After two consecutive years of austerity driven deflationary economic policies, Ghanaians can at last afford to look towards some degree of respite in 2011, reports TOMA IMIRHE.
The average man or woman on the street can take heart from the optimism expressed by both public and private sector chieftains that liquidity will return to the economy from this year as government opens its spending taps again. Basically they attribute this to the expected new revenues from oil and gas production. Of course the actual situation is more complex but still gives no less cause for optimism.
To be sure, the Mills administration has good reason to be confident enough to begin loosing the tight rein with which it has held back fiscal spending so far. Simply put, the travails through which Ghanaians have gone over the past two years have yielded considerable dividends as macro-economic stability has more or less been restored.
Having inherited a fiscal deficit of a record high of 14.8% of Gross Domestic Product incurred in 2008, last year’s deficit was a little below 10% despite the heavy unbudgeted extra costs resulting from starting the implementation of a new single spine salary structure for the public sector which ultimately will see government’s overall wage bill double. The trade deficit of 20% of GDP recorded in 2008 has been halved and the runaway depreciation of the cedi against the US dollar – nearly 40% over the 18-months between the beginning of 2008 and mid-2009 – has been stemmed with the cedi now stable against the US dollar.
Inflation has been cut from about 20% at the beginning of 2009 to 8.58% as at the end 2010 although domestic interest rates have fallen somewhat more slowly. Importantly, though bank credit to the private sector has begun to rise again as macro-economic stability is restored. Equally importantly, Ghana’s gross foreign reserves, which had fallen to barely 1.8 months of import cover by the beginning of 2009, now stand at about three months import cover.
Even as all this has been achieved, Ghana has discovered that the national economy is much bigger than hitherto thought. The rebasing of GDP computations to include forestry plantation, mobile telecommunications as well as oil exploration has increased the actual size of the economy, as captured by the GDP computations by about a third, by taking into account economic activities that hitherto were ignored in the calculations. This means that the Ghanaian economy has a much bigger capacity to absorb new fiscal spending, new private and public sector investment and new debt than earlier thought.
Indeed the ratio of Ghana’s US$19.4 billion public debt to GDP, which prior to the rebasing stood at 57.2% has consequently fallen to below 30%. Now the Mills administration can look at how to put this newly uncovered extra capacity to use in attracting new debt investment finance to fuel growth.
Add to all this, the fact that prices for Ghana’s traditional exports remain firm. By the beginning of the year, gold, which accounts for roughly one-third of Ghana’s merchandise trade exports, was selling on international markets at a high of US$1,368 an ounce. Cocoa too which also contributes another one-third of export earnings is also enjoying relatively high international market price of US$2,850 per tonne by early January this year. Cocobod expects cocoa production for the 2010/11 season to be good, indeed better than the previous season’s production of 632,024 tonnes, which, although down to 67,000 tonnes from the 2008 season, was still high, in historical terms.
But the biggest cause for optimism among Ghanaians is the commencement of commercial production of oil, since December last year. Ghana conservatively only expects to make about half a billion dollars from oil exports this year, and those revenues will only account for about 6% of government’s overall income for 2011. However, much more importantly, Ghana’s oil production will at least partly compensate for the heavy expenditure hitherto made on importing crude oil, mainly from neighbouring Nigeria.
About one-third of Ghana’s merchandise trade import bill goes into oil imports and this tends to rise to about two-fifths when crude oil prices approach or exceed US$100 a barrel such as is the case currently. Indeed, the single biggest threat to Ghana’s economic fortunes has been a surge in crude oil prices on the international market as the consequent rise in the import bill widens the trade deficit, depletes gross foreign reserves and puts pressure on the external value of the cedi, as well as forces government to introduce some level of subsidy which in turn increases its fiscal deficit. With Ghana now becoming an oil producer, the country can now enjoy some level of protection from this dire situation.
This means that Ghana can now engage in economic expansionism without having its necessarily resulting in an unmanageable trade deficit as has usually been the case in the past.
Of course, the Mills administration also has political motivation to move forward from concentrating on the restoration of macro-economic stability to an increased focus on economic growth; after two years of somewhat unpopular, although necessary deflationary economic policies, the government knows it needs to give the electorate more to cheer about ahead of the next general elections, less than two years from now, in December 2012. This will require stepping up spending to put more liquidity into the economy. Government aims to do this partly through the salary increases for the public sector by way of implementing the single spine salary structure, but more pivotally by increased spending on infrastructure. Here, government is not only looking at increased spending of its own internally generated resources but also at securing and using more foreign aid.
Crucial to government’s plans in this regard is China with which it has signed two multi-billion dollar framework agreements. Now the Mills administration anticipates massive Chinese investments in Ghana’s infrastructure in the areas of roads, highways, energy, water, education and the likes.
