CEPA discusses economic crisis

Lack of complementarily between fiscal and monetary policies has contributed to Ghana's current economic problems, Dr. Joe Abbey, Executive Director of the Center for Policy Analysis (CEPA), made this statement at a forum for economic think tanks in Accra.

Dr. Abbey said the current situation, especially the rapid depreciation of the cedi, arises from the failure of economic and financial managers to develop a culture of sustainable internalized fiscal discipline. "As a result, fiscal pressures, which re-surged in the latter part of 1998, intensified in the first half of 1999 and appeared to have persisted through the end of the year."

Dr. Abbey identified some contributory factors of the situation as harsh weather developments that led to the invasion of armyworms and floods in the northern sector of the country as well as the deterioration in commodity terms of trade. "In the forest belt, cocoa farmers fell victim to a combination of the terms of trade shock, policy slippage in respect of the exchange rate and producer price-setting regime. This led to the erosion of real farmer income by about 15 per cent on official estimates.

Dr. Abbey noted that the same combination of factors produced a substantial loss of cocoa export tax revenues to the budget. "The beneficiary in all this was the banking system and other operators in the foreign exchange market who gained access to official foreign exchange and sold to clients at much more depreciated transaction rates." He said high lending rates, rising interest rates and absence of "viable market for longer-term investment funds and commercial bank lending" also contributed greatly to the current situation.

"By the end of 1999, the exchange rate had experienced its heaviest nominal depreciation since Ghana adopted the float in 1991, in spite of massive intervention by the Bank of Ghana. ?Consequently, gross reserves, in terms of months of imports cover, had fallen to their lowest since the mid-eighties."

Dr. Abbey suggested that outstanding economic issues be tackled by government in a way that would determine the country's economic fortunes for this year and the next. These include tackling the weak fiscal position as well as the declining terms of trade, labour market issues, social issues such as subventions to the education and health sectors and the deceptive monetary policy. This is because the economic crisis facing Ghana requires both an adjustment and temporary financing of the short-term consequences that would ensure that the country does not slip into a reversal of hard won economic reforms.

Dr. Abbey noted that following the East Asian financial debacle, the IMF is likely to have intensified surveillance over member-countries and is less likely to grant waivers for tripping performance criteria and benchmarks agreed in the Economic Sector Adjustment Fund. He, therefore, called for tighter monetary and fiscal policies with which government can maintain credibility with donors. On the revenue front, Dr. Abbey said there is the need to examine the structure and incidence of taxation and strengthening of revenue collection agencies, including the provision of enhanced incentives and improved conditions of service. Dr. Abbey said the potential of the Value Added Tax needs to be more fully tapped by taking a critical look at the registration threshold currently pegged at 200 million cedis.

He said the restructuring of the VAT would help to enhance the revenue collection capabilities of the Customs, Excise and Preventive Service. He re-iterated that "there are efficiency gains in maintaining the single rate at 10 per cent" but said exemption policy may have to be scrutinized with a view to eliminating any loopholes and opportunities of abuse. Parliament has passed a bill increasing the VAT rate to 12.5 per cent. The extra 2.5 per cent will be used for the Education Fund.