Worrying Economic Signals From The MPC

- Danquah Institute Warns

Analysis by Asare Otchere-Darko

According to the Monetary Policy Committee of the Bank of Ghana, which held a press conference today (Tuesday, May 12), the “latest April survey shows further drops in both business and consumer confidence from the February surveys.”

This drop in business confidence, even though may have a short span, is reflected in the weakening of overall economic activity.

For example, revenue and expenditure are both lower this year than same time last year. But worst hit are wages and salaries, which even from the 2009 Budget projection should be far lower in real terms than the expected increases in the prices of goods and services. It is very tempting to conclude that the dawn of the ‘Better Ghana’ is some distance away from exposing a mere flicker of its radiance. We also tempted to predict that the initial signs from the Mills administration suggest that there is most likely to be a huge confusing gap between the so-called Social Democratic principles of the National Democratic Congress and implemented policies during the four-year term.

Wages and salaries of workers have already seen a significant drop in actual terms under the first 3 months of the new administration. It is a mere 2.6% of GDP (GH¢558.5 million) as compared with GH¢549.1 million (3.4% of GDP) for the same period in 2008. This is worrying for the purchasing power of Ghanaian workers if lined with the fact that headline inflation was 20.5% in March, up from 20.3% in February and 19.9% in January 2009.

Even more worrying is the economy’s reversal to pre-2001 days when Dr Kwabena Duffuor was Governor of the Bank of Ghana and Prof John Evans Atta Mills (as Vice President) was head of Government Economic Management Team. Those were the days, it would be recalled, when it made more sense to invest in short term Treasury Bills (which amounts to high interest-rated indebtedness to government) than to invest in business or in medium- to long term instruments, which were virtually non-existent in those days.

According to the latest figures from the central bank, more and more Ghanaians are now shifting their money from investing in businesses and long term securities into short-term ones like the 90-day Treasury Bills. This could only end to a fattening of government debt and its consequential crowding out of the private sector in the race for bank credit. This smacks of a return to the high inflation, high interest rate, depreciating cedi, depleting income and law growth rates of the 90s and 2000.

The indicators are far from comforting for the nation’s quest to industrialise. The share of short-dated instruments increased to 56.1%, from 45.7% at the end of December 2008. A significant and dangerous turn around of a persistent trend in the last 6 years, when we saw a growing pull of investor funds into longer-dated instruments. The slow down in the economy is also evidenced by the slow down in revenue mobilisation. With a tax expert at the helm of affairs, it was expected that by now the country would be seeing initiatives on how to widen the tax net and expand revenue, even without the NDC breaching its manifesto commitment not to increase the tax burden on individual Ghanaians and their families.

Total revenue and grants for the first quarter of 2009 was 6.1% of GDP (GH¢1,308.1 million), compared with 6.4 percent of GDP (GH¢1,129.2 million) for the same period in 2008. Total expenditure (excluding foreign financed capital expenditure) amounted to GH¢1,249.2 million (5.8% of GDP) compared with GH¢1,265.3 million (7.2% of GDP) for the same period in 2008.

While the drop in expenditure may be good for the narrowing of the fiscal deficit it offers no comfort to the Ghanaian worker whose standard of living has seen a dip this year. It was also very bad news for the all-important project of developing the country’s physical infrastructure.

We are also very sceptical about the fulfilment of the NDC promise to create jobs. For example, real annual growth of credit to the private sector was as low as 25.6% at the end of March 2009, a huge a slowdown from the 38.9% for March 2008.

Since the private sector is the engine of growth, there are worrying indications that its ability to create job will be severely checked by the rising cost of loans and the depleting trend of consumers’ purchasing power. We are, however, looking up to Government to unfold its big plans for the agricultural sector – the only area where one can be cautiously optimistic of any significant growth in the short- to medium term.

The latest figures from the BoG show that the trend of the last couple of years which saw the commercial banks chasing after consumers for personal loans has significantly eased down. We may call it non-quantitative easing.

The share of households (mostly consumer loans) has eased to 20.4% in March 2009. This, the figures show, is significantly lower than the 27.4% recorded in March 2008.

More worrying for businesses up and down the country is the cost of lending which is now as high as 37%. The BoG puts average lending rates 400 basis points higher this first quarter of 2009 than where it was last year. Though lending today is said to average 31.25%, for the majority of small scale enterprises (the biggest employment base in Ghana), lending rates are usually above the 35% mark.

Another critical indicator of Ghana’s worsening economy is the growing size of bad loans. Non-Performing Loans (NPL) ratio and the loan loss provision to gross loans ratio both increased by 9.6% and 7.6% respectively in March 2009, compared with 8.7% and 5.9% for the same period in 2008.

Yes, it is very clear that Ghana has been caught in the global financial crisis and its concomitant future uncertainties make it difficult for our $17 billion economy. But, what is unusual in Ghana is that unlike the worst hit areas (like the OECD countries) where the cost of borrowing is now at record low levels, about 1.5% interest rate in some cases, here in Ghana it is rather rising and rising. There must either be something fundamentally wrong in our analysis of the problem and/or our application formula of solutions.

It is very clear that our nation requires more innovative measures from Government than the current escapist posture of seeking refuge behind the curtain of global financial crisis.

