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What is the real state of our economy - Excerpts of the "State of our economy" speech by Dr Dawumia

The Statesman
4 May 2012 | General News

·          Something does not add up.
·          Where are the figures being collected from

·          Low inflation should be reflected in our lives

·          You cannot manage an economy on propaganda

·          Credibility and transparency are critical to economic management

·          Cedi depreciation is not a mystery
·          When in doubt, observe the exchange rate

·          Best response to Green Book is a red Card in December

·          Team Ghana's competition is not with each other but with other countries in global economic space

  Dr. Mahamudu Bawumia, the NPP vice presidential candidate for the 2012 elections has cast doubt on the official figures about the state of Ghana's economy.

In a Ferdinand O. Ayim memorial speech he delivered in Accra on Wednesday May 2, 2012 on the subject, “THE STATE OF OUR ECONOMY” Dr. Bawumia gave a cogent and tightly argued analysis of the current state of the Ghanaian economy.  

The former Deputy Governor of the Bank of Ghana and Economics lecturer said he decided to give his talk on the subject that was uppermost in the minds of most Ghanaians, “What is the real state of our economy?” Dr. Bawumia argues that to be able to do “anything substantial about the economy, you need to know what the real state of the economy is, and to understand the state of Ghana's economy today, we first have to understand where we are coming from, where we are and where we ought to be going”.

He traced the fiscal and monetary policies of the country since independence. He said that for the most part since independence,” Ghana's economy has been characterized by long periods of high and volatile inflation and macroeconomic instability which has reflected in high and variable interest rates and significant exchange rate volatility and depreciation.”

He traced the path that led to HIPC in 2001: “The debt burden of the economy increased dramatically during the structural adjustment period, with external debt as a proportion of our income (GDP) rising from 27 percent in 1984 to 103 percent by 1994 and rose further to 158 percent by 2000. The country was having difficulty servicing its debts. Ghana had become a highly indebted poor country (HIPC)”.

The HIPC Initiative adopted by the Kufuor Administration provided Ghana with a debt relief of about $4billion out of a debt stock of $6.1billion. Dr. Bawumia gave a comprehensive list of about 55 structural reforms and policies introduced between 2001 and 2008 that laid the foundation for a major expansion in economic activity, access to credit and macroeconomic stability. He described this as a phenomenal record of reform that resulted in a major economic recovery with macroeconomic stability and significant deepening of the financial sector.

Between 2000 and 2008, without oil, the size of Ghana's economy increased from some $5.1 billion to $28.5 billion, a six-fold increase. That, he said, is what can be described as unprecedented! Even in the face of a global economic and financial crisis in 2007/8 (with oil prices reaching a record high of $147/barrel) economic growth in 2008 rose to 8.4%.

Average Income per person (GDP per capita) was increased from $370 in 2000 to over $1000 by 2008

The government budget deficit as a percentage of our total income (GDP), was reduced from 9% in 2000 to 1.9% in 2005, but subsequently increased to 4.8% in 2006, 4.9% in 2007 and 6.5% in 2008 in the face of the synchronized global financial crisis and commodity price shocks. He emphasized that Ghana's fiscal deficit as a percentage of our total income (GDP) in 2008 was 6.5% - not 14.5% as the incoming NDC government had claimed in 2009. In that same year, the fiscal deficit in Botswana was 15%, 8.5% in Japan, and 7.1% in the United Kingdom.

Dr. Bawumia tackled the argument regularly made by the NDC government that to compare like with like, their performance in government now should be compared with the performance of the NPP in its first three years in office.

“What is undeniable is that Ghana was transformed during the period of the NPP's tenure (2001-2008) from a low income HIPC economy to a lower middle income economy on the frontiers of emerging market status. In this regard I am very amused when I hear our political opponents on the NDC side try to argue that they would like to compare the first three years of this government with the first three years of the NPP. How can one even suggest such a comparison? By analogy if you hand over to me a Tico car and a few years later I work hard to buy a a mass transit bus which I then hand over to you, how can you turn around to say that you want to compare the performance of the bus with that of the Tico you originally handed over to me? The NDC inherited a very different economy from the NPP.”

Dr Bawumia argues that the situation today is very different,:   “the worst form of financial crisis to have hit the global economy since the great depression of the 1930s is largely over and the global economy is on a path to recovery. This is particularly strong in the emerging market economies and the developing world. Crude oil prices have fallen significantly below the July 2008 highs of $147/barrel while the prices of other primary commodities like gold and cocoa have increased.

Ghana has benefited from the following developments on the resource and external front since 2009:

 The discovery of oil (in commercial quantities) by the Kufuor Administration in 2007 has boosted Ghana's economic growth significantly, as reflected in our recent real GDP growth data, indicating that real GDP growth has increased from 8.4% in 2008 (without oil) to 14.4% in 2011 following the onset of oil production.

 Oil prices (for which Ghana is now an exporter) increased by 13% between 2009 and 2011.

Gold prices are around the highest in our history. On average gold prices increased from US$652/fine ounce (between 2005 and 2008) to US$1240/fine ounce between 2009 and 2011. An increase of 90%!

 Cocoa prices are also at an all-time high. Increasing from GBP1032/tonne between 2005 and 2008 to GBP1987/tonne between 2009 and 2011. An increase of some 93%.

 Ghana's core terms of trade (i.e. the price of our main exports versus the price of our main imports) has therefore seen an improvement of some 73.0 percent between 2009 and 2011.

