– REPORT FROM THE SUB COMMITTEE ON THE ECONOMY - OVERVIEW OF THE FISCAL AND ECONOMIC SITUATION OF GHANA

The Economic Sub-Committee of the Government Transition Team has had the opportunity to study the nation’s current macro economic situation. The main points that have come out as a result of the overview are stated below. The transition team has noted the remarks made by the Minority in Parliament and will respond to the issues raised in detail in the course of the week next week. However, this statement will provide the context for the detailed response and the public will be more enlightened on the prevailing state of affairs.

The main points in respect of the nation’s current macro-economic situation are as follows:

HIGHLIGHTS

• In a word, the government of Ghana is “broke”.

• In 2008, government projected that it would spend GH¢168,127,900.00 (approximately GH¢168.1 million) more than it would take in as revenue. That was the projected deficit for the year. Instead, it spent GH¢1,340,196,800.00 (or GH¢1.34 billion) in excess of its revenue. In other words, the governments overshot its projected budget deficit by 697.1% in 2008.

• This translates into a deficit-GDP ratio of 13.42% - the highest in over 10 years. It also puts a severe strain on government’s finances in 2009, including its ability to provide essential developmental projects and social services. Whereas when the NDC left office in January 2001 the GDP deficit ration was 9%.

• The dire financial situation means that it would be very difficult to implement the salary increases announced by President Kufuor on the eve of his departure as this would create severe challenges for the economy.

• On the external front, the merchandise trade deficit has ballooned as imports continued to outstrip exports, thanks to increased donor inflows to pay for imports without corresponding increase in export earnings.

• In 2008, merchandise imports were estimated at US$8.63 billion, compared to merchandise exports of US$4.97 billion.

THE CAUSES OF THE PROBLEM SHORT-TERM CAUSES • Reckless election-year expenditures: For example, by the end of the first 9 months of 2008, several ministries had over-spent their annual budgetary allocations for salaries and benefits by between 76.0% and nearly 270.0%.

• Increase in Petroleum prices on the World Market: The rapid rise in petroleum prices on the world market increased the nation’s oil import bill, particularly for VRA, leading to unplanned government expenditures to the energy sector.

• Residual Effects of the Energy Crises: The failure of the government to fully resolve the 2006-2007 energy crisis only aggravated the situation.

• Shortfall in the Expected Returns on Investment from hosting CAN 2008: The flaws in the procurement process for the construction of Stadia and hosting the games which have resulted in cost overruns have created difficulties. This has been exacerbated because the “large number of visitors” that the government expected for the tournament did not materialize and the expectations in respect of revenue generation for the stadia have not been met.

LONG-TERM CAUSES • There were weaknesses in key sectors of the economy.

• There was a decline in investment in the manufacturing sector of 2.3% and a decline of 15.0% in the electricity and water sectors.

• Most of the “macro-economic stability” trumpeted by the NPP was due more to increased donor inflows, which gave us the dollars to support the cedi, rather than being the result of vigorous growth in the economy and in exports.

• Merchandise Exports as a share of total economic output between 1993 and 2000 under the previous NDC administration rose from 17.8% to 38.9%. After the NPP took over, this figure declined steadily, to 28.7% in 2000. As a result, once donor inflows and foreign remittances slowed down, the economy was incapable of sustaining itself (because of low levels of foreign exchange earnings). Consequently, between December 2007 and December 2008 alone, the cedi lost about 20.0% of its value against the dollar.

When one compares the economic situation between what obtained in years 1999- 2000 to the period 2007- 2008, in other words the last two years of the NDC administration compared to the more recent last two years of the NPP administration there were critical differences. Between 1998 - 2000, cocoa prices fell from US$1,645 to US$1,094 per ton, a cumulative decline of about 34.0% percent. Further, there was an increase of over 90% in oil prices and a decline in Gold prices. The rapidly rising oil prices resulted in a higher import bill and declining earnings from the nation’s principal export led to a depletion of Ghana’s international reserves. Comparatively the NPP administration faced no such threat. In 2008, cocoa prices passed the US$2,000-a-tonne mark, leading to large gains from cocoa exports – enough to off-set the effects of higher oil prices and maintain the economy on a sound footing. This did not happen. The result is a twin crisis of a growing budget deficit and a worsening trade deficit, which the NDC will have to tackle against a background of rising public expectations, and commitments that it intends to work hard to keep within its four-year term of office.

Hanna S. Tetteh Spokesperson President Atta Mills Transition Team

Dated at Accra, 16th January 2009