By Kofi AHOVI
The Centre for Policy Analysis (CEPA) has cautioned that government’s continuous obsession to strengthen the cedi will in the long run hurt the agricultural and manufacturing sectors.
It further added that government’s concentration on strengthening the cedi may push the country towards the Dutch disease phenomenon.
The Executive Director of CEPA, Dr. Joe Abbey, who made the call at the launch of its 2010 mid-term report on the economy, observed that over strengthening of the cedi may eventually kill the manufacturing industry.
The Dutch disease phenomenon occurs when the discovery of a natural resource raises the value of that nation's currency, making manufactured goods less competitive with other nations. It also leads to the increase in imports and a subsequent decrease in exports.
The cedi, though gaining grounds slowly, analysts say will gain some more credit against the dollar and the pound.
“The cedi is getting stronger and stronger. From the consumer perspective, this is a good thing because it means that you can buy more cheaply than before, but from the producer perspective, you are losing competitiveness and this is what we should worry about. Moreover, as you head towards the oil economy, the likely resolve is that the oil foreign exchange resource will give a further boost to strengthening of the Ghanaian cedi,” Dr. Abbey observed.
CEPA also asked government to be vigilant over the huge build-up in public debt, which could erode economic gains.
According to CEPA, it is important for government to keep an eye on debt sustainability in order to avoid getting back to the heavily indebted poor country (HIPC) status.
The public debt stock, after falling sharply on account of the highly indebted poor country (HIPC) initiative and the multilateral debt relief initiative involving external debt cancellation, debt forgiveness and debt relief, rose from $9.2 billion in 2009 by a little over $1.0 billion to $10.3 billion at end-June 2010.
Dr. Abbey said there is the likelihood that the debt could rise to unsustainable levels, unless the economy expands and grows to enable government to service the debt.
"In respect of budgetary operations, the outlook points to a 2010 deficit at least as large as that of 2009 - missing the target by a wider margin than in 2009," he said, citing increase in public sector policy due to full implementation of the Single Spine Pay Policy Structure.
He said the public sector wage bill for 2010 would increase by more than the 17% projected.
Interest payments would also be higher than projected because of the higher size of borrowing and higher cost of borrowing by government. Without further net accumulation of payment arrears, development spending would also exceed its target.
Government has projected a deficit target of 8% of GDP for 2010.
Dr. Abbey said the upward revision from 6% of GDP was a reflection of "a less favourable outlook for tax revenues, as well as upward revisions to domestic interest expenditures," as was the case in 2009.
On the fiscal operations, he noted that the 'ambitious' budget deficit target set for 2010, under the stabilization programme, was proving difficult to achieve on account of lower expected revenues and increased expenditure outturns.
“This coupled with the anticipated slow growth in 2010 after that of 2009 implies that the process of fiscal consolidation, the driving force in the stabilization programme may not be sustainable since tax revenue targets set on assumptions of higher growth may not be achieved,” he noted.
On inflation, Dr. Abbey said the current inflation targeting policy had restricted the availability of credit which has crowded out the private sector due to high interest and lending rates.
The Centre for Policy Analysis (CEPA) has cautioned that government’s continuous obsession to strengthen the cedi will in the long run hurt the agricultural and manufacturing sectors.
It further added that government’s concentration on strengthening the cedi may push the country towards the Dutch disease phenomenon.
The Executive Director of CEPA, Dr. Joe Abbey, who made the call at the launch of its 2010 mid-term report on the economy, observed that over strengthening of the cedi may eventually kill the manufacturing industry.
The Dutch disease phenomenon occurs when the discovery of a natural resource raises the value of that nation's currency, making manufactured goods less competitive with other nations. It also leads to the increase in imports and a subsequent decrease in exports.
The cedi, though gaining grounds slowly, analysts say will gain some more credit against the dollar and the pound.
“The cedi is getting stronger and stronger. From the consumer perspective, this is a good thing because it means that you can buy more cheaply than before, but from the producer perspective, you are losing competitiveness and this is what we should worry about. Moreover, as you head towards the oil economy, the likely resolve is that the oil foreign exchange resource will give a further boost to strengthening of the Ghanaian cedi,” Dr. Abbey observed.
CEPA also asked government to be vigilant over the huge build-up in public debt, which could erode economic gains.
According to CEPA, it is important for government to keep an eye on debt sustainability in order to avoid getting back to the heavily indebted poor country (HIPC) status.
The public debt stock, after falling sharply on account of the highly indebted poor country (HIPC) initiative and the multilateral debt relief initiative involving external debt cancellation, debt forgiveness and debt relief, rose from $9.2 billion in 2009 by a little over $1.0 billion to $10.3 billion at end-June 2010.
Dr. Abbey said there is the likelihood that the debt could rise to unsustainable levels, unless the economy expands and grows to enable government to service the debt.
"In respect of budgetary operations, the outlook points to a 2010 deficit at least as large as that of 2009 - missing the target by a wider margin than in 2009," he said, citing increase in public sector policy due to full implementation of the Single Spine Pay Policy Structure.
He said the public sector wage bill for 2010 would increase by more than the 17% projected.
Interest payments would also be higher than projected because of the higher size of borrowing and higher cost of borrowing by government. Without further net accumulation of payment arrears, development spending would also exceed its target.
Government has projected a deficit target of 8% of GDP for 2010.
Dr. Abbey said the upward revision from 6% of GDP was a reflection of "a less favourable outlook for tax revenues, as well as upward revisions to domestic interest expenditures," as was the case in 2009.
On the fiscal operations, he noted that the 'ambitious' budget deficit target set for 2010, under the stabilization programme, was proving difficult to achieve on account of lower expected revenues and increased expenditure outturns.
“This coupled with the anticipated slow growth in 2010 after that of 2009 implies that the process of fiscal consolidation, the driving force in the stabilization programme may not be sustainable since tax revenue targets set on assumptions of higher growth may not be achieved,” he noted.
On inflation, Dr. Abbey said the current inflation targeting policy had restricted the availability of credit which has crowded out the private sector due to high interest and lending rates.
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