News Guide Africa

Tag: Ghana economy deteriorating

  • Using monetary policy to control inflation: Economists look elsewhere for solution

    Using monetary policy to control inflation: Economists look elsewhere for solution

    Adnan Adams Mohammed

    Two renowned economists from the country’s leading universities have all flagged down the potency of using the monetary policies to control the recent leapfrogging inflation rate.

    They believe the Bank of Ghana’s measures put in place to curb the consistent rise in inflation are either not working or the situation is not being diagnosed properly. Both, are thereby calling on the government through the finance ministry to consider other factors such as the fiscal space.

    The Ghana Statistical Service last week announced that, increment in transport fares and unbearable food prices pushed  May inflation rate to 27.6%. This is against 23.6% recorded in April which was about 4% jump from March inflation of 19.4%. The inflationary trend pushed the Monetary Policy Committee (MPC) of the BoG to tighten the policy rate by 200 basis points from 17% in April to 19% in May. Yet, the according to Professor of Finance and Economics at University of Ghana, the monetary policy has proven to be inefficient and has therefore asked the government to adopt a fiscal policy approach toward mitigating inflation in the country.

    “If you look at the disparity between the inflation and the policy rate and the Treasury bill rate, it tells you there’s a lot more work to be done and we cannot look to the monetary policy because the problem is from the fiscal side”, Prof. Godfred Alufar Bokpin of the UG Business School. “The monetary policy is constrained in terms of how we can deploy that effectively to contain inflation and engineer growth.”

    Also, an economist at the University of Cape Coast has opined that the Central Bank maybe misdiagnosing the problem. He said, the increase in the BoG policy rate by 200 basis points to 19% is in response to risk to the economy; high inflation, weak financial inter-mediation and fiscal stress, which is expected to trigger lending rate hike.

    “The measures taken in an environment of volatile depreciation promises rather further inflation”, Professor John Gatsi, Dean of School of Business and Finance at UCC said in reaction to the MPC’s announcement, last week. “High inflation and upward lending rate will undermine government contracts execution and create new levels of arears due to cost implications for procurement of materials.”

    Prof Gatsi expatiated that, a number of projects maybe abandoned due to inflation, depreciation and cost of borrowing and warned that there maybe too much pressure on the banks as cost of mobilizing funds continue to increase with the possibility of distorted returns on placement of funds with the banks.

    According to the Government Statistician, Professor Kobina Annim, the rate of inflation for Transport (39.0%), Household Equipment and Maintenance (33.8%), Housing, Water, Gas and Electricity (32.3%) and Food and Non-Alcoholic Beverages (30.1.6%) were higher than the national average (27.6%).

    In May, 2022, 12 of the 13 divisions recorded inflation rates higher than the rolling average from June, 2021 to May, 2022.

    The data showed that Food inflation in May, 2022 was 30.1%, compared with 26.6% in April 2022. Non-food Inflation was however 25.7% in May, 2022, as against 21.3% the previous month.

    Meanwhile, Prof Bopkin has posited that, we cannot look to monetary policy to tackle this.

    “We must shift our attention to the fiscal side so that the fiscal side will respond appropriately with the discipline that it requires,” he stressed.

    “Once the source of the inflation is largely fiscal, then there’s a limit to how far you can deploy the monetary policy to bring down inflation and then engineer growth.

    “More so, because of the monetary policy framework that we are using under inflation targeting, because for one key requirement for inflation targeting to be effective, it is fiscal discipline. Once you deny the monetary side the fiscal discipline, then there’s no way they can use the monetary policy effectively to bring down inflation and engineer growth.

    At a press briefing, fortnight ago, the central bank said the growth prospects in the domestic economy remain positive and the Bank’s high-frequency indicators point to continued and increased momentum in economic activities with private sector credit showing some improvement in real terms, despite the increased price pressures.

    “All these are resulting in a closure of the negative output gap. The banking sector remains robust, with sustained growth in total assets, investments and deposits. However, business and consumer confidence have dipped, reflecting the sharp depreciation of the currency and the general high inflationary environment, which has resulted in higher input costs for businesses. A quick turnaround, with more confidence-building measures to counter these conditions, would provide further boost to the real economy”, it added.

