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Ghana: Macroeconomic Challenges and Prospects in the Medium Term Joseph Kwadwo Asenso, PhD
Outline of Presentation • Introduction • Gross Domestic Product • Inflation • Employment • Balance of Payment • Prospects
Introduction • One of the most telling reforms has been trade liberalization. Now we are faced with: • An import bill headache • Exchange rate conundrum • We are also have large markets to export our products.
Introduction II • Game changers: • The discovery of crude oil • The rebasing of the GDP • The rebasing of the CPI • These have an impact on macroeconomic stability
Introduction III • Macroeconomics is built around four broad themes: • Gross Domestic Product (GDP); • Inflation; • Employment; • Balance of Payment
Gross Domestic Product • The Ghana Statistical Service (GSS) rebased the GDP in November 2010 to reflect current economic realities since the previous base was perceived to have underestimated GDP. • The rebasing of the GDP resulted in the ff: • Ghana became a lower middle income economy in 2010; and • The rebasing portrayed a changed economic structure.
Lower Middle Income Status Ghana achieved a per capita income of US$1,307 in 2010;
Changing Economic Structure • Ghana’s economic structure has changed twice since 2006 due to: • Rebasing of GDP in 2010: the Services Sector overtakes the Agriculture Sector in 2006 • Crude Oil: the 206.5% growth in the Mining and Quarrying sub-sector in 2011 due mainly to the debut production of crude oil.
GDP-related Challenges • A middle income economy with a low income economy infrastructure – future growth; • Reduction in donor funding; • Drying up of concessional sources of funding; • Changing structure of the economy requires a paradigm shift in policy;
Inflation • The Ghana Statistical Service has rebased the Consumer Price Index (CPI) to reflect current household consumption patterns: • the base year has changed from 2002 to 2012; • the number of items in the basket has increased from 242 to 267; and • the markets from which price data are collected have increased from 40 to 42.
Points to Note I • Inflation has exited the single digit trajectory [10.0% in February 2013 (old base year) as against 10.1% in January 2013 (new base year)] • The rise in inflation in the first half of 2013 is mainly attributed to: • petroleum price adjustments; • demand pressures; and • seasonal factors.
Points to Note II • The weight of the food component of the CPI has been revised downwards from 44.9% to 43.6%. Possible Implication: The food component was the main suppressing factor in the single digit inflation era. With the reduction in weight, its impact on overall inflation is also likely to reduce. • The weight of transport has been revised upwards from 6.2% to 7.2%. Possible Implication: Transport fare increases, which arise mainly from fuel price increases, will lead to higher inflation in the new rather than the old CPI, all other things being equal
Points to Note III • The weight of the Housing, Electricity, Water and Gas component has been revised upwards from 7.0% to 9.5%. Possible Implication: Most of these goods have almost assumed an inelastic demand status. Price hikes could increase inflation because of the bigger weight • The weights of other components have gone up while others have come down. We have to monitor them and ensure that they do not undermine our inflation targets. • The rebased CPI has produced inflation rates which are consistently higher than those of the old CPI, albeit at small margins
Main Challenge with Inflation • The new CPI has reduced the weight of the food component in the basket and increased those of the known triggers of inflation. • This could pose challenges to BOG’s inflation-targeting regime in an era of petroleum and utilities deregulation.
Employment • The main challenge has to do with the lack of reliable data on employment; • Unemployed graduates; • Youth without the requisite skills to fit into vacant positions;
Balance of Payments • The BOP recorded a lower deficit of US$677.8 million in 2013H1, compared with US$2 billion in the corresponding period in 2012; • The Trade Balance improved to a deficit of recorded US$1.8 billion in the first 8 months from US$2.5 billion in the analogous period in 2012; • Earnings from gold fell by 12.6% to US$3.4 billion • Earnings from cocoa fell by 21.4% to US$1.4 billion
BOP Challenges • The country is primary commodity dependent. The falling prices of cocoa and gold have put both monetary and fiscal pressures on both the Fiscal and Monetary Authorities; • The ever-increasing import bill against the slower growing export sector leads to a negative balance of trade; • This in turn leads to a weak domestic currency through the CA effects;
The Dutch Disease in Ghana? No • The Dutch Disease shows up mainly in two ways: • An appreciating (stronger) domestic currency; • A declining output of the traditional sectors due to the movement of labour to new natural resource sectors. • Neither of this has happened since Ghana started producing oil. In fact, the cedi depreciated by 18.4% against the US$ in 2012
Prospects • Debut production of gas in 2014 • TEN fields production in 2016Q4 • Industrialization strategy built around the petroleum sector • A more stable outlook for electricity supply in the medium term • Conscious efforts to increase area under irrigation