The costs of macroeconomic instability

Thu, 13 Aug 2009 Source: Baafi, Alex Bossman

By Alex Bossman Baafi It is the responsibility of the government to create an enabling environment for businesses to grow in order to create wealth in the country. Government achieves this through its macroeconomic policy which aims principally to achieve two goals. Firstly, to ensure that the key macroeconomic variables especially economic growth and inflation are at acceptable levels at all times. And secondly, to create stable economic environment in which the economy can be vibrantly flourishing. That is, to curtail fluctuations (ups & downs) in economic activities. By the above, the government can create a more favorable environment for business. There are several macroeconomic variables that the government should make extra efforts to control in order to attain these desirable macroeconomic objectives and these can be grouped under four main headings of economic growth, unemployment, inflation and balance of payment.

Economic growth

Governments try to achieve higher rates of economic growth over the long term. That is to say growth that is sustainable and sustained over many years and not just for a short period of time. This should be done with the determined effort to achieve stable growth avoiding both recessions and excessive short term growth that cannot be sustained. Normally governments go all out and are happy to give the economy an excessive boom before and during election years. Since independence to date, various successive governments have contributed their quota in terms of creating vibrant economic growth for prosperity. Available statistics show that the Gross Domestic Product (GDP) was 5% in 1966, 3% in 1972, 1.7% in 1979, 3% in 1981, 5.2% in 1991, and 3% in 2000. From the forgone figure, one could say with adequate certainty that economic growth fluctuations make any meaningful progress notoriously difficult. Since then the country experienced a remarkable growth rates averaging 6% over the years, hitting 7.3% at the end of 2008. As a country, we must resolve not to let fluctuations set in again to send this country backward. To get out of abject poverty and underdevelopment by improving the living standards of our people, we must work hard to continue to improve upon our GDP growth rate as it stands now. We must target growth rates between 9 and 10 % annually if our millennium development goal of achieving a middle income economy status by 2015 is to be achieved and any growth rate below the current 7.3% will be very costly. The indications are that the fluctuation had already set in as was evident the recent MPC report – The health of the economy in which it was stated that GDP is moving towards 6% from 7.3% due to high prices of fuel and cement and I think this is unfotunate. Unemployment

One of the cardinal aims of governments is to ensure that unemployment is as low as possible, not only for the sake of the unemployed themselves but it represents a waste of human resources and a drain from the national economy. A nation’s wealth is created using other inputs by its human capital. No matter the technology, strategy or ideas, we depend on people as the most valuable asset of every nation. It is therefore imperative for us to make good use of our human capital. We must not loose sight of the fact that unemployment level in this country is estimated around 25% of the total labour force. A situation where a quarter of a country’s labour force is jobless is a serious socio-economic issue. For example our unemployed people are without incomes, the longer the people become unemployed the more dispirited they become. Their self esteem continues to fall making them succumbing to stress related illnesses. They loose dear ones, friends, relatives and their personal relations of all forms. It leads to widespread desperation among our army of jobless youth leading to increase in domestic violence, broken homes, kayayei, child labour, armed robbery, sakawa and what have you in our society. The nation itself looses heavily as result of lack of revenue from personal incomes and corporate taxes and therefore the total national income (GDP) is always lower than its potential capacity. The practical example was contained in the story- VAT SERVICE MISSES TARGET, Revenue agency records a 14 per cent drop (front page on Graphic Business, August 11, 2009). With Treasury bill rates up, (91-day, 25.90% and 182-day, 28.82%) the government is borrowing from the public and crowding out the private sector. This is leading to a rise in unemployment and low economic activity in addition to the unpleasant adverse impact of the global economic downturn on our domestic economy in particular and the world economy as a whole .


Inflation means a general rise in prices throughout the economy. The government’s duty here is to keep inflation low and stable. One of the most important reasons for this is that it will facilitate the process of economic decision making. That is, businesses will be able to set prices and wage rates and also make investment decision with confidence. Available figures show that inflation was 12% in 1992, got up to 25.2% in 2000 fell to 18.1% by the close of 2008 and gone up again to 20.74% by June 2009. Generally, inflationary history of our country is not the best. In my humble opinion, 2-digit inflation in any progressive economy is unacceptable. Inflation leads to lack of economic growth because it creates uncertainty and makes trade and investments decision making very risky. On the international markets, it makes our domestic exports less competitive and imports cheaper. Such bleeds economic atmosphere where our economy always runs into balance of payments deficits, leading to lack of economic growth, unemployment and compounds our already heavy burden of poverty and underdevelopment. Inflation also leads to depreciation in the exchange rates thereby worsening the country’s current account position with our international trading partners. This makes our economy unable to compete with its international rivals in the global market, and always depending on donor supports and international financial institutions for our survival. With inflation hovering around 20.74% and interest rate pegged at 18.5%, the cost of doing business had gone up considerably. In addition, the government Treasury bill business makes it a disincentive to borrow from the banks for private investment even most financial institutions now prefer to invest in treasury bills themselves than to give credit to the private businesses for investment and this is detrimental to the economic wellbeing of the country.

Balance of payment

It is the government’s responsibility to provide an environment in which exports can grow without an excessive growth in imports and create a climate in which the country’s foreign currency earnings at least match or preferably exceed the country’s demand for foreign currency. That is working hard to achieve a favourable balance of payments. For example, the achievement of a favourable balance of payments depends, in part, on whether changes in exchange rates allow the country’s goods and services to remain price competitive on the international markets. The problem is that, there is high interest rate and there is also high rate of inflation. Higher interest rates tend to slow the growth of the economy because it could reduce the level of aggregate demand for domestic goods and services. Exchange rate could strongly influence the demand for the country’s export as higher inflation rates affect consumer’s income and for that matter the purchasing power. Perhaps what make these problems more serious is that interest rates, exchange rates and inflation could also have an impact on each other and that makes the overall assessment of their impact on the economy more complex so we do not have to underrate the challenge.


I believe we have a competitive advantage in the exports of certain non traditional items like mangoes, banana, pineapples to mention a few, into the European and other international markets. The ministry of Agriculture in collaboration with the Ghana Export Promotion Centre could design an incentive package for our farmers. These may include setting up buying agencies like what is done for the purchasing and marketing of cocoa in the country. There are banks in the country that are capable and willing to extend credit to farmers but for want of collaterals these financial institutions are unable to advance credit. We must be able to do something to assist farmers to get access to credit not to mention provision of technical advices and the supply of subsidised inputs to farmers. We need to invest heavily in our agricultural sector as a first step into solving our economic growth, inflation, unemployment, and balance of payments problems. Also we need to revisit our internally revenue generating system, overhaul it to make it more efficient to get more revenue for infrastructural development. For example a country of our size with both Tema and Takoradi harbors should not look beyond it bothers for exorbitant loans with its concomitant bitter conditionalities. We should do what it takes to harness the operations of the harbors to take care of our revenue requirements. Let us learn from other places like Israel and some of the Scandinavian countries.

Finally, our system of education must be reviewed to train more people in entrepreneurship, ICT and professionals than can provide value-added services to take up jobs in the growing services sector of the economy as part of tackling the joblessness situation in the country. In addition, we need good governance, efficient public administration devoid of corruption, and transparent and accountable governance to turn the fortunes of our economy around.

Email: abkbossman@yahoo.co.uk

Columnist: Baafi, Alex Bossman