extent of the role of economic fundamentals remains unclear.

Developments in the public debt

Government debt now stands at some GH¢138.9billion, or 68.6percent of GDP at the end of September 2017, down from 73.1percent at the end of 2016. This means that by September 2017, every Ghanaian citizen was indebted to Ghana’s creditors to the tune of about GH¢5,100.

The total debt stock represented over 315percent of total exports, 330percent of total revenue and over 430 percent of tax revenue. Interest payments on the public debt stood at some GH¢9.7 billion (43.9percent of tax revenue) and is projected to rise to nearly GH¢15 billion by close of 2018, representing one of the fastest-growing items of expenditure in the budget.

We note that this penchant to resort to external borrowing poses a macroeconomic risk. As the debt burden continues to escalate, continuing currency depreciation could lead to a rapid increase in the value of foreign-currency denominated debt and its concomitant interest payments beyond sustainable levels.

The simple policy conclusion is that if Ghana wishes to grow faster it must first raise the balance of payments constraint on demand and put an ice on its appetite for borrowing. If the balance of payments equilibrium growth rate can be raised by making exports more attractive and by reducing the income elasticity of demand for imports, demand can be expanded without producing balance of payments difficulties. Most importantly, Ghana must start to curb the relentless rise of debt.

Further, we argue that it is not just the size of the debt that matters, but what kind of spending we do with the borrowed money. We should also, or rather, be asking about the costs and benefits of government expenditures on different items at different times. Resource misallocation and inefficiencies in government spending are significant sources of distortions in the Ghanaian economy. What do you think our spending priorities should be?

Conclusion and policy options

A large part of the estimated 7.9percent growth in 2017, just like those of the last two decades, has been propelled by increased production and booming prices of Ghana’s main commodity exports. As such the sources of growth in Ghana remain highly vulnerable to external shocks.

Despite this sterling economic performance, mostly owed to the impressive outturn of the oil sector, Ghana’s manufacturing sector still commands a smaller proportion of the GDP, churns out fewer exports, and employs fewer people compared with manufacturing sectors of other similar countries. The Ghanaian economy is still heavily dependent on the production and export of primary products (cocoa, gold and oil) and consequently suffers from the associated risks of this dependence.

The challenge facing Ghana, as with many other African countries, is to transform the economy from a resource-dependent one to a dynamic, diversified industrial economy. Incidentally, the SDGs suggest how to grow good jobs. Goal 9 sets as an objective to ‘by 2030, significantly raise industry’s (manufacturing’s) share of employment and gross domestic product’. Industry is prioritized because it is a high productivity sector capable of absorbing large numbers of moderately skilled workers.

In Ghana, the unemployment rate is highest for persons with Secondary School certificates, i.e. those who successfully completed SSS/SHS education (19.3percent) and those with BECE certificates (11.3percent). Persons with tertiary educational qualifications have the lowest unemployment rate (7.3percent). It is also interesting to note that 40.1percent of the youth in Ghana, in the age group of 15–35, have no education while only 3.8percent have acquired a tertiary educational qualification.

It is therefore surprising that the priority of government in the budget seems to be on graduates.

Apart from the new nation-building initiative intended – the Nation Builders Corps Programme (“NBCP”), which is projected to hire 100,000 graduates, the National Entrepreneurship and Innovation Plan (“NEIP”) also focuses on providing tax reliefs to graduates who take up entrepreneurship.

While commending government for such active labour market policies, we encourage government to pay attention to the mass of unskilled secondary school certificate holders. The most sustainable way of providing hope for these youths is through industrialization and structural transformation of the Ghanaian economy.

From the point of view of development strategy, one of the most important features of any industrialization program is the role of transformative industrial policy. We need to revisit the idea of selective industrial policy targeted at agriculture-based manufacturing (agro-industry), following the sterling examples of Brazil, China, Chile and Malaysia.

The success story China, is not only fascinating but a clear testament to a simple yet highly relevant policy recommendation for today’s developing countries: if you want to prosper, you need to make stuff, from textiles, garments and toys to electronics, and ships and automobiles.

According to a recent report issued by the United Nations Economic Commission for Africa (UNECA, 2016), over the last three decades, Brazil has been among the most active countries in terms of their use of policies designed to expand natural-resource-processing industries and food production. Today, Brazil is among the top three producers and exporters of orange juice, sugar, coffee, soybean, beef, pork, and chicken.

During the 1990s, Chile succeeded in becoming the largest exporter of farmed salmon in the world. It also became one of the main exporters of fresh and processed fruit and tomatoes. Since independence in 1957, Malaysia has successfully transformed its economy from a poor, primary-commodity-based one into an upper middle-income industrialized one.

Today, Malaysia’s trade is driven largely by the manufacturing sector, contributing 60 percent of all merchandise exports in 2012. As of 2012, Malaysia was the world’s second largest producer of palm oil (behind Indonesia). Between 2000 and 2012, Malaysia accounted for over 55 percent of world exports of palm oil. About 80 percent of Ethiopia’s population is dependent on agriculture for their livelihoods, so naturally, industrial policy in Ethiopia has focused heavily on promoting manufacturing industries that provide linkages to the agricultural sector. The leather industry and the textile and garments industry are the best examples.

In fact, the success stories of most of the well-performing Asian tigers like Malaysia and China and that of Brazil were actually success stories of industrial policy. For example, oil palm is not native to Malaysia but the industry has been deliberately promoted through industrial policy, which started as far back as the 1960s when the government tried to diversify its traditional commodity export base (tin and rubber).

Palm oil was one of the first industries picked by Malaysia’s government – and is still one of the priority industries – as a sector with strong linkages to the manufacturing sector – production of crude palm oil, refined palm oil, and palm kernel oil (UNECA, 2016).

In conclusion, there is no denying the fact that an industrialization is a critical tool for economic transformation in Ghana. Hence, it is refreshing to know that the government is considering industrialization as the driver of its development agenda through the “one district one factory policy”. Similarly, the “one village one dam” policy together with the “planting for food and agricultural” program if well-planned and implemented will boost the agricultural sector, serving as backward linkage to the manufacturing sector.

However, we submit that this must not be laissez-faire attitude. Rather, government needs to take on a more active role in influencing the direction of investments, with a strong emphasis on promoting agro-industrial development given the relative abundance of agricultural raw materials and unemployed youth in this country.

Government should be more committed to the creation of an enabling environment in which the manufacturing sector would play a greater role in driving economic growth and export diversification.

Central to this effort is the maintenance of low inflation and low bank lending rates supported by an investment climate which facilitates and simplifies business and trade processes.