    On fiscal policy implementation, the Committee observed that execution of the budget for the first quarter was broadly in line with targets although there was a minor deviation in the deficit target, stemming largely from low revenue receipts.

    It is the expectation of the Committee that fiscal consolidation will take hold gradually and the mid-year budget review will provide further fiscal fine-tuning to ensure that the fiscal consolidation efforts stay on track.

    The MPC said despite the improvement in the trade balance due to favourable commodity prices, the external sector has weakened somewhat due to developments in the capital and financial account.

  • Inflation to worsen further

    Inflation to worsen further

    By Elorm Desewu

    Year on year inflation is expected to worsen further in the coming months in the wake of the decision by the Public Utility Regulation Commission to hike tariffs of electricity and water as well as increase in transport fares by the transport operators in the country.

    The Electricity Company of Ghana and the Ghana Water Company have proposed a tariff hike for consumers between of 148 and 334 percent respectively while the transport operators have kicked start with their 20 percent increase in transport fares across the country.

    This is expected to impact heavily on the non-food inflation which would trigger a further rise in year on year inflation.

    The current development would pose a headache to the seven member committee of the Monetary Policy Committee (MPC) as they commence their bimonthly review of the economy this week.

    Already, the MPC has revised it medium term inflation target of 8+/-2 to March 2023.

    The Bank of Ghana announced some measures in April this year in relation to universal banks, in attempt to anchor inflation. These include, the Cash Reserve Ratio was increased to 12 percent; the Capital Conservation Buffer was reset to the pre-pandemic level of 3 percent, making the Capital Adequacy Ratio a total of 13 percent; and the provisioning rate for loans in the Other Loans Exceptionally Mentioned (OLEM) category was reset to the pre-pandemic level of 10 percent.

    But recent figures from the Ghana Statistical Service, (GSS) depict that year on year inflation measured by the Consumer Price Index, (CPI) increased significantly to 23.6 percent for the 12-months period ended April, 2022 from 19.4 percent in March, 2022.

    According to the Ghana Statistical Service, “four divisions – transport (33.5%); household equipment and routine maintenance (28.5%); food and non-alcoholic beverages (25.6%), and housing, water, electricity, gas and other fuels (25.0%) recorded inflation rates above the national average of 23.6% with transport recording the highest inflation.”

    National month-on-month inflation from March 2022 to April 2022 was 5.1%.

    It also noted that this is the first time in 29 months that inflation for imported items exceeded domestic inflation. Whilst inflation for locally produced items was 23.0%, inflation for imported items was 24.7%.

    “The inflation for imported goods is higher than the 17.3% recorded for March 2022 while the inflation for locally produced items is 23.0% higher than the 20.0% recorded in March 2022.”

    Whilst Food and Non-Alcoholic Beverages inflation was 26.6%, Non-Food inflation stood at 21.3%.

    April 2022’s food inflation of 26.6% is higher than both food inflation for March 2022 (22.4%) and the average of the previous 12 months (13.5%).

    Food inflation’s contribution to total inflation however, decreased from 51.4% in March 2022 to 50.0% in April 2022.

    All the 15 food subclasses recorded positive month-on-month inflation with Fruit and Vegetable Juices recording the highest of 15.3%.

    Non-food year-on-year inflation on average went up again in April 2022 compared to March 2022, that is from 17.0% to 21.3%. Only one out of the 12 Non-food Divisions had the 12 months rolling average to be higher than the year-on-year inflation for April 2022 for the divisions. Transport is the Division that recorded the highest inflation in April 2022 (33.5%).

    There is a high expectation that the MPC would again hike the policy rate further to stem the rising inflation.

  • Gofer Delegators Or Economic Managers – Dr Monfant quizzes

    Gofer Delegators Or Economic Managers – Dr Monfant quizzes

    Adnan Adams Mohammed

    Dr Jerry Monfant, an economist has described the current managers of Ghana’s economy as absolutely clueless about establishing good economic models to forestall the looming economic dangers.

