Ghana’s economy sluggish, operating below potential – CEPA

The policy think tank, Centre for Policy Analysis (CEPA) has said Ghana’s economy is sluggish and currently operating below its potential.

Indicating it has drawn attention to the fact that the current stabilization programme emphasizes Macroeconomic Stability with Growth rather than Growth with Macroeconomic Stability, CEPA warns that the sluggish pace in economic activity has implications for economic growth in the non-oil sector in 2010.

According to the think tank the anticipated slow growth in 2010 following 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.

Warning the country about the possibilities of debt unsustainability,  CEPA said it is important, to keep an eye on debt sustainability in order to avoid getting back to the heavily indebted poor country (HIPC) status. The economy must therefore grow to signify its ability to service Ghana’s public debt (internal and external) obligations. Currently, Ghana’s public debt is high compared to countries of similar characteristics, CEPA said.

CEPA which is publishing its Mid-term Report on the Economy for 2010 Wednesday October 20, 2010 captures the following challenges among others:

It says on fiscal operations that the ‘ambitious’ budget deficit target set for 2010 under the stabilization programme is proving difficult to achieve on account of lower expected revenues and increased expenditure outturns.

CEPA is of the view that compressing expenditures in the short-run is nearly impossible because of downward rigidities in the nature of expenditures that are contractual (wage-related expenditures, development projects), mandatory (interest rates ─ domestic and external), and statutory (because the constitution and law require payments to certain Funds). Failure to fulfill such expenditure obligations may result in delays in payments, stoppage of projects, payment arrears or even the bouncing of government cheques, it warned.

On the issue of monetary sector developments, CEPA indicated that in the Ghanaian context, monetary policy gets ‘overwhelmed and ineffective’ when budgetary policy is too expansionary. If fears or concerns about inflation would mean restrictions on the availability of credit, then the borrowing requirements of government (if big), would imply that the private sector could be crowded out, resulting in high interest rates and lending rates.

It warned that for the indigenous small-to-medium scale enterprises (SMEs) such high lending rates and interest rates could have implications for economic growth in terms of output and job losses. On the other hand, if the Bank of Ghana (BOG) tries to accommodate by increasing the availability of credit, then the inflation rate is likely to pick up ─ as experienced between mid-2008 and mid-2009 when inflation increased from 15 percent to 20 percent, CEPA said.

According to CEPA, “if this is not controlled, then interest rates would increase some more.”

Adding that, unfortunately, ‘monetary policy easing’ since November 2009 has not produced the desired impact on the economy. This is because challenges still remain with respect to the transmission of continued reductions in the monetary policy rate to lending rates of commercial banks.

Moreover, high stocks of the non-performing loans (NPLs) ─ currently estimated at about 20 percent of outstanding loans ─ have been impairing commercial banks’ delivery of credit to the private sector, contributing to slower private sector credit growth, it said.

By Emmanuel K. Dogbevi

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