REJOINDER: GHANA - TOUGHER TIMES ON THE HORIZON

By K. B. Oku-Afari, Director, Policy Analysis and Research Division
Ministry of Finance and Economic Planning, Ghana


On June 4, 2008, CITI issued an economic and market analysis report on Ghana, titled “Ghana, Tougher times on the horizon”. The contributing economist was David Cowan.

The report has been reviewed, and I wish to issue the following comments. The comments are my personal views, and do not in any way represent the official views of the Government of Ghana or the Ministry of Finance and Economic Planning of Ghana.

In general, within the context of the current world economic situation, globally, there are tougher times ahead, and Ghana is no exception. The report gives a lot of food for thought, but some aspects of the analysis are very subjective and judgmental, reflecting the personal opinion of the analyst, and he cannot be begrudged for that. I will, however, want to take the opportunity to comment on some few factual inaccuracies and indicate my opinion on some of the issues raised.

Growth in Incomes
I do not believe that there have been slow growth in incomes over the last few years. For instance, while Gross Domestic Product per capita, grew by about 1.1 % in 2000, the growth rate increased consistently to reach 3.6 % in 2007.

Public sector wages have increased substantially in both nominal and real terms, and the formal private sector has not been an exception. It is true that people complain about “not feeling the improvements in the economy in their pockets”, but I am of the opinion that the taste of the average Ghanaian has changed substantially. A lot more Ghanaians are now conscious of investing for their future, and thus they see the need to put up houses, invest in mutual funds, equities and other money market products. This is evident in both the rural and urban areas of the economy. This is also evident in the Bank of Ghana’s index of economic activity, and particularly in the sale of cement, where the market is almost cleared consistently, despite the hike in the price of the commodity in recent times. A lot more Ghanaians now frequent restaurants and the numerous fast food joints that have sprung up all over the country. Ghana’s tele-density is one of the fastest growing in the world, with many more Ghanaians in various income categories owning mobile phones. The UNDP “Human Development Report, 2007” that the CITI report quoted, attests to this fact.

The Perpetual Reformer
On the issue of Ghana being a “perpetual reformer”, in my opinion, we have to acknowledge that reforms are organic, and a continuous process which every economy, developed, emerging, developing and under-developed undergoes. The use of the phrase sounds pejorative, rather than for real economic analysis. I would like to correct the inaccurate reporting and put on record that Ghana has not adopted an IMF Policy Support Instrument (PSI). Currently, Ghana does not have a formal programme with the IMF, but is still subjected to the usual Article IV Consultations which every member country of the IMF is subjected to. The analyst keeps repeating that Ghana is on a PSI programme, but I do not know which PSI programme review that the analyst keeps referring to. I think this is an issue that the analyst could have easily sought confirmation. Moreover, in my opinion, I do not see the point that the analyst makes about the Bank of Ghana adopting inflation targeting regime and Ghana being the first post-HIPC/MDRI country to raise financial resources from the private sector. These are not IMF programmes.

The Fiscal Problem in Ghana
The reform being referred to is the overarching “Public Financial Management Refoms Programme” which was started in the mid 1990s. We need to be very clear about the fiscal reforms referred to in the CITI report, because I do not see how the fiscal position in itself, can undergo reforms. The analysis on the budget deficit seems to be one-sided. No mention is made about the tremendous effort that has been made and continues to be made on the mobilization of domestic revenue. Tax revenue increased from 14.7% of GDP in 1995 to 16.3% of GDP in 2000 and has jumped to about 22.9% of GDP in 2007. The trend in expenditure as a percentage of GDP as reported seems to be very inconsistent, including the review period indicated. For instance, the analyst indicates that expenditure rose “sharply again to 29% in 2003, before rising more modestly to over 30% by 1994”. I wish to note that the NPP Government came to power in 2001, thus between 1996 and 2000, the NPP was not in Government.

Zero net domestic financing of the budget has not been a policy goal in itself. The fiscal policy of government has been to use the net domestic debt as a ratio to GDP as the fiscal anchor. The initial policy in 2002, was to half the net domestic debt-to-GDP of about 26%, by end-2005, and this was achieved.

The Deficit Returns
It is true that some of the reasons for the surge in the deficit are exogenous but, also, the tension between infrastructure development and fiscal deficits is recognized. I believe that the underlying fiscal deficit in Ghana’s situation is sustainable if the resources involved, particularly, the sovereign borrowing (which constitutes about 4.4% of GDP) is managed well and put into productive investment, as this will grow the Gross Domestic Product.

