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Feature Article of Tuesday, 10 July 2012

Columnist: Mutaka, Alolo

Microeconomic Indicators Expose Government

Ghana’s economy since the year 2000 has seen tremendous growth, with occasional dips as is common with any developing country. In March 2001, shortly after the NPP Government came to power, his Excellency J.A Kuffour made a significant decision to join the IMF and World Bank’s Highly Indebted Poor Country programme(HIPC). This was an initiative by the World Bank and IMF aimed at reliving nations with unsustainable debt with the intention of increasing infrastructural development. This decision to join the HIPC by the NPP government was significant because, it helped reduced Ghana’s external debt from $6.1 billion to about $2 billion.

Historically, Ghana has experienced periods of high debt and high inflation as well as currency depreciation. During the year 2001, debt as a percentage of the GDP was not only unsustainably high and crippling but also deprived Ghanaians from money which could have been used for needed developmental and social projects. The benefits of the HIPC were unprecedented during the Kuffour’s regime from (2001-2008). Microeconomic indicators begun to stabilize and Ghana’s debt stock was significantly reduced by about $4 billion within that period. There were Rapid infrastructural developments as well as social and policy reforms. Ghana was then elevated from a HIPC economy to a middle income economy under the Kufour administration. The graph below indicates the trend of the reduction of government debt from the year 2000.Even a layman can see the trend in the reduction of debt as a percentage of GDP under the Kuffour’s governance.


Unfortunately, the 2001-2008 economic transformation of Ghana seems to be taking a down turn. The current NDC government under President Mills since 2008 has increased the country’s debt stock once again. Currently, Ghana’s total public debt has increased from Gh8.8 million in 2008 to GH25.8 Million. This represents a percentage of 137 of the 2008 total debt which the NDC government came to meet in power 3 years ago. This does not include debt that has recently been approved by parliament. Both domestic and public debts have been unprecedentedly increased by the Mills-led administration during a period of 3 years. This has been noted as the highest debt accumulated by any government within a period of 3 years since independence. The multi dollar question is, what has all the money been used for, when we cannot see any developmental projects? My wild guess is that part of the money has been used in the payment of judgement debts.

Dr. Bawumia, The renowned economist and the NPP presidential running mate in his speech at the Ferdinand O. Ayim Memorial Lecture in May 2012, tried to inform Ghanaians about the state of Ghana’s economy. But instead of government addressing those issues, they rather raided attacks on his personality claiming that he fabricated those figures to score political points. The state of our economy as indicated by the Dr. Bawumia is in a worse shape. Our economy is seem to be retrogressing under this current administration These assertions have been supported by Mr Amissah-Athur, the Governor of the Bank of Ghana who recently confirmed the rising debt of the nation and the instability of our currency. Ghanaweb.com on the 29 of May 2012 reported that, the IMF delegation on its recent visit to President Mills confirmed that Ghana is currently experiencing economic challenges and hardships. The IMF advised the government to take drastic measures to save the ailing economy, but obviously for the purpose of scoring cheap political points the government has not adhered to the advice of the IMF vis-a vis the continues retrogressing of the economy.

It can also be clearly noticed in the diagram above that the total debt as a percentage of GDP was clearly not sustainable and hence the decision by the kuffour government to join the HIPC initiative in 2001. After the HIPC initiative, there was a tremendous fall in the debt stock from 2001 to the year 2008 as can be seen above. The total debt which was unsustainable at 189% of our GDP in the year 2000 was brought down to about 28% by the end of the year 2008.

This is the primary reason why we should be worried as Ghanaians when government is busily compiling debt once again when the previous government worked so hard to reduce the debt stock, or more importantly, when the usage of that money cannot be visibly accounted for. Debt in itself is not much of a problem but the sustainability of that debt is what we should be worried about. Current reference could be made with the situation in the Euro zone where nations are not able to sustain their debts. Whiles the Euro zone is currently battling with the issue of rising unsustainable debt, Ghana is currently accumulating debt which cannot even be accounted for.

Like the visionary Dr. Bawumia said, y
ou cannot rule the economy with propaganda and if you try to cover things up, some of the microeconomic variables that cannot be manipulated will expose you. There is the need to concentrate on the macroeconomic aspect of the economy. The microeconomic indicators of our economy have been very volatile over the past few years.