This Government inherited oil, and at the same time cocoa and gold prices have virtually doubled in the last three years. It has also borrowed so much money on our behalf and in the process has more than doubled Ghana's total public debt. With this set of economic opportunities, Ghanaians should as a matter of right expect a much better Ghana.

Dr. Bawumia says “the apparently rosy picture painted by an oil driven GDP growth rate in 2011 masks some worrying developments in the real economy”. He cites the drastic reduction in agriculture growth from 7.4% in 2008 to 0.8% in 2011,

  Industry growth (excluding oil) has not fared much better, with a decline from 15.1% in 2008 to 4.5% in 2009, 6.9% in 2010 and 14.1% in 2011. Electricity and construction sector growth have slowed down. The growth in electricity production has slowed down from 19.4% in 2008 to - 0.8% in 2011.

What is clear from the performance of the real sector since 2008 is that growth rates in agriculture (where most people depend on for their livelihood) and industry have declined. The question that we should ask as Ghanaians is why aren't these sectors growing at much faster rates than they were when we had no oil and following the significant increase in cocoa and gold prices?

How are we going to create jobs when critical sectors of the economy like agriculture are not growing? At yesterday's May Day celebrations, the Secretary General of the TUC bemoaned the fact that Ghana appeared to have a booming economy that is not creating jobs to address the major challenge of unemployment in general and youth unemployment in particular. Well, it is clear from the evidence so far that in fact, the economy is not booming outside of the oil sector but rather what we are seeing is declining growth in agriculture and industry.

The jobless growth we are seeing in Ghana under this government is therefore not a mystery. You cannot create jobs when critical sectors are significantly declining.

Dr. Bawumia reserves his most withering remarks to the government claims of having achieved single digit inflation as a mark of good management of the economy. He points out that single digit inflation has been achieved in Ghana under past governments and it should not be claimed under the “unprecedented” achievements of this NDC government.

But his main argument states that governments aim at low and stable inflation to reduce the cost of living, reduce interest rates and stabilize exchange rate.

“We do not seek to achieve single digit inflation just for the sake of beautiful statistics. The statistic must have meaning in people's lives. Unfortunately, most people in Ghana cannot relate to the talk about single digit inflation when they get to the market. I was in Malata market last week and it is clear that prices are increasing at a faster rate than what the official statistics may be capturing So where are we collecting our price data for the computation of inflation? Which markets are we visiting?”

On the effect of inflation on interest rates, Dr. Bawumia states that the attainment of reduced inflation to single-digit levels should reflect on reduced interest rates. Between 2001 and 2008 for example, inflation was cut by more than half from 40.5% to 18.1%. In the process, average bank lending rates were reduced by almost half (from 44% to 27%) by 2008, a reduction of 17 percentage points.   Between 2009 and 2011, inflation has also been cut in half from 18.1% to some 8.8% currently. Average bank lending rates have however only declined marginally from 27% in 2008 to 26% currently, a reduction of 1 percentage point. Why the missing link now? Why have interest rates become suddenly so sticky downwards? Could it be that banks, like the suppliers of goods in Malata market have not quite bought into single digit inflation pricing? The financial services market (like our traders in Makola and Malata) appear oblivious to the fact that we have single-digit inflation prevailing in the economy. So where are we collecting our price data for the computation of inflation? Which markets are we visiting?

Low and stable inflation tends to result in exchange rate stability. This relationship has held in the case of Ghana for many years.

What we are however seeing is that there is a sudden break in this relationship. The exchange rate is rapidly depreciating while inflation is in single digits and stable. Ladies and Gentlemen, something does not add up. The rapid exchange rate depreciation observed suggests that inflation could be higher than what is being captured by the official data.

It is clear that when it comes to established relationships between the cost of living, interest rates and exchange rates, the single digit inflation in Ghana is not consistent with what we expect to see. If single digit inflation is meaningless for cost of living, interest rates, exchange rates, and jobs, what is it for? To put it another way, if single digit inflation does not help with respect to the prices of the things you buy, the cost of borrowing money for your business, the value of the cedi to the dollar, or help the youth to get jobs, then what is the point?

I would however leave the judgment on whether we actually have single digit inflation to Ghanaians who shop in our markets every day.

Nevertheless I think it is time for Ghana to have a truly independent and well-resourced statistical service.

There is an urgent need for a paradigm shift because we cannot continue doing things the same way and expect different results. The paradigm shift that Nana Akufo-Addo and the NPP are seeking the mandate of Ghanaians to implement is one of focusing on SOLUTIONS and RESULTS underpinned by a mindset change and the inculcation of a can-do spirit in Ghanaians.

In moving to this new paradigm it is important that we understand that in the context of a global economy, our competition (as team Ghana) is with other countries and not primarily with each other. Our competition is China, Malaysia, Thailand, South Africa, Brazil, India, Singapore, South Korea, the United States, etc.

Our businessmen and women, our contractors, our teachers, nurses, engineers, etc. are our players on the field of international competition. They are our Black Stars. We should support them and provide them opportunities regardless of which party they may happen to support. While we engage in healthy political competition as part of our democratic process, we should always remember that ultimately our competition is not with each other. It is with other countries in the global economic space.

We have to plan long term and be prepared to take long term decisions for the benefit of Ghana and not decisions driven by short term political advantage. We should be prepared to tap into the talents of Ghanaians within and outside Ghana regardless of political affiliation for the economic transformation of Ghana.

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