Business in Ghana

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Ghana Economic Review and Outlook 2013 and the Dawn of the Dutch Disease

Posted by Business in Ghana on October 20, 2012

DATE: Thursday 25th October 2012      TIME: 8.30 a.m. prompt

Venue: British Council Hall, Liberia Road, Accra

Major Findings

Currency crisis has been brought under control

Over the first half of this year, the cedi lost about 20 percent of its value against the US dollar in the foreign exchange markets. It stabilized somewhat between July and August, reaching a peak of GHᄁ1.9565 per US dollar in late-August, and thereafter gradually gained in value /recovered to the current GHᄁ1.8938 by mid-October. Barring any adverse developments, CEPA projects an end-year rate of GHᄁ1.85 per US dollar. For the year as a whole this would mean a cumulative loss in the value of the cedi by about 13 percent.

The weakening of the cedi in the first half of the year can largely be attributed to the political business cycle  a characteristic of democracies around the world  which is also observed in the Fourth Republic of Ghana. It largely manifests itself in election years, resulting in loss of macroeconomic stability  continued loss in the value of the cedi and rising inflation.  A World Bank study, for example, found that the election year budget deficit has been, on average, 1.5 percentage points of GDP higher than the budget deficit of the preceding year. In anticipation of this, investor concerns were expressed from the middle of 2011 as to whether Ghana would perform worse than average in 2012.

The Executive Board of the IMF met to review the performance and outlook of the 3-year stabilization programme. It concluded by endorsing the macroeconomic policies of the government and by end-July disbursed US$178.74 million. This endorsement gave credibility to the commitment to fiscal discipline of the government and support for the monetary policy measures of the Bank of Ghana. As a result, prices of Ghanas 10-year Eurobond rose in secondary markets and their yields dropped to 6 percent compared with the initial coupon rate of 8.5 percent per annum. Moreover, the second 5-year bond issue in August 2012 was highly oversubscribed with additional finances amounting to GHᄁ590 million, and most importantly at a fixed interest rate of 23 percent per annum compared to the 26 percent per annum in the earlier 5-year bond issue of June.

The commitment of government, expressed by the Minister of Finance and Economic Planning, was to use these additional resources NOT to finance a larger fiscal deficit but to lengthen the maturity of the public debt. If this is done it should enable a lowering of the yields of the shorter maturities, particularly the 91-day Treasury bill, from the present 23 percent to about 20 percent. This provides an opportunity for aligning the monetary policy rate (MPR) of the Bank of Ghana with the domestic interest rate structure without signalling an increase in lending rates and not in any way disturbing the strengthening in the value of the cedi as projected by CEPA for the rest of the year.

But the Dutch Disease dawns on us

The publication also reveals the CEPA finding that the so-called Dutch Disease is in evidence. This shows itself in the increasing loss of international competitiveness of exporting and import-competing activities in the non-oil sector; and loss of factors of production into oil-related subsectors of the Services sector; and the consequent slowdown in the tempo of activity or growth rates and threat of rising unemployment.

In the short- to medium-term, the remedy against the unfolding Dutch Disease is to focus on reducing the costs of doing business and increasing productivity in Ghana.

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3 Responses to “Ghana Economic Review and Outlook 2013 and the Dawn of the Dutch Disease”

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