Public expenditure in 2011 is projected at GH¢12,670.8 million, (or 40.7% of GDP) which is about 15% above what government spent in 2010. Government hopes that it can accommodate this spending increase and at the same time cut the overall fiscal deficit down to 7.5% of GDP. This, in part is expected to further slash inflation marginally from 8.58% as at December last year, to 8.5% by the end of this year. All this is expected to propel real GDP growth to a record high 12%, with the oil sector accounting for 5% of this and the non-oil sectors accounting for the other 7%.
The prospects for significantly improved liquidity are not in doubt but the economic growth projections are more contentious. Dr. Kwadwo Tutu, a Senior Research Fellow at the Institute for Economic Affairs, regards the 12% GDP growth target as too ambitious given that oil revenues for 2011 are now projected at US$448 million, down from the US$1.4 billion originally expected. This view is echoed in an analysis presented by PriceWaterCoopers, the audit and management consulting firm, which says that “while the proposed initiatives in the budget are aimed at stimulating growth the 2011 GDP growth target of 12.3% seems ambitious.” The audit firm’s analysis points out that the activities in the oil and gas sector will only just be starting in 2011 so expecting 5% growth from that sector alone seems overly ambitious.
However government remains confident that its ambitious growth targets will be met this year. Patrick Kyei, Director of Budget at the Ministry of Finance and Economic Planning, says that the growth projection is feasible, given that it accounts fully for the investment and spending that will accompany the initial full year of oil production. This optimism is shared by Michael Cobblah, Ghana country representative of Ecobank Development Corporation, who opines that “the GDP growth rate of 12.3% including oil is achievable and could even be improved upon, particularly through aggressive infrastructural development.”
Instructively, capital expenditure by government for 2011 is projected at GH¢3.75 billion which represents 29.6% of the total budgeted spending and amounts to 12% of GDP.
Whether or not government’s growth targets are met, though, there will most likely be a price to pay in the form of higher inflation. Economic analysts agree that during the first half of the year, inflation is likely to creep upwards in the face of the inevitable pass-along effects of the 30% increase in petroleum prices effected at the beginning of the year, and the expected general rise in liquidity available in the economy, as government increases its spending rate.
Here, both demand pull and cost push inflation can be expected to take hold. Cost push inflation can be expected to occur on several fronts. Apart from the rising cost of petroleum product prices due to the price surge in crude oil on the international markets, the economy will have to cope with the cost push effects of higher wage bills, (and consequently higher overall operating costs) for state-owned utility providers which would either translate into higher tariffs or put pressure on government’s fiscal deficit as it picks up those higher wage tabs without a commensurate increase in revenues.
Also, the tax reforms introduced in the budget will have a cost-push inflationary effect as well as a demand pull one. The cost push aspects will come from a plethora of new taxes on business activities. One is a 20% environmental tax on plastic packaging materials and products excluding bottled water. Besides this, the five-year tax exemption for real estate developers has been abolished (except for those who partner the Ministry of Water Resources, Works and Housing to provide affordable housing – need as STX) and tax exemptions for the hotel and hospitability industry have been thrown out of the window too, which means housing and hospitality services will cost more too. The communications service tax, hitherto only paid by mobile telephony networks, has been extended to all companies and it is unlikely that they will all absorb the tax themselves rather than pass it along to consumers like the mobile telephony companies have done.
Add to all this the extension of the National Fiscal Stabilization Levy by another one year and an increase in the Tema Oil Refinery Debt Recovery Levy, both of which will translate into higher product and service prices.
Then there is the demand pull inflation that will result from more liquidity in the economy. One source of this will be the further implementation of the Single Spine Salary Structure for public sector workers. It is instructive that GH¢3,732/8 million – about two-fifths of governments projected recurrent expenditure for 2011 of GH¢8,924.9 million will go into paying public sector workers, this being nearly double government’s previous wage bill. The new liquidity being created from this will be enhanced by the fact that the new salaries are being back-dated to January 2010 when the new pay structure was supposed to have taken off, with the back-log of salary arrears to be paid in lump-sum tranches.
While business taxes are on the rise, personal taxes are going in the opposite direction as personal income tax reliefs have been reviewed upwards, covering marriage and dependent responsibility, old age, child education, aged dependent relatives and training costs. This means more disposable income, which is available to go into more demand for goods and services, another potential source of demand pull inflation.
Rising inflation would in turn stem the interest rates cuts that the economy has enjoyed through 2010. Ghana’s banks are notoriously much more willing to react to rising benchmark interest rates than falling ones, and this is on the cards in 2011.
But although businesses rate the high cost of borrowing as one of their biggest problems they will not complain very much if slightly higher loan costs are accompanied by significantly improved demand for their goods and services. Neither will consumers, complain very much if they have to pay a bit more for the goods and services they demand but they have significantly more money in their pockets to pay for them. Which is why 2011 holds the promise of higher inflation, but happier times for businesses and their customers alike.