    The international economist has noted that, research indicates that Ghana is not amongst well prepared Central Banks to take the hit on inflation as compared to Nigeria.

    He expatiated that, Ghana joined 13 worse economic performing countries in the World in November, 2021 and as well ranks fourth with a distressed Sovereign US$ Debt behind Argentina, Venezuela, and Lebanon. Also, Ghana ranks third as a worse performing emerging markets hard currency Sovereign Bonds.

    “Meanwhile the government of Ghana is absolutely clueless about establishing good economic models to forestall the looming economic dangers”, Dr Monfant shared his worry about the the Ghanaian economy in his recent post circulated on social media.

    Below is the full statement:

    From Dr . Monfant’s Desk

    Gofer Delegators Or Economic Managers?

    United States inflation is up at 7% as at 13th January, 2022. As part of the prudent measures to subdue the inflation, the US government has asked for more oil reserves to be released and has equally implore on China, Japan and South Korea to follow same in order to suppress the global inflation.

    Poland recorded 7.8 percent inflation during the same period. The busting measures taken by the Polish government includes cutting the VAT on petrol and diesel to 8 percent, and VAT on food, gas and fertiliser to 0 %. Both US and the Polish government are expected to raise interest rate to prevent excess financial transmission in their economies as a means of containing the global rising inflation.

    Our research indicates that Ghana is not amongst well prepared Central Banks to take the hit on inflation as compared to Nigeria.

    Of course, Ghana’s economic profile for the last three months leaves more to  be desired.

    Ghana joined 13 worse economic performing countries in the World in November, 2021.

    Ghana ranks fourth with a distressed Sovereign US$ Debt behind Argentina, Venezuela, and Lebanon.

    Ghana ranks third as a worse performing emerging markets hard currency Sovereign Bonds.

    Ghana is the 5th worse performing emerging economy in the World.

    Meanwhile the government of Ghana is absolutely clueless about establishing good economic models to forestall the looming economic dangers.

    41 percent of average Ghanaian household income is used for food consumption alone. In 2019, Ghana imported US $2bn of agricultural and related products across the World, while the citizens were made to believe that the government policy of “planting for food and jobs” was making headway.

    With the current Global stance, we anticipate 50 percent of an average household income to be used on food consumption alone, as the economy would be importing external inflation into the country through its agricultural import.

     E- levy, which is also billed to cut household incomes to a proportion are all part of the bizarre economic narrative which does not make sense to an economists. It’s clear living conditions could get even more worse, as the country might likely embrace debt default according to our scorecard scenario. This has a potential of raising social tensions.

    The productivity of the citizens are expected to decline by 0.017 percent and  we project this percentage to increase as the months roll-on.

    It’s clear the government of Ghana is no longer in charge of the management of the economy.  The questions economic pundits ask, is whether the Country has Gofer Delegators or a real economic management team? Call me if you find an answer.

  • Gov’t to increase domestic revenue with new approach

    Gov’t to increase domestic revenue with new approach

    Adnan Adams Mohammed

    In the effort to increase domestic revenue collection, the government has announced some seven new measures to help address fiscal challenges.

    The government is of the believed that expenditure cut alone will not be enough to revive the ailing economy and that the government’s focus is two-fold: to control expenditure and to raise more revenues domestically.

    Addressing a press briefing in Accra, last week, the Minister of Finance, Ken Ofori-Atta expressed optimism that the measures will go a long way to cushion the citizenry amid the economic downturn.

    “The government will begin the implementation and collection of the revised property rate by the end of April 2022”, the Minister noted. “This will improve the government’s revenue and help increase the country’s tax-to-Gross Domestic Product (GDP) ratio.”

    Find below the new revenue measures announced by government:

    The government plans to begin the implementation and collection of the revised Property Rate by end of April 2022.

    Government also intends to implement the E-VAT/E-Commerce/E-Gaming initiatives by end of April 2022.

