Lower global commodity prices and a stable currency would aid the decline of Ghana’s inflation to 9.2 per cent in 2012, a United Kingdom Economist Intelligence Unit (EIU) Country Report on Ghana has revealed.
The report indicates that the surge in oil exports would bring the current-account deficit down to 4.4 per cent of Gross Domestic Product (GDP) in 2011, whilst the start of oil production and related activity in 2011 would push Ghana’s economic growth up to 8.9 per cent.
According to the EIU report made available to the Ghana News Agency in Accra on Thursday, the main challenge for economic policy of the country over the period would be on how to regain control of public finances.
The report said government was well aware that fiscal policy management needed to improve, but pressing local demand for greater development spending, not to mention public-sector pay increases, would mean that there would be slippages on the fiscal targets laid out by the IMF in particular.
It noted that government’s plans to improve fiscal management were mostly realistic and the overall fiscal deficit was expected to come down to 6.1 per cent of GDP in 2011.
The deficit is expected to increase moderately in 2012, to 6.4 per cent of GDP, as the government loosens policy slightly as elections approach.
Donors are likely to overlook minor lapses, but they would be less tolerant of any further large-scale build-up of arrears.
Overall, economic policy during the forecast period would continue to focus on improving the management of public expenditure, increasing revenue collection, developing the business environment, reducing poverty and extending credit and support for the private sector.
The report acknowledged government’s efforts to bring down the fiscal deficit from 2011 to 2012, which according to the report will be aided by strong growth in the economy, and tax inflows.
However, there is the need to widen the tax net to take more generally by cutting numerous exemptions, revisiting tax agreements with mining companies and integrating the various government agencies that currently collect taxes in order to improve efficiency.
This was a theme for the 2011 Budget and its importance was highlighted by the revision of GDP, as tax revenue as a share of GDP is now below 14 per cent, low even by African standards.
The report shows that the onset of oil production in 2011 would provide a small boost to tax revenue but, confirmed that as the 2011 Budget acknowledged, the impact would not represent a panacea for government finances.
Indeed, much of the revenue generated by the oil industry during the early years of production would go towards reducing the domestic payment arrears that grew heavily in 2008 and remained large in 2009 and 2010.
According to the report, the government therefore faced a difficult task in managing the expectations of the electorate over what could be achieved with the oil revenue.
“The government is committed to restraining spending growth and has shown it’s willingness to make some unpopular moves, such as reducing fuel subsidies.
“However, data for 2010 showed that revenue has come in below budget and expenditure above as the government struggles to balance its commitments of tightening fiscal policy and fostering growth,” the report indicated.
The report revealed that the government was likely to consider issuing another Eurobond, “although this would need to be designed in conjunction with the International Monetary Fund (IMF) to comply with the Fund’s conditions for funding.”
The Bank of Ghana (BoG), the Central Bank, faces partly contradictory monetary policy aims, namely containing inflation while fostering economic growth.
As inflation ebbed recently, and with the central bank concerned over sluggish economic output, it has made numerous cuts to its discount rate, which fell from 18 per cent at the end of 2009 to 13.5 per cent by the end of 2010.
However, whether these cuts would translate into increased lending during the forecast period is unclear, especially as lending rates at the commercial banks have been slow to follow the BoG’s lead so far, owing to structural constraints in the sector such as a poor legal infrastructure.
Lending rates may start to fall now that the Government is starting to clear its arrears with local contractors, allowing banks to recover bad debts, but this would take time to resolve itself.
Against this, the BoG would need to manage building inflationary pressures and the extra liquidity stemming from the onset of oil exports, and policy tightening may be required.