Pay rises and high utility tarrifs to affect economy

The Economist Intelligence Unit (EIU), has in its March 2008 report on Ghana, expressed the view that "the inflation outlook for 2008-09 is also not promising; state-owned utilities are expected to raise electricity and water tariffs in the coming months; food prices will remain high until the main harvest begins mid-year; and continuing high oil prices and planned pay rises for the public sector will also be a cause for concern.

Overall, we expect inflation to remain largely unchanged, at 10.4% in 2008, before rising to 11.7% in 2009 as a result of election related spending and government pay rises." Other economic highlights are:
Failed divestiture and higher spending threaten budget.

The government's fiscal policy will continue to focus on the three pillars of the Ghana Poverty Reduction Strategy II (GPRS II), namely investing in human resource development, promoting the private sector and deepening good governance as anchors of social and political stability. On resource mobilisation, it is expected that no new tax policies will be introduced in 2008. The government plans to increase revenue mobilisation through improved administration of the tax system with reduction in leakages and corruption, although in an election year, priorities are likely to lie elsewhere.

However, the final impact of the government's decision to suspend the sale of a large stake in the state-owned Ghana Telecom is likely to be a shortfall in planned non-tax revenue, resulting in a larger than budgeted fiscal deficit (see Economic performance).

Operationally, there are strong indications of budgetary overrun on the expenditure, especially as a result of public sector wage adjustments. This will be exacerbated by expected increases in expenditure to boost the government's image in the run-up to the presidential election in December.

However, on the budget books some expenditure will be delayed until the 2009 budget through what has become a form of government borrowing by proxy: the government gives out construction contracts, which are pre-financed by private firms. These firms then borrow from the deposit money banks with letters of comfort from the implementing government ministry, department or agency. This will be one way in which the government can boost spending in an election year while maintaining that its fiscal targets are still being met.

Inflation story for 2007 ends on a high in fourth quarter

Year-on-year inflation rates for October through to December 2007 were 10.1%, 11.4% and 12.7% respectively. Inflation trended downwards in the first quarter of 2007, reaching 10.2% in March, but this trend was reversed in the second quarter when inflation averaged 10.7%, as drought caused food prices to rise for staples such as maize, yam, cassava, and plantains.

Despite the earlier drought, the rate of inflation decelerated in June and July 2007 as a result of the beginning of the major crop-harvesting period. In August 2007, the rate of inflation resumed a rising trend as a result of upward adjustment in the prices of petroleum products, which also translated into higher transport fares and cost-push pressures, the slight reduction in inflation in September and October 2007 was largely due to lower prices for food and beverages.

Inflationary pressure accelerated in November and December 2007 as a result of further upward adjustment in the prices of utilities and petroleum products as international oil prices continued to rise and the Public Utility and Regulatory Commission announced increases in tariffs for water and electricity. These translated into higher transport fares, which had cascading effects on cost-push inflation.

Other pressures were due to the higher spending patterns of consumers during the Christmas season and increased government spending to prepare for the Africa Cup of Nations 2008 (CAN 2008) football tournament.

Upward price trend continues into 2008

The acceleration of inflation, which started in October 2007, shows no sign of abating. Year-on-year inflation for January 2008 was 12.8%, the highest since July 2006. The main factors responsible for the new high are surges in the non-food prices such as transportation, hotels, cafes and restaurants group on account of high demand during CAN 2008.

Housing, water, electricity, gas for cooking and other utilities groups also saw increases. Higher prices for food and beverages, including bread and cereals, and fats and oils, also contributed to the upward movements of the rate of inflation.

Producer price of cocoa increased

In late February the government announced a 26.4% increase in the producer price of cocoa for the 2007/08 crop year, to GH¢1,200/tonne (US$1,239/ t), from GH¢950/t. The last time the price of cocoa was increased was in February 2002 for the 2001/02 main crop season.

The price increase was in response to increased cocoa smuggling into Cote d'Ivoire, where cocoa was fetching GH¢1,190/t. The total cost to the state-run Ghana Cocoa Board (COCOBOD) as a result of the price increase is estimated at GH¢27.8 million (US$29.6 million), as COCOBOD will pay the higher price for an estimated 111,050 tonnes yet to be purchased this season.

Historically, farmers in both countries have smuggled their product across the border in response to relative price differentials