    In addition to that, government will also roll out the simplified tax filing mobile application for all eligible taxpayers by July 2022.

    Government will keep impressing upon Parliament to fast track the passage of the E-Levy Bill, Tax Exemptions Bill, and Fees and Charges Bill.

    Government will prioritise the Revenue Assurance, Compliance, and Enforcement (RACE) Programme to plug revenue leakages especially at the ports and the infamous fuel bunkering and small scale mining exporters cabal.

    The government also intends to partner the private sector to introduce digital systems to monitor quarrying, sand winning and salt winning to get more revenues from natural resources; and immediately enforce the “No Duty – No Exit” policy at the MPS Terminal at the Tema Port to improve revenue collection.

    With immediate effect, government will enforce the “No Duty – No Exit” policy at the MPS Terminal at the Tema Port to improve revenue collection.

  • Bokpin backs Fitch; warns govt against drawing from reserves

    Bokpin backs Fitch; warns govt against drawing from reserves

        

    Adnan Adams Mohammed

    A senior economist has backed the recent position of Fitch, one of the international rating agency that, over drawing on the country’s international reserves in an attempt to stabilise the cedi will lead the economy into emergency theatre room.

    The professor of economics worried that, Ghana may have to go to the International Monetary Fund (IMF), against government’s will, eventually when the economy deteriorates further as a result of the escalating Cedi depreciation.

    Fitch Ratings in a podcast said Ghana’s international reserves position has become very reliant on Eurobond issuance. Indicating that, Ghana is not in a situation where the government needs to constantly roll over hard currency debt or whose debt market is wholly reliant on non-resident investors. In supporting the Fitch’s position, the University of Ghana economist noted that, a careful look at the template that Ghana sent to the IMF in 1965 under the watch of Dr Kwame Nkrumah, which is a reflection of what has been happening over the years, there’s only one thing left which is keeping us from going to the IMF right now and that has to do with the depreciation of the cedi.

    “If the Bank of Ghana decides to fight that, burn through our international reserves and once the international reserves deplete to a certain level, you have no choice than to go the IMF in an ambulance”, the economist, Prof Godfred Bokpin has said during a TV discussion, last week. “The effect of that is beginning to show on the cedi and what will happen now is that everybody is waiting to see to what extent can the Bank of Ghana defend the cedi with their international reserves.”

    “This was what we did in 2014 and somewhere in the middle of 2014, our net international reserves could only cover like 2 months of imports. When it gets to that point, you will have to make a call to the IMF,” he added.

    In its Fixed Interest Podcast Series in which Mr Toby Iles, Head of Middle East and Africa Sovereign Ratings featured Mr Jermaine Leonard, the Director at Fitch Sovereign and Lead Analyst for Ghana and Zambia, the agency said Ghana’s inability to access the international market played a major role in the country’s current downgrades.

    Talking about the drivers of the downgrade of Ghana’s ratings and the negative outlook, Mr Leonard said: “The key rating driver for the downgrade to B- and the negative outlook is the sovereign’s loss of access to international bond markets”.

    “We believe that not being able to issue Eurobond debt elevates some concerns regarding Ghana’s external liquidity, especially as we expect global financing conditions to remain tight for some time and it also exacerbates the existing weaknesses of Ghana’s public finances”.

    According to him, “Ghana is not in a situation where the government needs to constantly roll over hard currency debt or whose debt market is wholly reliant on non-resident investors”.

    In fact, Mr Leonard added, “Ghana ended 2022 with an international reserves position that we estimate at $7.9 billion and that is just above three months of current external payments and that is an improvement for Ghana”.

    “Ghana’s reserves averaged about two-and-a-half months of coverage over the previous ten years, so, that improved reserves position will allow Ghana to meet its external debt servicing payments in 2022”.

    “That said, Ghana’s international reserves position has become quite reliant on Eurobond issuance for replacement”, he pointed out.

    Continuing, he noted: “If you were to look at a historical chart of monthly reserves levels, you would notice the peaks and valleys that correspond to regular Eurobond issuance followed by the gradual drawdown on reserves until the next bond issuance”.

