The Group of Seven Finance Ministers have expressed their concerns on the global economic downturn. The US is slipping into recessionary territory, the EU and Japan remain tepid, and China and India are also projecting lower growth. The favourable global economic environment that Ghana and other developing countries have enjoyed over the last six years is turning around and greater risks face us.
In this article, three questions are addressed: First, what challenges does the end of the “Goldilocks” global era pose for Ghana?
Secondly, how may these challenges begin to be addressed in an election year? Finally, what is the single most important implied action that the new President will have to deal with early in 2009?
1. The Challenges
For Ghana, the global downturn comes at a difficult time: Fiscal deficits have risen in 2006/7, breaking a downward trend since 2000; the benefits of the debt reduction schemes have all been fully absorbed; oil prices are not falling significantly as economies slow down; additional external bond issues are likely to be difficult as global credit markets shrink, and we are in an election year and the scope for economic reforms tends to be limited in such periods.
On the other hand, Ghana's success in finding oil, though limited at up to 1.3 billion barrels or four years of Nigeria's exports, provides a possible instrument to shore up Ghana's hopes to reach middle-income status and double per capita income by 2015.
The immediate challenges of the downturn are the risks it poses for Ghana's growth. In particular, export demand and prices, tax revenues, import prices, foreign investments, access to external resources and possibly remittances are all at risk.
The historical peaks for the prices of cocoa, timber and minerals are likely to taper off or decline, especially given the lower growth expected in China and India.
There is likely to be little respite in oil prices, given the security and refinery capacity factors that also underlie its high prices.
The global investment climate has suffered a setback, given the credit crunch and the uncertainty of demand.
Access to external borrowing such as through the recent bond issue will be greatly diminished. And remittances may also be affected as Ghanaians abroad face difficult times.
In short, the growth rates of six per cent we have had over the last few years will, unless other factors come into play, decline, perhaps by one per cent and possibly by as much as two per cent.
The goal of keeping inflation below 10 per cent will be threatened as these difficult conditions interact with an underlying fiscal deficit in the two to four per cent range ( after allowing for the recent energy price pass through).
Sustained high growth and low inflation are essential if Ghanaians are to sense that their lives are improving.
2. Policy Options
The need to design policy responses to the global downturn is complicated by the electoral timetable.
Political business cycles, with expenditure levels rising and reform efforts slacking in election years are now acknowledged by politicians and analysts, including the international organisations.
All concerned have learnt that the challenge is to manage this cycle to minimise its negative economic fallout, rather than to pretend that it can be completely avoided.
In Ghana's case, the political business cycle comes on top of an already tepid economic reform effort over the last few years. While macroeconomic performance has been strong until 2005, growth has picked up in 2005-7, and the investment climate and governance dimensions of reform have been strong, micro economic reforms in sectors such as energy, water and other infrastructure, have been particularly slow.
The benign international environment, oil prices notwithstanding, has helped prop up Ghana's growth rate as much as reforms have.
With both now at risk, Ghana needs both an election year economic strategy, and more importantly, the new President needs a bold economic strategy for implementation immediately in early 2009.
Three policy areas deserve utmost attention this year. First, fiscal pressures must be managed with discipline, which means that likely revenue shortfalls must not be allowed to raise the fiscal deficit.
This is essential for protecting the gains made in reducing inflation.
The big risk in an election year is a wage and salary increase that is out of line with underlying fiscal and economic fundamentals.
This will be difficult to manage, but there is no choice. A public debate on the global downturn and the risks it poses for Ghana will be essential. Its external source, is in a sense, an easy out for today's politicians. Second, on the public investment programme, the emphasis has to be on completing projects that will increase productivity this year or as soon as possible.
The temptation, in an election year, to initiate new projects across the country is especially ill advised given the risks of a downturn.
Productivity growth is what ultimately makes an economy grow. In Ghana's case today, productivity is particularly hindered by poor infrastructure.
The author of this article is the former World Bank Vice-President for AfricaEvery effort must be made to complete infrastructure projects that are nearing completion, and to give priority to maintenance where this is holding back effective operation.
This is particularly true for transportation, including rural roads. Further, no effort must be spared to take decisions relating to the infrastructural sectors that will facilitate private activity currently held up by government procedures.
This is especially the case for the energy and water sectors. The water sector is the next sector at greatest risk, and again, decisions that are holding back reforms in water need immediate attention. Third, the government's focus on improving the investment climate and the costs of doing business has been admirable. Even so, Ghana's investment climate remains inferior to that of many comparable countries.
This focus must be sharpened, to offset the higher costs that the downturn will have on exporters and on services. Ghana's benchmark here should be countries like Chile, Singapore, etc and not just other African countries.
The author of this article is the former World Bank Vice-President for Africa.
Article by Dr Gobind Nankani