Its party time: from bicentenary, to football
This item in the report seems very mischievous. The report states that “Ghana has been in party mode for virtually the last two years … with the Government organizing a grand party and a year long series of events to celebrate”.
I do not know whether the hosting of the African Cup of Nations in February 2008 was also a party as the economic analyst seems to portray in his analysis. We have already acknowledged that the activities had fiscal implications. It is, therefore, not the discovery of the CITI analyst that the events had significant fiscal implications.

I also wish to indicate here that most of the expenditures on the Golden Jubilee celebrations and the hosting of the CAN 2008 were on capital investments that were developmental. Two brand new sports stadia were built, and two others were renovated and expanded for the event. Other related infrastructure, including housing and roads, were built, in relation with the events.

We have repeatedly indicated that the wage bill has, over the years, been the Achilles heel in expenditure execution. It is for this reason that the Government has initiated the public sector wage reform as part of the wider public sector reform programme, with the passage of the Fair Wages and Salaries Commission Act. It is surprising and unfortunate that the analysis emphasizes that the golden jubilee, the CAN 2008 and the wage overruns are all “pre-election splurge”.

The inconsistency in the analysis continues with the branding of the relief granted to Ghanaians in the face of the global rising cost of fuel and food as “pre-election spending spree”. It is unfortunate that the report goes on to indicate that the “measures were quickly pushed through Parliament”, as if the process was not a transparent one, but I wish to indicate that due parliamentary procedures were followed and agreed upon by both sides of the House.

The removal of import duties were on rice, wheat, yellow maize, while those on fuel products were domestic excise and the debt recovery levy. Crude oil imports do not attract import duties. I also wish to place on record that Dr. Anthony Akoto Osei is not a Deputy Minister. He is a Minister of State. The Central Bank Struggles to fight inflation
No doubt, the fight to bring inflation to single digit has been a difficult one in Ghana, but substantial progress has been made on this front. However, comparing the current inflation situation in Ghana to Nigeria and la Cote d’Ivoire, may not be right because of the asymmetry in the economic situations of the countries involved. It is also not clear why the analyst uses the average inflation up to end 2005 and, thereafter, decides to use the year-on-year for the analysis, “mixing apples with oranges”.

To target the exchange rate or the inflation rate
The Bank of Ghana has, on several occasions explained the conduct of its monetary policy to all stakeholders, including the IMF. The IMF has on some occasion expressed its discomfort for the relative stability of the Cedi against the other major international currencies. At one time, the Fund discussed the possibility of classifying the cedi as a fixed exchange rate, under the pretext of a general global exchange rate reclassification exercise by the Fund. The Bank of Ghana insisted that the relative stability of the cedi at the time was due to the sound macroeconomic fundamentals. With the current gradual depreciation of the cedi, one wonders whether the IMF will still want to classify Ghana’s exchange rate as fixed or crawling peg. The IMF’s view, therefore, may not be sacrosanct.

From debt write-offs to eurobond
There is no theory that once external debt write-offs have been granted under the HIPC/MDRI programmes, new donor flows to a country should be in the form of grants rather than debt. The mix in donor flows as suggested by the Bretton Woods Institutions depends on the Country Policy Institutional Assessment (CPIA) classification of strong performer, moderate performer or weak performer. Ghana, having been classified as a strong performer by the World Bank, has been won off grants, and can have more loan financing. The concessionality (or grant element) in the financing is, however, critical for a country like Ghana, and the borrowing has to be done responsibly within the overall debt sustainability policy of the country. That is exactly what Ghana is pursuing. I also would like to point out that direct budget support could be both loans and grants, while project support could also have grants in the form of project grants.

With regard to the US$ eurobond raised by Ghana from the private international capital markets, it is rather surprising that an analyst from CITI, the lead managers of the transaction could indicate that the amount was raised in a hurry.

If the analyst was part of the team that worked on the transaction he would appreciate that the whole exercise was not done in a hurry. It was a culmination of consultations and discussions since 2004, that went into the process both from home and abroad, including with the International Financial Institutions (IFIs) and the numerous market players, including CITI. Perhaps, it rather took the government a long time to finally decide on the timing and the amount, having considered prudence in spite of the fact that prospective managers made a lot of efforts to hurry Ghana to International Capital Market.

The pressure on the cedi
In my opinion, the pronouncements on the exchange rate by the CITI analyst may have an announcement effect and amount to a speculative attack on the currency. The “announcement of bad news” has been started by the CITI analyst.

The election battle field is now set
This section is mainly on the current political situation, and in my opinion, the analyst is entitled to his personal views.

I believe these comments correct some of the factual inaccuracies and set right the wrong perceptions that the report may have induced.