    “Also, non-residents do hold about 20 per cent of Ghana’s domestic government debt and that comes to just under US$6 billion. This is all medium- and long-term issuance, which limits the risk of capital flight but our concern is the slow and steady draining of reserves but then there is also a risk of foreign investors selling what they hold and taking their dollars out of Ghana, which would put further pressure on reserves”.

    The other concern, Mr Leonard mentioned, “is specifically about the public finances”, explaining: “Ghana has a medium-term debt sustainability issue that will necessitate a strong fiscal consolidation to get debt levels on a downward path but beyond just the level of debt, there are debt affordability issues; Ghana’s debt is more than five times its annual government revenue and yearly interest costs take up a little less than half of government revenue, so, few external financing options will mean an increased reliance on more expensive domestic debt and that will keep the interest burden high, making consolidation more difficult”.

    Asked about the prospects for new sources of external financing and the medium-term fiscal consolidation, Mr Leonard said: “Along with the drawing down of international reserves and the use of IMF SDRs, we do expect that the government will be able to find some additional external financing; this could come from private loans from international commercial banks, or, perhaps, an additional lending from official lenders – an IMF programme is a possibility. This would, also, likely open international capital markets to Ghana again. Ghana completed an IMF programme in 2019 but has been reluctant to return to a programme. That said, Fitch believes that it would be the most likely outcome if the government were to experience some real financing stress”.

    Importantly, he added, “I would note that we do not expect that this would be like Zambia, where IMF negotiations dragged on over the course of close to two years and only brought to fruition by a default event and a change in government”.

    “Regarding fiscal consolidation, we do expect to see a narrowing in the fiscal deficit but the problem of low government revenue and rigid fiscal structure will remain. Ghana’s 2020 budget forecast a reduction of the deficit to 7 per cent in 2022 and to 5.3 per cent of GDP by 2023. We believe that it is optimistic, our forecasts are for a narrowing in the fiscal deficit to around 8 per cent of GDP by 2023”.

    “Now, this should be a significant consolidation, as the overall fiscal deficit was 15 per cent of GDP in 2020”.

    Further, he said “we think that a good deal of the deficit reduction will come from COVID-related spending falling out of the budget and that the government will continue to face low domestic revenue mobilisation and that will present some challenges, as interest costs remain high and as the government continues to realise contingent liabilities from the energy sector”. In conclusion, he noted, “we do expect some fiscal consolidation but at a lower pace than what’s in the government’s medium-term fiscal framework and there are some notable risks that could materialise over that period”.

    On what could influence a stable rating and positive outlook for the country, Mr Leonard said: “On the positive side, that is what things could lead to a stabilisation of the rating? A resumption of access to international capital markets would be a big one and that could come from an IMF programme, or from a change in investor sentiments. Over the medium term, we will be paying attention to the international reserves position and whether Ghana can see a rise in non-debt creating flows like FDIs and we’ll also be paying attention to whether the government can implement its fiscal consolidation plan and put public sector debt on a downward path”.

    “In terms of negative rating sensitivities, here again, the reserves levels will be important as a measure of external liquidity and we’ll also be watching the government’s ability to source new external financing with which to meet its debt servicing obligations. Also, we will be paying attention to the level of fiscal consolidation that the government can achieve along with any signs of stress in the domestic debt market”.

    Fitch downgraded Ghana’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B- ‘from ‘B’ with a negative outlook in January 2022. The downgrade of Ghana’s IDRs and negative outlook, the rating agency said, reflected the sovereign’s loss of access to international capital markets in the second half of 2021, following a pandemic-related surge in government debt.

    Fitch, in a report, said, “This comes in the context of uncertainty about the government’s ability to stabilise debt and against a backdrop of tightening global financing conditions. In our view, Ghana’s ability to deliver on planned fiscal consolidation efforts could be hindered by the heavier reliance on domestic debt issuance with higher interest costs, in the context of an already exceptionally high interest expenditure to revenue ratio.”