Dutch Disease Dawns – CEPA

The Centre for Policy Analysis (CEPA) has indicated that there is evidence of the so-called ‘Dutch Disease’ in Ghana.

In its latest publication, ‘Ghana’s Economic Review and Outlook 2013 and the Dawn of the Dutch Disease,’ which would be launched on Thursday in Accra, CEPA said the increasing loss of international competitiveness of exporting and import-competing activities in Ghana’s non-oil sector and the loss of factors of production into oil-related sub-sectors of the services sector, coupled with the consequent slowdown in the tempo of activity or growth rates and the threat of rising unemployment bore testimony to the onset of the ‘disease.’

“In the short to medium-term, the remedy against the unfolding ‘Dutch Disease’ is to focus on reducing the costs of doing business and increasing productivity in Ghana.”

It however noted that the Ghana Cedi – US dollar crisis had been brought under control.

“Over the first half of this year, the cedi lost about 20 percent of its value against the US dollar in the foreign exchange markets. It stabilized somewhat between July and August, reaching a peak of GH¢1.9565 per US dollar in late-August, and thereafter gradually gained in value /recovered to the current GH¢1.8938 by mid-October.

“Barring any adverse developments, CEPA projects an end-year rate of GH¢1.85 per US dollar. For the year as a whole this would mean a cumulative loss in the value of the cedi by about 13 percent.”

It noted that the weakening of the cedi in the first half of the year could largely be attributed to the political business cycle a characteristic of democracies around the world which is also observed in the Fourth Republic of Ghana.

It largely manifests itself in election years, resulting in the loss of macroeconomic stability, continued loss in the value of the cedi and rising inflation.

A World Bank study, for example, found that the election year budget deficit has been on average, 1.5 percentage points of GDP higher than the budget deficit of the preceding year.

“The Executive Board of the IMF met to review the performance and outlook of the three-year stabilization programme. It concluded by endorsing the macroeconomic policies of the government and by end-July disbursed US$178.74 million. This endorsement gave credibility to the commitment to fiscal discipline of the government and support for the monetary policy measures of the Bank of Ghana.

“As a result, prices of Ghana’s 10-year Eurobond rose in secondary markets and their yields dropped to 6 percent compared with the initial coupon rate of 8.5 percent per annum. Moreover, the second 5-year bond issued in August 2012 was highly oversubscribed with additional finances amounting to GHC590 million, and most importantly at a fixed interest rate of 23 percent per annum compared to the 26 percent per annum in the earlier 5-year bond issue of June.”

It said the Minister of Finance & Economic Planning reiterated the commitment of government to use these additional resources not to finance a larger fiscal deficit but lengthen the maturity of the public debt.

“If this is done, it should enable a lowering of the yields of the shorter maturities, particularly the 91-day Treasury bill, from the present 23 percent to about 20 percent. This provides an opportunity for aligning the monetary policy rate (MPR) of the Bank of Ghana with the domestic interest rate structure without signaling an increase in lending rates and not in any way disturbing the strengthening in the value of the cedi as projected by CEPA for the rest of the year.”