With Ghana enjoying its highest growth rate for 30 years (of 7.3%) last year and the new government showing signs of tackling the debt, this sees total public debt, which now stands at $7,742.4 million, representing 49.2% of GDP), down from $7,918.1 million or 54.6% in 2008.

While we admire attempts to narrow the fiscal deficit of 11.5% or so to 3% in the medium term, the seeming lack of initiative to tackle rising cost of living and the growing threat of joblessness, in our view, smack of a return to the (P)NDC days where the priority was more to satisfy IMF conditionalities than to tackle the economic situation of Ghanaians and the underlying weaknesses of our national economy.

President Mills and his government, while singing on the international roof tops that they believe in “transparency”, we believe Government can be more forthcoming with details of the negotiations at the Spring Meeting in Washington, DC, between Ghana and the International Monetary Fund and the World Bank.

Yesterday, we believe Dr Paul Acquah, the Governor of the Bank of Ghana, gave Ghanaians a big enough hint of what they have to do to get the chased-after monies from the Bank and Fund to meet our development programmes.

He said, “The Government budget for 2009 was presented in March. The general thrust of policy in the budget is to correct the fiscal slippage observed in 2008 and to re-establish the role of fiscal policy in achieving accelerated growth with stability. In this regard, the budget sets a fiscal consolidation path that reduces the overall fiscal deficit to 9.4 percent in 2009 with a medium term objective of 3 percent. This would largely be achieved through stringent expenditure review and measures including efficient revenue administration to create fiscal space for increased developmental programmes.” (Emphasis ours)

We are appealing to President Mills and his Finance Minister to come clean on which belts have to be tightened in order for the country to receive the relatively huge allocations of funds being bandied about from the Washington trip.

We believe it to be potentially very positive for Ghana if news that the recent Spring Meeting of the Fund and Bank in Washington has earned Ghana a tentative allocation of about $3.2 billion. About $2.2 billion of the amount, we are told, is expected to come from the World Bank essentially for budget support programmes, while the remaining $1 billion support from the IMF is to “shore up the country's foreign exchange reserves.”

From the World Bank, we are told that $1.2 billion has been tentatively allocated to Ghana for Budget/Sector Support Programmes and Projects for the ensuing three-year period. Of this amount $450 million had been earmarked for budget support for the next 3 years, with an additional amount of $75 million already allocated to Ghana.

Dr Duffuor may do well to explain to Ghanaians what exactly is meant by ‘shoring up foreign exchange reserves’. It is recalled Dr Duffuor, Finance Minister, recently held a press conference, where he lambasted NPP and the central bank for doing just that in the last couple of years after redenomination.

From what we are gathering, the Fund’s position to the Ghana government is that there should be no scope now for, what they call, countercyclical fiscal loosening. Indeed, the Fund is calling for ‘upfront fiscal restraint.’ Which means keep the lid on spending so tight as to keep fiscal deficit down, whether or not the spending is for essential infrastructural development or lifeline interventions.

In March 2009, the IMF announced that it has “modernised its conditionality framework in the context of a comprehensive reform to strengthen its capacity to prevent and resolve crises.” The new framework, according to the Fund, “ensures that conditions linked to disbursements of IMF financing are sufficiently focused and adequately tailored to the varying strengths of members’ policies and fundamentals.”

Yet, this is no comfort to Ghanaians when the details of what we are pledging to do in return for the funds are still a heavily guarded secret. Those details are more important than the intention of the Fund and Bank for so-called greater country ownership.

If President Mills really believe in what he told the international community last week that greater transparency helps development, then he can begin in a big way by telling Ghanaians what type of bullet is to be bitten and who and who may have the bigger and harder bits to bite.

The IMF has said lending will no longer be tied to its mandatory structural performance criteria starting May 1. Instead, borrowing countries would be able to receive money based on their domestic reform programmes.

We are yet to be convinced. They point out that conditionalities were of two types. One is of structural conditions, with the other one dealing with macroeconomic conditions, which may include criteria for containing inflation, reducing budget deficits and public debt, or strengthening the central bank's reserves.

The bottom line is that the details of our current arrangement are basically all about the second set of conditionalities above – so what then is new? The $1 billion tentative allocation from the IMF seems far from certain. It is described as “a possible precautionary standby arrangement of not less than $1 billion to support Ghana’s foreign exchange reserves.”

Standby arrangement is an IMF decision where a member country is assured to purchase or draw on funds from the General Resources Account up to a specified amount for a specified short period of say two years. The catch is that the member must observe the terms of conditionalities set out in the supporting arrangement in order to draw on the funds.

When the Fund says treat a standby arrangement as precautionary, it usually means you cannot draw on the Fund resources unless the need arises. Nevertheless, the $1bn must still be seen as good news because much of it seeks to strengthen our crisis preparedness. In our case mainly the depreciating cedi and rising cost of vital import commodities.

The $1bn loan, if we ever get it, would be charged at a market-based interest rate (currently 1.5 percent, but potentially higher), and with an unusually short repayment period (less than 5 years).

The signs are not good. However, it is too early to conclude on a negative note. President Mills has enough time to drive the economy with greater oomph than he has so far shown. He should do so not with windows of the vehicle tinted. We need more transparency from him and his government. The author is the Executive Director of the Danquah Institute.