Feature Article of Thursday, 27 September 2012

Columnist: Muhaminm, Mohammed

Macro-Economic Success And Economic Fundamentals In Ghana

- A Dignostic Approach.

Macro-economic success in Ghana has of late become a major issue of controversy and confusion in the political discourse of our beloved country between the two major political stakeholders in the fourth republic, the controversy is borne out of the fact there seem to be a disconnect between macro-economic success and the fundamentals of the economy i.e. price and exchange rate among others. Let me be emphatic and very quick to say that, success in macro-economy everywhere must necessarily lead to stability in price, exchange rate, increase in economic growth and above all it ought to ensure full employment, all things being equal.
The thrust of the above is that, if there is decline in inflation consistently in any economy assuming that all things are equal, it must of necessity lead to stability in price, exchange rates, ensure economic growth and create employment in the economy. Indeed in well established economies this relationship is always established. Let me quickly demonstrate briefly how a consistent decline in inflation will invariably lead to price and exchange rate stability and growth in the economy among others. Any student of economics and finance knows that debt finance is cheaper than equity and as such in an economy where inflation is consistently declining means, companies have cheaper source of funds to produce more and expand. The implication of producing more is the that supply will increase and by extension a corresponding fall and stability in price, expansion on the other hand will call for additional hands and hence job creation, we will import less because we produce more within and therefore stabilize the exchange rate and last but not the least the economy will grow due to increase production and expansion of the economy.
Let me be fair to the facts by saying that, macro-economic success in our country in the immediate past and present has proven not to be consistent with the fundamentals of the economy. If it is therefore not consistent today, I’m afraid it was not consistent yesterday either. The question therefore is what account for this inconsistency in Ghana. A careful analysis of the economy reveals the following as the major cause of the disconnect between macro-economic success and the fundamentals of the economy.
The structure of the Ghanaian economy in my candid view accounts for this phenomenon, the structure is responsible for the inconsistency because it is largely informal. As a result regardless the extent of decline in inflation financial institution will not respond by decreasing interest rates because the risk of lending in an economy which is largely informal is very high and the higher the risk the higher the interest. If we therefore want to address the inconsistency of a decline in inflation with fundamentals of the economy then we must address the predominantly informal nature of the Ghanaian economy.
Another important factor which creates this problem is the systematic problem of lack of clear residential identification and the tracking of people’s movement from one place to the other even within the country. That is, we don’t have adequate and proper systems in place for locating loan beneficiaries through effective house numbering as well as their movement from one place to the other. This situation increases the abscourntion rate of loan beneficiaries and by extension the non performing loans of the banks thus compounding the risk of lending.
Again the shortage nature of the Ghanaian economy which I define as the inability of the country to maintain and sustain a manufacturing or productive economy to produce most of our needs as a country is equally responsible for the inconsistency. That is, a country that virtually produces nothing and depends largely on imports to support its economy cannot stabilize its currency even in the face of consistent decline in inflation. Moving forward our governments attention should be focused on reviving our dead manufacturing sector so as to reduce the unacceptable level at which our country depends on imports for a sustained currency. No economy grows by supporting others and collapsing is on through excessive imports.
The method and approach of service delivery of our financial institutions further compound the situation through increased overheads cost as a result of the numerous branches with which they operate with. This makes it impossible for them to reduce interest rates even as inflation and prime rates declines on a consistent basis let me cease this opportunity to advice our financial institutions to fully take advantage of technology by extending service delivery without necessarily being physically present everywhere. Indeed it is only in a developing country like Ghana where technology is grossly underutilized that number of branches is a measure of competitiveness.
Last but not the least available statistics indicates that only thirty percent (30%) of the country’s population represent the banking population of Ghana, now what that means is that all the financial institutions are depending on this 30% for their profits and will therefore not reduce interest rates even if prime rate is zero. The small nature of the banking population means that, they must necessarily keep their interest rates high if they are to make profit. Ladies and gentlemen, these are the reasons that account for the inconsistency in macro-economic success with fundamentals of our economy.

Mohammed Muhamin
National Theatre of Ghana