Inflation Rate Drops Further

... As Government Spending Moves Above 2008 Level

Inflation rate for July 2010 has dropped to a record 9.46 per cent despite the over 50 per cent increase in government expenditure in 2010.

Inflation reached 18.1% in December 2008 as a result of demand pressures arising from the fiscal expansion stance of the previous government and rising crude oil prices. This led to a build-up of strong inflationary pressures in the economy, which caused the inflation rate to continue to rise in the first half of 2009, reaching an all time high of 20.7% in June. The inflation was also fuelled by the weakened domestic currency, which lost more than 30% of its value against the dollar between July 2008 and June 2009.

Since June 2009, however, the inflation rate has been on a steady decline, reaching 16% in December 2009. By June this year, the inflation rate had dropped to 9.5% and we expect the rate to reach, at least, 7% by December this year.

The notion that government is holding back payments to creditors which has caused the inflation rate to decline and is also starving commercial banks of cash inflow, thereby making it difficult for the banks to reduce their lending rates is not only false but a complete misrepresentation of the facts.

Contrary to what the critics believe in, government expenditure is rather on the increase as depicted in the Tables below.

• Total government expenditure in 2008 was GH¢8.2 billion. Compared to GH¢9.1 billion spent in 2009 gives an increase of 11% over the 2008 expenditure;

• Total government expenditure in the first half of 2008 was GH¢3.6 billion. The corresponding figure for 2009 was GH¢4.2 billion and for 2010 it was GH¢5.4 billion. This represents an increase of 16.7% in 2009 and 50% in 2010 over the 2008 level;

• Government capital expenditure in 2008 was GH¢1.9 billion. The corresponding figure for 2009 was GH¢2.1 billion. Government capital spending in the first half of 2008 amounted to GH¢855.7 million. The expenditure for the corresponding period in 2009 was GH¢1.0 billion and in this year also GH¢1.0 billion.

• Spending on goods and services totalled GH¢648 million in 2008 compared to the GH¢621 million in 2009. For the first half of this year a total of GH¢428 million has been spent on goods and services.

In fact, the government has been ingenious by front loading certain expenditures not only to alleviate the hardships in the economy but also to promote growth. For example, the government brought forward the disbursement of agriculture investment budget to fund agricultural activities which usually end by May-June every year, something that has never been done before. Arrears amounting to GH¢160 million owed to road contractors and dating back in 2008 were also paid enblock in January this year.

In 2009, total arrears relating to 2008 that were paid amounted to GH¢626 million, bringing together a total of GH¢786 million of 2008 arrears since January 2009. The government also paid GH¢445 million out of the total GH¢848.4 million of the Tema Oil Refinery debt owed to Ghana Commercial Bank in April this year. In addition, debt servicing costs amounting to GH¢1,749 million have been paid since January 2009.

In all, the current government has spent GH¢2,980 million since January 2009 to liquidate part of the huge debts left by the previous government. The Mills led administration has also been current on transfers to statutory bodies such as the DACF, GetFund, and the NHIS.

The steady decline in the inflation rate is attributed principally to the prudent fiscal management by the current government, good agricultural policies (causing good food harvest), continued monetary restraint, and declining world oil prices.

Indeed food inflation has dropped from 15.4% in June 2009 to 6.1% in June this year. Over the same period, non-food inflation dropped from 24.7% to 11.9%. The appreciation of the Cedi has also contributed significantly in lowering inflation in the country.

The fact is that, budgeting is about making choices in the face of scare resources. Budget execution should therefore recognize the need to link spending to prioritized choices based on approved and available resources. The desire for accelerated growth should not blindfold us into engaging in unfunded and wasteful expenditures that would create serious turbulence on the economic landscape with disastrous consequences as happened in the country before January 2009.

ISSUED BY ABDUL HAKIM AHMED,

MEDIA LIAISON MINISTRY OF FINANCE AND ECONOMIC PLANNING

THE NEWS EDITOR