The average man or woman on the street can take heart from the optimism expressed by both public and private sector chieftains that liquidity will return to the economy from this year as government opens its spending taps again. Basically they attribute this to the expected new revenues from oil and gas production. Of course the actual situation is more complex but still gives no less cause for optimism.
To be sure, the Mills administration has good reason to be confident enough to begin loosing the tight rein with which it has held back fiscal spending so far. Simply put, the travails through which Ghanaians have gone over the past two years have yielded considerable dividends as macro-economic stability has more or less been restored.
Having inherited a fiscal deficit of a record high of 14.8% of Gross Domestic Product incurred in 2008, last year’s deficit was a little below 10% despite the heavy unbudgeted extra costs resulting from starting the implementation of a new single spine salary structure for the public sector which ultimately will see government’s overall wage bill double. The trade deficit of 20% of GDP recorded in 2008 has been halved and the runaway depreciation of the cedi against the US dollar – nearly 40% over the 18-months between the beginning of 2008 and mid-2009 – has been stemmed with the cedi now stable against the US dollar.
Inflation has been cut from about 20% at the beginning of 2009 to 8.58% as at the end 2010 although domestic interest rates have fallen somewhat more slowly. Importantly, though bank credit to the private sector has begun to rise again as macro-economic stability is restored. Equally importantly, Ghana’s gross foreign reserves, which had fallen to barely 1.8 months of import cover by the beginning of 2009, now stand at about three months import cover.
Even as all this has been achieved, Ghana has discovered that the national economy is much bigger than hitherto thought. The rebasing of GDP computations to include forestry plantation, mobile telecommunications as well as oil exploration has increased the actual size of the economy, as captured by the GDP computations by about a third, by taking into account economic activities that hitherto were ignored in the calculations. This means that the Ghanaian economy has a much bigger capacity to absorb new fiscal spending, new private and public sector investment and new debt than earlier thought.
Indeed the ratio of Ghana’s US$19.4 billion public debt to GDP, which prior to the rebasing stood at 57.2% has consequently fallen to below 30%. Now the Mills administration can look at how to put this newly uncovered extra capacity to use in attracting new debt investment finance to fuel growth.
Add to all this, the fact that prices for Ghana’s traditional exports remain firm. By the beginning of the year, gold, which accounts for roughly one-third of Ghana’s merchandise trade exports, was selling on international markets at a high of US$1,368 an ounce. Cocoa too which also contributes another one-third of export earnings is also enjoying relatively high international market price of US$2,850 per tonne by early January this year. Cocobod expects cocoa production for the 2010/11 season to be good, indeed better than the previous season’s production of 632,024 tonnes, which, although down to 67,000 tonnes from the 2008 season, was still high, in historical terms.
But the biggest cause for optimism among Ghanaians is the commencement of commercial production of oil, since December last year. Ghana conservatively only expects to make about half a billion dollars from oil exports this year, and those revenues will only account for about 6% of government’s overall income for 2011. However, much more importantly, Ghana’s oil production will at least partly compensate for the heavy expenditure hitherto made on importing crude oil, mainly from neighbouring Nigeria.
About one-third of Ghana’s merchandise trade import bill goes into oil imports and this tends to rise to about two-fifths when crude oil prices approach or exceed US$100 a barrel such as is the case currently. Indeed, the single biggest threat to Ghana’s economic fortunes has been a surge in crude oil prices on the international market as the consequent rise in the import bill widens the trade deficit, depletes gross foreign reserves and puts pressure on the external value of the cedi, as well as forces government to introduce some level of subsidy which in turn increases its fiscal deficit. With Ghana now becoming an oil producer, the country can now enjoy some level of protection from this dire situation.
This means that Ghana can now engage in economic expansionism without having its necessarily resulting in an unmanageable trade deficit as has usually been the case in the past.
Of course, the Mills administration also has political motivation to move forward from concentrating on the restoration of macro-economic stability to an increased focus on economic growth; after two years of somewhat unpopular, although necessary deflationary economic policies, the government knows it needs to give the electorate more to cheer about ahead of the next general elections, less than two years from now, in December 2012. This will require stepping up spending to put more liquidity into the economy. Government aims to do this partly through the salary increases for the public sector by way of implementing the single spine salary structure, but more pivotally by increased spending on infrastructure. Here, government is not only looking at increased spending of its own internally generated resources but also at securing and using more foreign aid.
Crucial to government’s plans in this regard is China with which it has signed two multi-billion dollar framework agreements. Now the Mills administration anticipates massive Chinese investments in Ghana’s infrastructure in the areas of roads, highways, energy, water, education and the likes.
