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Opinions of Saturday, 11 April 2009

Columnist: Agyeman, Harold

Response to Dr. Nduom's stimulus package

I have been quite enlivened by recent public suggestions, given notable prominence by Dr. Paa Kwesi Nduom when he remarked that Ghana should elaborate a stimulus package, which in his view can start with an initial investment of about GH¢5 billion. I have thereafter also followed with keener interest, what I consider as the measured response of the Minister for Finance, Dr. Kwabena Duffuor who averred that Ghana did not need a stimulus package as the impact of the global economic crisis on the country was much muted compared to the other industrialised countries that have already rolled out such stimuli.

I am quite certain in my mind that the recent G20 Meeting in London, at which Africa was marginally represented, and the indices and downward revisions being churned out from all manner of places on the global outlook for the 2009 calendar year, may be the motivating factor for all this public discussions on the subject. Certainly, there is consensus that 2009 is going to be a pretty bad year. Global demand would continue to taper and countries that have export-oriented economies would be badly hit.

But returning to the original theme of this write-up, it is necessary to highlight that the remarks by Dr. Nduom and Dr. Duffuor while they contrast, serve two very important needs.

First, Dr. Nduom’s remark highlights the need for economic think-tanks and other research bodies to activate a lively non-partisan national debate on the unfolding global economic crisis, help Ghanaians understand its origins, how the crisis has mutated from the global financial sector into the real economy, how Ghana as a country is affected by the crisis, and what policy measures may be appropriate at this stage to abate the impact on the country, even as we seek to take advantage of the general global slowdown to reposition economic activity such that when the triggers of recovery begin to animate we would be lifted up with the rising curve.

Dr. Dufuor’s response on the other hand indicates that Government has a clear understanding of the crisis, is firmly monitoring the evolving impact on the economy, and is poised to, perhaps, take necessary action should it be required.

In my view, there is the need for a convergence of the two, for while Government is usually concerned with managing the proximate demands of the economy, taking into account its political interest, inputs for longer-term and other strategic options from unencumbered experts could do the country well.

In this short piece, however, I side my arguments closer to Dr. Duffuor’s. This is because while I do support the policy interventions proposed by Dr. Nduom on their own merit, I do not believe that they can be properly labelled as being components of a stimulus package that responds to the ongoing global economic concerns. Aside their ideological flavour of import substitution, Dr. Nduom’s proposals are an eloquent expression of the long held need for a fundamental restructuring of the Ghanaian economy, which many Governments over the past have been unable to do.

What is important to understand therefore is that a stimulus package is supposed to be a short to medium term direct policy intervention that corrects a distortion in a domestic market condition to abate the slide of demand, maintain or create jobs, and keep the economy stable in extraordinary times and situations. In Ghana’s own case, however, I believe that the need for a focused government intervention in the economy has always been present, almost since our independence. Domestic productive capacity has persistently been weak; export market share, aside traditional exports, seem almost negligible, and our integration into the global economy is quite tenuous.

It is for these reasons that I share the views expressed by Dr. Duffuor that Ghana does not, at this stage, need a stimulus package, so defined in its classical sense. The actions Dr. Nduom proposes are issues that the budget should deal with within the framework of the normal economic management decisions of government. In any case, for a stimulus package to be purposeful it requires some basic questions answered. We need to understand what it seeks to do, how it seeks to do it, how much it would cost the country and tax payers and what the impact will be.

First, we need to understand whether a stimulus package is required. This assumption is however embodied in Dr. Nduom’s remarks. Nonetheless, since the current crisis is a global crisis, the entry point for such an investigation of whether a stimulus is required to ginger the real economy should begin from the country’s inter-face with the global economy – international trade.

