Post election economy - winner in for cruise ride if...
Barring any last minute surprises from the fiscal side, the winner of tomorrow's general elections should preside over a fairly stable and stronger economy from 2017, compared to the state it has been between 2012 and this year.
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This is after four years of fiscal squeezing, marked investments in power generation and a tight monetary regime combined with a new debt management strategy to stabilise macroeconomic imbalances, reduce the challenges posed by the power supply deficit and lift business and consumer sentiments.
With the deficit projected to end this year at five per cent (down from 11.5 per cent in 2012), inflation at 15.8 per cent and the cedi holding its own against the major foreign currencies, next year could be a period for strong economic take-off after four years of virtual stagnation.
Already, the steady return of stability to the economy, which is the outcome of a painful but necessary fiscal discipline under the government's much touted Homegrown Policies and the three-year Extended Credit Facility (EFC) with the International Monetary Fund (IMF), has started feeding into the economy.
Treasury bill rates, which are a key determinant of the health and direction of an economy, have started trending downwards, dropping from 22.50 per cent in November to 16.86 per cent as at December 5.
The successful reversal of the fiscal and monetary slippages and the moderation in their impact on business growth would be boosted by an expected increase in crude oil and gas outputs in 2017.
The coming on board of the Sankofa Gye-Nyame Field and the expected ramping up of production from Jubilee and the Tweneboah-Enyera-Ntoume (TEN) fields in the latter part of the year should help to increase government revenue and provide a steady source of fuel for thermal plants. This should help to reduce the growth obstacles that the power shortages pose to the private sector.
But while these present positive outlooks to the winner of the December 7 general elections, many economists concur that much depends on the outcome of government finances in 2016, which will only be available in early 2017.
"I think there is a consensus out there that the next four years will be better than the last and that from 2017, things will pick up."
"So, you will find that all the growth forecasts are on the upside, inflation forecasts are also toward the downside and the external deficits are expected to start narrowing," an economist, who declined to be quoted, said.
"But what I will say is that much depends on how we finish 2016. We have to finish 2016 on a good note for that to strengthen the confidence that we have on the outlook," the source added.
Exceeding 2016 deficit
In 2012, government finances and their implications on the deficit virtually remained within targets in the first nine of the year but slipped to 11.9 per cent in the last quarter after election year pressures forced the government to expend beyond the budget to be able to retain power.
Prof Peter Quartey of the Institute of Statistical, Social and Economic Research (ISSER) of the University of Ghana (UoG) fears the same thing may be repeated, with New Patriotic Party's (NPP's) Nana Addo Dankwah Akuffo-Addo, stepping up his bid to wrestle power from President John Dramani Mahama and his National Democratic Congress (NDC).
"The stakes in the last and the current elections have been high and so we normally see the incumbent overspending."
"Based on that I am worried that we will, as usual, spend more than we have budgeted and once we do that it will have repercussions on inflation, exchange rate, and many others," he told the GRAPHIC BUSINESS on December 2.
"Once we do not meet our targets, donor inflows will slow and the first few months can be quite problematic since revenues normally do not come in so quick in the first quarter," he added.
Dr Eric Osei Asibbey of the Economics Department of UoG, Legon, shared in that sentiment.
"We only hope that government will stay within its means. If it doesn't, which I fear will happen, then it is likely it will lead to an erosion of whatever gains that we have had over the last up three months," he said, pointing to the marginal decline in inflation and the stability in the foreign exchange market.
"If there are no enough counter mechanisms to counter the expenditures we normally see in election years, then it is likely to led to a spiral in inflation," he added
Rebuilding
Apart from 2004, when budget deficit in an election year dropped to four per cent from 6.2 per cent in 2003, large budget deficits have virtually become synonymous to election years in the country, with the 2012 figure of 11.5 per cent, a jump from the 2011 close of 4.2 per cent, being the worst so far recorded.
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The overspending are always the outcomes of a combination of push and pull factors, majority of which bother on excessive demands from public sector workers for improved conditions of services, an urge to please electorates with new projects and subsidise on utilities, and the intermittent slump in commodity prices and the resulting impact on budgeted revenues.
Although wage pressures and subsidies have subsided in recent times, a new threat has emerged -- falling revenue, resulting mainly from a drop in tax collections (an outcome of slower growth in the private sector).
As of October, this year, total revenue and grants were reported at a little over GH¢18.5 billion, about 48.8 per cent lower than the full year target of GH¢37.9 billion.
Based on these, Prof. Quartey, who heads the University of Ghana's (UoG) Economics Department, said his outfit was convinced this year's budget deficit target of five per cent would be exceeded "but in the levels we hit in 2012."
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"From the projections that the Ministry of Finance has given, we should have a fairly decent deficit in 2016 but as you know, projections and outturns are not normally the same. I foresee us overshooting the budget deficit but I do not anticipate anything in the double digit range," he said.
Conservatively, he said the budget target of five per cent could be exceeded by 200 basis points, thereby bringing to seven per cent the deficit the country will record in 2016.
Should this happen, the economist said the new administration should be expected to do what the country does after every election -- rebuild.
"The usual thing to do is to clean up. Normally, the first half half of the year is used to clean up and stabilise as quickly as possible," Prof. Quartey said.
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While the anticipated rise in petroleum sector revenue will help to smoothen the post-election year adjustment, Dr Asibbey said the new administration would have to deal with the high interest rates in the country.
"For some reason, interest rates have just refused to fall in spite of the fact that we have seen some relative stability," he said.
Given that interest rate is the one good indicator that connects directly with the real sector of the economy, Dr Asibbey said having high rates means that the stability is not translating into the real sector, which anchors growth in the private sector.
"Another area that a new administration will have to look at is the high debt stock and taxes. We need to find a ways of reducing the debt by borrowing less from the economy and that will help in the interest rates issue," he added.