Public expenditure in 2011 is projected at GH¢12,670.8 million, (or 40.7% of GDP) which is about 15% above what government spent in 2010. Government hopes that it can accommodate this spending increase and at the same time cut the overall fiscal deficit down to 7.5% of GDP. This, in part is expected to further slash inflation marginally from 8.58% as at December last year, to 8.5% by the end of this year. All this is expected to propel real GDP growth to a record high 12%, with the oil sector accounting for 5% of this and the non-oil sectors accounting for the other 7%.
The prospects for significantly improved liquidity are not in doubt but the economic growth projections are more contentious. Dr. Kwadwo Tutu, a Senior Research Fellow at the Institute for Economic Affairs, regards the 12% GDP growth target as too ambitious given that oil revenues for 2011 are now projected at US$448 million, down from the US$1.4 billion originally expected. This view is echoed in an analysis presented by PriceWaterCoopers, the audit and management consulting firm, which says that “while the proposed initiatives in the budget are aimed at stimulating growth the 2011 GDP growth target of 12.3% seems ambitious.” The audit firm’s analysis points out that the activities in the oil and gas sector will only just be starting in 2011 so expecting 5% growth from that sector alone seems overly ambitious.
However government remains confident that its ambitious growth targets will be met this year. Patrick Kyei, Director of Budget at the Ministry of Finance and Economic Planning, says that the growth projection is feasible, given that it accounts fully for the investment and spending that will accompany the initial full year of oil production. This optimism is shared by Michael Cobblah, Ghana country representative of Ecobank Development Corporation, who opines that “the GDP growth rate of 12.3% including oil is achievable and could even be improved upon, particularly through aggressive infrastructural development.”
Instructively, capital expenditure by government for 2011 is projected at GH¢3.75 billion which represents 29.6% of the total budgeted spending and amounts to 12% of GDP.
Whether or not government’s growth targets are met, though, there will most likely be a price to pay in the form of higher inflation. Economic analysts agree that during the first half of the year, inflation is likely to creep upwards in the face of the inevitable pass-along effects of the 30% increase in petroleum prices effected at the beginning of the year, and the expected general rise in liquidity available in the economy, as government increases its spending rate.
Here, both demand pull and cost push inflation can be expected to take hold. Cost push inflation can be expected to occur on several fronts. Apart from the rising cost of petroleum product prices due to the price surge in crude oil on the international markets, the economy will have to cope with the cost push effects of higher wage bills, (and consequently higher overall operating costs) for state-owned utility providers which would either translate into higher tariffs or put pressure on government’s fiscal deficit as it picks up those higher wage tabs without a commensurate increase in revenues.
Also, the tax reforms introduced in the budget will have a cost-push inflationary effect as well as a demand pull one. The cost push aspects will come from a plethora of new taxes on business activities. One is a 20% environmental tax on plastic packaging materials and products excluding bottled water. Besides this, the five-year tax exemption for real estate developers has been abolished (except for those who partner the Ministry of Water Resources, Works and Housing to provide affordable housing – need as STX) and tax exemptions for the hotel and hospitability industry have been thrown out of the window too, which means housing and hospitality services will cost more too. The communications service tax, hitherto only paid by mobile telephony networks, has been extended to all companies and it is unlikely that they will all absorb the tax themselves rather than pass it along to consumers like the mobile telephony companies have done.
Add to all this the extension of the National Fiscal Stabilization Levy by another one year and an increase in the Tema Oil Refinery Debt Recovery Levy, both of which will translate into higher product and service prices.
Then there is the demand pull inflation that will result from more liquidity in the economy. One source of this will be the further implementation of the Single Spine Salary Structure for public sector workers. It is instructive that GH¢3,732/8 million – about two-fifths of governments projected recurrent expenditure for 2011 of GH¢8,924.9 million will go into paying public sector workers, this being nearly double government’s previous wage bill. The new liquidity being created from this will be enhanced by the fact that the new salaries are being back-dated to January 2010 when the new pay structure was supposed to have taken off, with the back-log of salary arrears to be paid in lump-sum tranches.
While business taxes are on the rise, personal taxes are going in the opposite direction as personal income tax reliefs have been reviewed upwards, covering marriage and dependent responsibility, old age, child education, aged dependent relatives and training costs. This means more disposable income, which is available to go into more demand for goods and services, another potential source of demand pull inflation.
Rising inflation would in turn stem the interest rates cuts that the economy has enjoyed through 2010. Ghana’s banks are notoriously much more willing to react to rising benchmark interest rates than falling ones, and this is on the cards in 2011.
But although businesses rate the high cost of borrowing as one of their biggest problems they will not complain very much if slightly higher loan costs are accompanied by significantly improved demand for their goods and services. Neither will consumers, complain very much if they have to pay a bit more for the goods and services they demand but they have significantly more money in their pockets to pay for them. Which is why 2011 holds the promise of higher inflation, but happier times for businesses and their customers alike.
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