IFS applauds govt for ensuring macroeconomic stability
Policy think tank, the Institute for Fiscal Studies (IFS), has lauded the government for creating a stable macroeconomic environment for the first half of the year but says much needs to be done to sustain the stability and market confidence.
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It mentioned the declining inflation rate, relative stability in the exchange rate and the strengthening of foreign reserves as some of the indices that pointed to the return of a stable macroeconomic environment.
While the stability was encouraging, the Executive Director of the IFS, Professor Newman Kusi, said at a news conference in Accra yesterday, “a lot more needs to be done at both the fiscal and the macroeconomic fronts to achieve the objectives set for the budget”.
“The journey has just commenced and we are yet to see how far the government will navigate its way through,” he said at the event that heralded the mid-year review of the budget on July 31.
He attributed the macroeconomic stability in the first six months to “the tight fiscal and monetary policies pursued by the government during the period”.
“Exchange rate stability, in particular, is supported by substantial inflows of foreign exchange from government bond issued in April this year,” he said.
Prof. Kusi, however, said the issuance of the bond to “predominantly non-residents” created a potential risk of future capital reversal should the exchange rate deteriorate.
Should that happen, he said, it would bring serious pressure on foreign reserves and the exchange rate.
Addressing challenges
Although data for the half year are not available yet, figures from the Bank of Ghana (BoG), the Ghana Statistical Service and the Ministry of Finance show that the fiscal and the monetary sides are rebounding after ending 2016 on a pretty bad note.
Inflation, which ended at 15.4 per cent in December 2016, had declined to 12.1 per cent in June this year.
First quarter Gross Domestic Product (GDP) also rose by 6.6 per cent, compared to 6.4 per cent in the same quarter last year.
The BoG policy rate which ended 2016 at 25.5 per cent has also been reduced to 21 per cent, signalling to the banks to reduce the cost of their credit to the private sector.
Although expenditures have been broadly contained, first quarter fiscal data showed that revenues underperformed by GH¢2.3 billion, resulting in a bridge in the deficit target.
To help reverse the weak revenue performance, Prof. Kusi said, the government needed to introduce additional measures to enhance mobilisation.
“Serious reprioritising of spending in favour of the payment of valid arrears, increasing capital spending, dealing with the budget rigidity caused by the wage bill and interest payments will also help.
“The government should also enforce strictly the provisions of the Public Financial Management Act (Act 921) to deal with unauthorised, irregular and fruitless spending, as well as strengthen fiscal transparency and accountability,” he added.
Increase spending
While the 2017 growth target of 6.3 per cent was encouraging, Prof. Kusi said, the IFS “finds the rate of growth of non-oil GDP very disappointing”.
“This unfortunate development is partly due to the government’s spending retrenchment, which has severely hit expenditure on goods and services, capital expenditure and arrears payment,” he said.
Given that increased public spending helped to improve private sector liquidity and supported projects, the IFS Executive Director said, the government’s decision to cut expenditures by GH¢3.6 billion in the first quarter of the year was inimical to economic growth.
“Cutting back capital spending and not paying valid arrears hold back economic activity, with serious consequences for domestic revenue mobilisation,” he said.
He said the institute had realised that adherence to the deficit target “seems to have become an overriding goal of the government”.
Prof. Kusi said while the institute recognised government’s efforts to stay within the projected deficit, the danger was that the much-depressed spending could seriously constrain economic growth, job creation and domestic revenue mobilisation.