We must scale the hurdles
Ghana indeed has been ahead of the curve in Africa for many years. But the road has been bumpy at times, and in recent years, the economic situation in Ghana has deteriorated quite markedly.
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A combination of factors explain this deterioration. They include macroeconomic policies, institutions and shocks. On the policy side, in 2012, there was a very large expansion in the fiscal deficit which was mostly driven by a swelling of the wage bill as a result of wage increases and a reform of the pay scale, which was much more costly than what was expected at the time.
It was accompanied by increases in other spending and over-optimistic revenue projections. So fiscal deficits almost tripled that year. Monetary policy was also too accommodative.
As a result, we have seen a substantial increase in inflation and depreciation of the local currency, which lost 60 per cent of its value in the last two years.
Institutional rigidities in the public finance system made the subsequent adjustment efforts more difficult.
Widespread earmarking of revenues within the budget and large spending conducted by agencies have constrained expenditure reduction. Also, large tax exemptions made reversing revenue shortfall more difficult.
We are of the view that our priority must be to restore macroeconomic stability. This means making further efforts towards fiscal adjustment.
We are happy that the government has engaged in an ambitious programme of fiscal consolidation. These efforts are on track, but there is still a relatively long way to go before the situation is fully back to a sustainable level.
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For instance, the government’s decision to reduce the recently upwardly adjusted electricity tariff from 59.2 per cent to 45 per cent and 50 per cent, respectively for two specific categories of consumers means that the budget deficit target of 5.3 per cent for this year, will be missed.
Also, monetary policy needs to continue to be very vigilant to improve the credibility of the central bank, bring inflation down, and stabilise the local currency.
Beyond macroeconomic policies, structural reforms will be very important to improve the resilience of the economy to shocks. Structural reforms, in particular in public finance, also will be important so that gains achieved in fiscal consolidation will be maintained over the medium term and fiscal discipline becomes more entrenched in the coming period.
These and many more will be the main talking points as the Deputy Managing Director of the International Monetary Fund sits at table with President John Mahama, some ministers and officials of Bank of Ghana to address important economic challenges, most importantly, how to restore macroeconomic stability.
It is important for the government to work hard to address fiscal and external imbalances, improve its business environment, and promote opportunities for growth, all of which is key to the recovery of the country’s efforts to create jobs and kick-start growth. — GB