Can Dr. Paul Acquah’s ‘resilient’ Ghanaian Economy Withstand the Turmoil?

Since Bank of Ghana Act 2002 was enacted, bestowing independence to the central bank, various monetary policy committee meeting reports have been replete with 'resilience' and 'robustness' characterizations of the Ghanaian economy. On Monday 21st July, 2008, when the prime rate was increased further from 16% to 17%, citing fears of high inflationary fears and expectations, the Chairman of the committee, Dr. Paul Acquah, still maintained his position about the economy, albeit, on a lower tone as time passed by, from robust to fairly robust etc.

(Let us bear in mind that brags about macroeconomic stability, stable currency, strong external position and lower inflation rates have been commonplace in their circles and the media, particularly the budget documents and state of the nation addresses, though not recently!).

The Governor noted, then, that the latest information on the economy continued to show 'sustained' pace in economic activity and that the Bank's Composite Index of Economic Activity (CIEA) continued to show a 'strong' growth into the second quarter of 2008. He went on to say that Evidence from other real sector indicators also point to 'sustained momentum' in economic activity. In the 2008 budget, dubbed 'A Brighter Future', presented to the Parliament last year it was noted that 'notwithstanding the challenges of the energy crisis, rising fuel prices associated with the increases in oil prices on the international market, output has been robust and the economy remains resilient'.

Again, after at a press conference after MPC meeting on Tuesday October 28, Dr. Paul Acquah maintained that the Ghanaian economy 'remains robust and resilient'. He however cautioned that the country could be affected through the exposure of banks, fall in demand for commodities, especially gold and cocoa, tightening of donor inflows, low level of remittances and reduced investment inflows.

But HOW would the Ghanaian economy with these numerous characterizations survive the global financial crisis? Concerns about the impacts of the global bankruptcies and credit crunch have been addressed extensively in various platforms and widely circulated especially in the print and electronic media. Most of the issues raised and discussed in this regard include impact of the turmoil on remittances, aid, foreign direct investment, equity investment, commercial lending, trade, trade prices, and other flows. But exactly WHAT are the ramifications of all these for a 'resilient' and 'robust' Ghana?

One of the possible ways of getting at this question is to make a quick check with the Ministry of Finance and Economic Planning, the purse-holding and pocket-controlling ministry of our economy. In the year 2006, which recorded an overall budget deficit equivalent to 7.8 per cent of GDP, against a budget target of 4.5 per cent of GDP, total receipts including domestic revenue, donor grants, foreign loans and HIPC relief amounted to GH¢4,331.7 million, equivalent to 37.7 per cent of GDP. Out of this, domestic revenue contributed GH¢2,556.9 million, roughly 59 per cent of the total receipts. Thus over 40 per cent of the Ghanaian government's purse was externally controlled.

Now consider: Total grant disbursements of GH¢634.9 million, was '17.5 per cent' below the budget estimate; Multilateral HIPC Assistance was '37.8 per cent' below the budget target, while Programme grants also fell short of target by '4.0 per cent'. The outturn for Project grants, was GH¢228.5 million against a budget target of GH¢300.0 million, also '24 per cent' below budget target. Total loans received for 2006 was GH¢460.1 million, against a budget estimate of GH¢670.0 million, were lower than budget target by '31.3 per cent”. Now please take a break and take critical note of all these shortfalls in 2006 with regards to the externally-controlled portion of the government's purse.

Let us furthermore find out where these loans and grants were obtained from and how these sources have been hit by the global financial crisis. From the budget appendix which accompanied the 2007 budget document, total loans for the year 2006, as at September 2006, which fell short by 31.3 per cent were contracted from various sources. With exception of International Development Association (IDA) which loaned the economy hundreds of millions of US dollars, the other lenders such as International Fund for Agricultural Development (IFAD), African Development Fund (ADF) and governments of China, Belgium and France all loaned the economy tens of millions of U S dollars, individually. The remaining group of lenders was made up of commercial banks namely Fortis Bank, Commerzbank, ING Bank N. V and KBC Bank all borrowed the economy tens of millions of U S dollars on separate accounts.

From all indications, the above-mentioned banks and other commercial lending institutions, particularly in the industrialized countries and Asian counterparts as well, are unlikely to be as useful as they have been in the recent past, noting that in the recent past they have not even met a significant portion of our demands. The case of Fortis is very unpalatable as Heleen de Graaf and Philip de Witt Wijnen of Spiegel International Online noted in one of their reports on the global financial crisis that 'over-confidence, bluff and arrogance have proved an almost fatal cocktail for Fortis which was saved from collapse by a financial injection of almost €11.2 billion on Sunday'. This therefore indicates how timely intervention by the Dutch, Belgian and Luxembourg governments enabled Fortis to escape the nightmare scenario of a run on the bank. This must most probably be a lender of last resort of a sort. The situation with ING BV Netherlands is not different as the Dutch government, in an attempt to avoid collapse, injected a whopping US$13.4 billion after its share price plunged by almost a third. To a very large extent, commercial lenders are very likely to be reluctant in granting us loans as there is a freeze of credit flow even among them, as a result of the financial crisis.

Foreign governments which the Kufuor government has been contracting loans with over the period, particularly those in the industrialized countries as well emerging Asian countries , can not also be that reliable given the ongoing developments in the global financial system. They have all been implicated and are making unparalleled commitments to save the financial system from a collapse. These huge financial commitments made by these countries, estimated at almost a third of the size of their economies, would mean taxing their citizens hugely and possibly turning to reserves-rich economies for assistance! Dirk Willem te Velde of Overseas Development Institute has noted that aid budgets are already under pressure as a result of debt problems and weak fiscal positions, particularly in the UK, other European countries and in the USA. With this turmoil, the promises of increased aid at the Gleneagles summit in 2005 are likely to be pushed further off track as aid budgets will now be under increased pressure.

My personal thought is that things are not that gloomy as our leaders would want us to believe. The impacts of the global financial crisis are quite enormous. The future, I must say, is not inviting! Particularly when the effects of the turmoil on remittances, aid, foreign direct investment, equity investment, and trade are considered. We appear to be at crossroads and it is at this moment that we need a strong leader. And this I leave it with you hoping that you gather enough information to decide.

My expectation given these developments is a cut in a number of programmes and projects currently being run by the kufuor administration. I also expect that fuel prices on the domestic markets be maintained at current levels, despite sharp falls in the prices on international markets, to make available some funds. This will also give the government some fiscal space in order to continue certain crucial programmes and projects. Consequence of other issues linked with the financial turmoil such as remittances, aid foreign direct investment, equity investment, and trade would be discussed in a second part, so please watch out!

Alhassan Atta-Quayson

Graduate Student, Univ. of Ghana

+233 24 4986441