In Ghana’s case, the question ought to be “what is the exact amount of export volumes being lost to the economy as a result of the global downturn for which internal demand has to be stimulated through massive and targeted public expenditure?” The figures are not readily available. However, gold and cocoa, the two major export revenue sources have not experienced a marked decline on the global commodity market. Indeed, gold, the real store of value, is doing quite well on the metal exchanges as central banks, wealthy individuals, and families reposition their credit paper money against substantial gold holdings. Also, cocoa, until recently, has not been doing too badly either. In any case, these export items are such that internal domestic demand cannot be immediately generated to take the slack that may result from the export sector. In terms of other non-traditional exports, the impact may be mixed. Textile exports may have been affected but then the absolute figures and number of people employed in the sector would need to be carefully reviewed.

A second significant question, assuming that we are agreed on the sectors of the economy worst hit by the global crisis and which require intervention and support, should appropriately be the nature of the support and the likely impact. But even so, another question should be asked: “what will the cost be to the economy if a stimulus package is rolled out?” In Ghana’s case, the widening fiscal deficit, estimated at 18.3 per cent of GDP, hints the need for any massive public expenditure injection to be properly debated and the merits clearly agreed. The issue of economic prudence however appears to be one that Dr. Nduom seeks to fault the Minister of Finance as the 2009 budget policy thrust is geared towards reducing the budget deficit to sustainable levels, improving the exchange rates and managing inflation.

However, the economic reality vis-à-vis the position of Dr. Nduom generate additional questions such as: where is the money for financing the stimulus going to come from when international financial channels are blocking and domestic resources are non-existent; export receipts are dipping; official development assistance and private remittances are receding; international reserves have gone down; and public revenue sources drying up. The obvious sources of income for government -borrowing through the issuance of debt instruments- present great risks in our circumstances. If we are to take the stimulus value of GH¢5 billion proposed by Dr. Nduom, we will be looking at almost 30 per cent of GDP. With inflation at such a high level and interest rates of over 20 per cent prevailing in the banking sector, excessive government borrowing would further crowd out the private sector and worsen the availability and flow of credit to the private sector. It would also unbridle the levers available to the Bank of Ghana to undertake any meaningful monetary policy. In my view, what is required at this stage is for inflation to be within policy control to assure economic stability and for credit to be available to businesses at reasonable cost.

Thirdly, a stimulus package presupposes that there exists domestic capacity to take advantage of and generate domestic output in the sectors targeted. In this regard, and as previously noted, domestic productive capacity does not properly exist. Or is there? I do not believe that there is any value in stimulating demand for the benefit of interests outside the country. Of course, this is modified Keynesian economics. The concept of digging a hole and filling it up just to create output cannot be applicable in our knowledge-based world and cannot be a part of a stimulus package in our case.

I have outlined these points not to denigrate any proposal relating to the subject but to invite additional and structured dialogue that would benefit the direction and tenor of Government policy. Indeed, despite the reassuring remarks of the Minister for Finance, which is in good order, the fiscal and monetary managers need to take urgent and purposeful action to reduce prime rate, and coerce, through all legitimate means, the commercial banks, particularly the government-owned banks to reduce interest rates and target lending to agriculture, agro-processing and small-scale industries. Government should also re-direct expenditure, perhaps during the supplementary budget presentation, to the growth accelerators of the national economy to blunt the impact of the crisis on the economy, shorten the slow-down, create internal domestic demand and jobs.

In fairness therefore to Dr. Nduom, all aspects of his proposal makes sense. We need to develop domestic capacity, in agriculture, agro-processing and other small and medium scale industrial enterprises. However, the gestation period for such measures would not be short-term and we would need efficient and effective delivery systems to ensure that policy interventions, even though they may lag, are properly implemented. Improvement in productive capacity should therefore go hand in glove with opening market opportunities in our immediate neighbourhood, particularly within the ECOWAS region but also within the wider Africa continent.

In conclusion however, I must beg to move that when we talk of stimulus packages in relation to the ongoing global economic crisis, let us not clothe import-substitution policies in the garb of stimulus and present them as such.

Harold Agyeman, Antoa, A/R