Inflation is very vital in the development of any economy and therefore one could commend the NDC government for keeping inflation at a single digit for a while but then again it looks as if certain things does not sum up. Why do I say so? There are so many assumptions usually made in economics and one would expect inflation to at least move with some of the other micro economic variables such as interest rates, exchange rates and perhaps policy rates and most importantly the price movement of goods. In the case of our economy, inflation seems to be stable but interest rates and exchange rates are very volatile driving the prices of goods and services up, and also increasing the cost of doing business, whiles inflation still remains the same. This does not make any economic sense considering the methodology used in computing inflation digits in Ghana where consumer prices are central. This single digit inflation as reported does not reflect in the cost of living nor the interest and exchange rates as well as the prices of goods and commodities. The NPP government between the year 2000 and 2008 reduced inflation from 40.5% to 18.1% whiles stabilizing the exchange rate against the dollar within that same period with a total depreciation of 43% by the end of 2008.The private sector was also rapidly developed due to the conducive nature of doing business during that period which kept the unemployment rate very low. When the NDC government took power in 2008 the cedi/dollar exchange rate was 1.10/1 but today the cedi/dollar exchange rate sits at 1.92/1 and continues to rise. Within a period of 3 years the cedi has lost almost 90% of its value to the US dollar. This is alarming and unprecedented indeed.

Usually high inflation in Ghana is accompanied by high exchange rates with the world’s major currencies such as the US dollar. However what is surprising in recent months is the drastic fall in the value of the Ghana cedi to the major foreign currencies, and also high levels of interest rates, coupled with drastic increase in the prices of consumer products, despite the recorded stable and single digit inflation. With the discovery and export of oil, it was expected that this would even cause a Dutch disease not in terms of a fall in the manufacturing sector given its small nature, but rather to a great extent in relation to the appreciation of the Ghana cedi given the projected increased demand for it as a result of the oil discovery. This has however not been the case, and has caused some questions to be asked about the government’s ability, with the help of the Bank of Ghana to stabilise the fall in the value of our currency. The diagram below shows the graphical correlation between exchange rates of the Ghana cedi to the dollar with inflation rates. It must be noted that this is graphed based on the annual averages.


Given the difference between the absolute exchange rates and inflation rates the variables are logged in order to graph them for comparison analysis. As can be seen from the above diagram, the inflation rates from 2000 to 2007 fell significantly which was characterised with a relative slowly rising but yet stable exchange rates. However in 2008 inflation rates increased a bit as a possible result of the global financial crisis and as expected, was accompanied with an increase in exchange rates. However, in the year 2009, inflation rates fell right up to the year 2010 and even beyond but this was still associated with high exchange rates, contrary to what has been observed over the past 8 years. This makes the reported stable inflation figures questionable. One again, if you rule with propaganda, the indicators will always expose you.

Once upon a time under the Kuffour administration when Ghana became a middle income status economy (emerging economy), the Ghana Stock Exchange was adjudged the best performing exchange in the Sub Saharan Africa. However for the first quarter of 2012, the Ghana Stock Exchange was reported to be the third worse performing market in Africa by the UK based economist (unprecedented achievement). This clearly is as a result of the bad management of the economy which caused the cedi to depreciate against the dollar at a record low. Stock markets are rated in terms of returns to investors and since investors change their dollars to cedis to invest in the GSE, they lose the value of their dollar when they have to change it back to the dollar due to the high rate of depreciation of the cedi. What do we expect when the priority of a government is to pay judgement debts to its allies? Due to the economic hardship in the country, every ordinary Ghanaian now knows about the high rate of volatility in the exchange rates. In depth analysis of exchange rates and inflation rates of the economy as well as the performance of our financial market is a story for another day. In my candid opinion, this unprecedented and gargantuan mismanagement of our economy is purely as a result of bad and very poor leadership by president Mills and the NDC government. The NPP has proven beyond doubt their capability in the management of the economy and I believe come December 7, 2012, Ghanaians would give the mandate to Nana Akuffo Ado and Dr Bawumia for vigorous economic transformation. I believe the youth of Ghana would vote based on policies and economic performance but not based on propaganda by the NDC.

Long live Ghana! Long live NPP.

Alolo Mutaka, member NPP Communications Team,UK/Ireland

@aloloakamu on twitter
+44 (0)7760657934

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