DR. KOJO APPIAH-KUBI

According to the Minister for Finance and Economic Planning in his mid year review of the 2009 budget statement and economic policy, the policy thrust of the 2009 budget “…was to deal with the imbalances in the economy to restore macroeconomic stability and fiscal sustainability. The 2009 Budget therefore sought to gradually adjust and consolidate public spending to reduce the pressures on inflation, exchange rate, and the balance of payments … to pave the way for sustainable growth, job creation, and improvement in the livelihood of the citizens for a better Ghana”. In the assessment of the Minister “…the first half of the year points to significant successes in a number of areas”. This piece therefore attempts to analyse the successes so far achieved by the NDC government in its first half year and compares these successes with that accomplished in the first half of 2001 of the then new NPP government. This is to enable analysts to assess the trend success of the policy directions of both governments.

Macroeconomic stability involves the pursuit and achievement of macroeconomic goals including: low or sustainable levels of budget deficit or a balanced budget, low levels of inflation, a balanced trade or current account, and a stable exchange rate. The NDC government initially set the fiscal goal of reducing the budget deficit from 14.90 per cent of GDP (excluding divestiture receipts and including sovereign bond expenditure) to 9.4 per cent of GDP and the domestic primary balance from -10.3 per cent of GDP to -2.3 per cent during the year 2009. In the first half of 2009 the NDC government appears to have achieved a budget deficit of 4.5 per cent (including divestiture receipts) and a domestic primary balance of 0.8 per cent of the projected GDP. These positive developments are indeed indicators of very good performance, which should be credited to the Finance Minister and the government and more, particularly, since the achieved indicators of success also compare favourably with the projected deficit targets of 6.5 per cent and 3.2 of GDP for the budget deficit and domestic primary balance respectively. Comparatively the NPP government during the first half year of office in 2001 also managed to reduce the budget deficit from 8.5 per cent to 0.9 per cent of GDP and raise the positive domestic primary balance from 2.4 per cent to 2.6 per cent of GDP during the first six months in office in 2001. Indeed both governments seem to have done very well during their first half years, and this underscores the widely held view that new governments tend to perform well and better in their early years in office than in their later years. However, comparing the fiscal achievements of both NDC and NPP governments in their respective first half years of government in 2009 and 2001, the NPP appears to have done better in reducing the budget deficit but worse in improving the domestic primary balance than the NDC government. This comparison is done against the background of the start chances as reflected in the levels of macroeconomic indicators of the respective government on assumption of office. The NDC government inherited an inflation rate of 18.1 per cent and consequently set an inflation target of 15.3 per cent for 2009. The inflation rate, however, worsened from 18.1 per cent at the beginning of 2009 to 20.7 per cent in June 2009. In contrast the inflation rate improved and declined from 40.9 per cent at the beginning of the 2001 to 37.9 per cent in June 2001 during the first half of 2001 under the NPP government. Comparing performances of both governments that of the NPP seems to be higher than that of NDC in their respective first half years in office in terms of ensuring price stability.

According to the 2009 mid year review the trade balance improved from a deficit of US$4,985.60 million at the start of 2009 to a deficit of about US$955.8 million at the end of June 2009, whilst the trade deficit under the NPP government during its first half year in office in 2001 declined from US$830.3 million to about US$277.3 million. Apparently the trade account under the NDC government has profited tremendously from the sharp drop in oil prices on the international market, which brought about a considerable reduction in the country’s oil imports from US$1,326.5 million to US$449.6 million during the first half of 2009. Increases in cocoa export earnings of about 16.6 per cent on the back of high rising world cocoa prices as well as continuous improvements in gold prices recorded during the first half of 2009 also contributed to this improvement in the trade account. Obviously the NDC government seems to have done better in reducing the trade deficit than the NPP government during their first half years in office.

By all indications the Cedi rate of exchange appears to have lost some stability in the first half of the new NDC government in 2009 more than under the NPP during its first six months in office in 2001. The NDC government inherited a cedi, whose value had depreciated by about 22.1 per cent against the dollar in 2008. During its first eight months in office the depreciation rate had deteriorated and depreciated by 33 per cent and also lost grounds to all other foreign currencies. By comparison the new NPP government inherited a much higher cedi/dollar depreciation rate of almost 50 per cent in 2001. By the end of its half year in office in 2001 the cedi/dollar rate had depreciated by only 4.8 per cent. Indeed the cedi rate during this period even gained grounds and appreciated against the pound sterling and other currencies. This indeed signals a better achievement on the part of the NPP government in stabilising the cedi value in its fist six months in office in 2001 compared to that of the NDC government. The main 2009 budget read in March 2009 registered gross international reserves as having fallen by US$800.4 million from a stock of US$2,836.7 million at the end of 2007 to US$2,036.2 million at the end of December 2008, equivalent to about 1.8 months of import cover. The net reserves showed a surplus of US$1.3 billion. According to the supplementary budget read in August 2009 the gross international reserves by end June 2009 totaled US$1,705.2 million enough to cover 1.9 months of imports of goods and services for the country and almost reaching the target of 2.0 months of imports cover set for 2009. Though the statistical figures presented in both budgets bear some inconsistencies, one can take it that there has been an increase in the import cover of the country’s gross international reserves in the first half of 2009 under the NDC government, which can be probably attributed to the reduced value of the country’s current oil import bill. When the NPP government assumed power in 2001 gross international reserves amounted to US$264 million, equivalent to about 2 weeks of import cover; the net reserves showed a deficit of US$194 million. By the end of the first six months of NPP government gross international reserves had risen to about one month of import cover.

From the above mid-year review it is possible to surmise that both the NDC and NPP governments did well during their first half years, but the NPP government seems to hold the edge over the NDC for ensuring a higher level macroeconomic stability. Without doubt the NDC government seems to be on track to achieving its macroeconomic goals of reducing the budget deficit or fiscal stability and trade balance. It seems, however, unlikely to achieve its other macroeconomic goals of general price and exchange rate stability set for the year. It is not likely for it to achieve its price stability goal for the year because the second half year of 2009 is likely to witness many hard decisions concerning salary increases, utility price increases, and upward price adjustments of petroleum products caused by international market forces. Moreover, the unfavourable nature of the rains in 2009 is likely to affect the agriculture production negatively and consequently the prices of food stuffs. Already the NDC government has missed its exchange rate target and indications are that the cedi value is likely to lose grounds to other foreign currencies for the rest of the year. This is due to the fact that the third and fourth quarters of the year are also likely to witness, as is usually the case, increased demand for foreign currencies to finance Christmas imports and this can exert a further downward pressure on the cedi value and consequently on inflation. All these factors are likely to impact negatively on the general price levels of the country. Should these events prevail the Bank of Ghana would be forced to raise the prime rate and reduce money supply to check inflation and this can impact adversely on interest rates and domestic manufacturing of goods and services.

The NDC government has set ambitious macroeconomic targets for 2009. A close examination of the macroeconomic achievements of the NDC government so far and the prevailing economic environment, however, seems to suggest serious deficiencies in the efficacy of the current economic policies and tools of the government to achieve its set targets. As a matter of urgency the government should, therefore, re-examine its current economic policy directions and tools to assess their effectiveness in achieving its set socio-economic goals rather than blame its failures on the past government.