IFS doubts gov’t projections on economy

BY: Jessica Acheampong
Prof Newman K. Kusi, Executive Director, IFS

The Institute for Fiscal Studies (IFS) has contradicted government’s position that the economy will improve in the remaining two months of the year.

It argued that the factors on the ground did not support such projections.

 

With the current high interest rates, rapid depreciation of the Cedi, and deregulation of the downstream petroleum sector, the upsurge of inflation, for instance, is likely to remain for the rest of the year, while the fall in prices of the country’s main export commodities and the resultant potential loss of foreign exchange and revenue to the government may also continue for the rest of the year.

The Executive Director of IFS, Professor Newman Kwadwo Kusi, at a pre-budget forum organised by the Institute in collaboration with the Natural Resource Governance Institute (NRGI) said inflation rates moved to double digit largely through the effect of adjustment in fuel and utility prices as well as fiscally driven demand pressures.

Inflation is currently at a record high of 17. 4 per cent as of September 2015, something, Professor Kusi said, was likely to face an upward swing in the face of the deregulation of petroleum product prices. 

The increase in inflation led the Bank of Ghana to revise the end-2015 inflation target from 11.5 per cent to 13.7 per cent.

“Even if fiscal consolidation takes hold and contributes to keep down domestic demand and pressure on interest rates and the exchange rate and thus reduce inflation, other drivers of inflation such as food, fuel and utility prices are hard to predict,” he said.

From 2014, the Cedi has weakened against some major trading currencies as demand continued to outweigh supply.

Available data from the IFS showed that during the first nine months of the 2015, the Cedi traded at GHC4.33 to the US dollar in June 2015 from GHC3.20 to the dollar in December 2014, reflecting a year-to-date depreciation of 26.1 per cent.

By the end of September 2015, the local currency was trading at GHC3.71 to the dollar on account of the expectation of some US$4billion inflows, which was expected to provide a strong buffer and help to bring sustainability in the foreign exchange market.

Professor Kusi explained that there was no concrete assurance to show that pressure on the Cedi would abate before the end of the year.

“It is well known, the weakness of the domestic currency is a result of the macroeconomic imbalances, in terms of large fiscal and current account deficits leading to mounting public debt and rising interest rates,” he said.

He added that, “as have been pointed out earlier, the balance of payments support is not too strong. Therefore, there will not be any strong positive impact on the domestic currency. The fear, therefore, is that the worst of the cedi depreciation is yet to come.” — GB