Editorial: Good Statistics, But Slow Growth, Who’s To Blame?
FIGURES released by the Monetary Policy Committee of the Bank of Ghana this week show that the economic indicators continue to point in the right direction, at least on the macro level.
The rise in prices of goods has fallen for the third consecutive month. What cost ¢1,000 in March 2004 was selling at ¢1,067 by March 2005. The good news is that what sold at ¢1,000 in June 2004 was going for ¢1,057 last month. The cost of loans has also decreased. Credit to the private sector, especially SMEs has gone up. Total tax revenue is up by almost 26%. Significantly, more people have signed up to the SSNIT scheme, which may indicate that employment is rising. Moreover, between January and May this year, company taxes yielded over ¢1 trillion, 50% more than the same period last year. This could mean a combination of factors: that companies are expanding, more are being created and their profit margins are rising. And, oh, remittances are up again by 50% for the same period.
At 15.5%, the benchmark 91-day Treasury Bill is at its lowest since the PNDC kicked off its liberalisation of the financial sector. Though, the commercial bank base rates are down to an average 22.5%, Dr Acquah, the Governor, was quick to add that the financial institutions are maintaining “rigidly large common average real interest rate spreads.” The significance of this to the economy cannot be overstated. When the Government or central bank is restricting money and credit, firms find loans difficult to obtain and investment tumbles. Small business is especially hard hit because the larger firms tend to have their credit needs catered to first. The economy pays for high interest in income not earned and in output not produced.
When investment is cut by high interest, two things happen. (1) Business does not take as much advantage of the new, more efficient tools to produce goods as it might. (2) Industry slows down the rate of expansion of the total output capacity of the country's factories. In effect, the rate of growth of output slackens when high interest prevails. A combination of pressure from Dr Acquah and Baah Wiredu, the finance minister, has not gotten the banks to lower real interest rates significantly. The hurt to the economy goes against a liberal economy, which Ghana is religiously following to improve the economy. This is right in principle but we don't seem to be following it right.
Free economies work in an environment of growth. In a country where social infrastructure is woeful, state spending is vital to growth. Yet, this Government is shy to spend. It appears it wants on its epithet: THE NDC TOOK BIG LOANS AND SPENT, WE GOT THOSE DEBTS CANCELLED. ALAS, BUT LITTLE TO SHOW FOR. President Kufuor has admitted that he needs about $2 billion extra funds annually to undertake his development programme. As at yet, there is no clear indication how we are to raise that kind of money.
The signs so far are not good. A shortfall, for example, has been significantly felt in the area of programmed grants. So far, nearly ¢1 trillion less than expected has come in. Government expenditure for the year up to May is provisionally estimated to be 14% below the budgeted expenditure of ¢11.2 trillion. More worryingly perhaps, capital expenditure of ¢3 trillion, recorded a shortfall of some ¢900bn for the first five months.
This raises a number of issues: is Government being too prudent? When is the accelerated growth promised going to start without the needed push of accelerated capital expenditure from Government? Is the independence of the central bank actually stifling growth?
Today, in Ghana, money used in transactions is mainly of three kinds - currency (paper money and coins in the pockets and purses of the public); demand deposits (non-interest bearing checking accounts in banks); and other checkable deposits at all depository institutions, including commercial and savings banks, savings and loan associations, etc. So what does it mean when the Bank of Ghana says Broad money (M2) growth has decreased from 40% in May 2004 to 23% in May 2005, when at the same time reserve money is down from 35.4% in June 2004 to 15.7%? Reserves refers to currency held in bank vaults. This, vitally, is used to support a much larger volume. In our considered view, it speaks of an economy more concerned about balancing the books than growth. M2 in economics refers to the amount of cash in circulation, the amount in checking or demand-deposit accounts plus savings accounts, and money market accounts, such as shares in mutual funds, which are relatively liquid but believed to represent principally investments to their holders rather than media of exchange.
We accept that money, like anything else, derives its value from its scarcity in relation to its usefulness and that control of the quantity of money is essential if its value is to be kept stable. And with money's real value measured only in terms of what it will buy, it is crucial that the lid is kept tight on the pressure pot of inflation. Indeed, if the volume of money grows more rapidly than the rate at which the output of real goods and services increases, prices will rise. This will happen because there will be more money than there will be goods and services to spend it on at prevailing prices. But if, on the other hand, growth in the supply of money does not keep pace with the economy's current production, then prices will fall, the nation's labour force, factories, and other production facilities will not be fully employed, or both.
Could it therefore not be correctly argued that the current tactic of the BoG is to fight inflation by actually keeping the supply of money below productivity? Currently, it appears tight fiscal policy is more the end than the means.
In theory, the BoG neither requires nor seeks the approval of any branch of Government for its policies. The System itself decides what ends its policies are aimed at and then takes whatever action it sees fit to reach those ends. There are two major problems, however. One is the problem of political responsibility for the country's economic policies. The other is the problem of final control over the Government's actions in the economic sphere. Since the central bank is independent, it is not, in theory, accountable to anyone for the economic policies it chooses to pursue. But this runs counter to normally accepted democratic principles. Independence was felt necessary to keep politicians' sticky politically-motivated fingers from the till.
The BoG controls the money supply – that is, the money in the hands of the public. When ordinary Ghanaians say 'there's no money in the pocket' this may be what they are referring to: reduction in money supply. Money supply helps determine the general level of interest rates paid for the use of money, employment, prices, and economic growth. Many economists believe the money supply is the most important determinant of these variables. And this is controlled by an institution uncountable to the electorate.
Yet, who do we blame for Government's inability to change gear for the accelerated growth? Is the central bank neutralising the President's economic policies? Perhaps, not. But these are questions we believe the nation needs to be considering.