CLAMORING FOR ECONOMIC RESILIENCE: Moving Past the Gloom of an Existing Era

CLAMORING FOR ECONOMIC RESILIENCE:  Moving Past the Gloom of an Existing Era

The COVID-19 pandemic is regarded as the most disruptive experience since the great depression and has taken a heavy toll on the global economy– and Ghana has not been an exception. The pandemic, which started in Wuhan, a city in China, in December 2019, has affected over 200 countries, bringing economic activities to a standstill. This once-in-a-century pandemic caused most countries and cities to completely lockdown, with airlines, restaurants, shops, pubs and night clubs closed down.

The pandemic has led to disruptions in global supply chains with drops in value creation and delays in shipments of major goods and services; widespread supply shortages and attendant huge price increases; slowdown in investments and mass lay-off of workers which further dampened economic activities; and unprecedented volatility and collapse of stock markets which recorded all-time low indices.

The pandemic also led to a decline in the international price of crude oil with significant revenue loss to oil exporting countries; decline in tourism, resulting from border closures, fewer international trips, cancellation of cruise lines, airline suspensions, and cancellation of regional and global events; unanticipated increases in health spending; and higher public debt burden.

With the situation somewhat stabilizing, the global economy has seen the easing of restrictions and things appear to be returning to what has been described as the ‘new normal’. Besides the restrictions being eased gradually, various countries across the world are beginning to put together building blocks to rebuild their economies post- COVID-19.

Looking at the happenings, Dr. John Kwakye, the Director of Research at the Institute of Economic Affairs (IEA), presents a worrying view of the pandemic’s effect on the Ghanaian economy and also discusses the post-covid-19 outlook of the economy and suggests measures the government could put in place to speed up the country’s recovery after the pandemic.

Ghana’s economy before COVID

Ghana’s economy was on the growth trajectory before COVID-19 struck, with economic growth for 2019 projected to be 7.1 percent, while non-oil GDP was also projected to grow by 6 percent. Provisional data available on the performance of the economy as at the end of September 2019 showed that most of the macroeconomic indicators were on target.

WhatsApp Image 2020 07 06 at 3.55.22 PMDr. John Kwakye, Director of Research at the Institute of Economic Affairs (IEA)

Dr. Kwakye confirmed in his narration that pre-COVID, the Ghanaian 

“economy was doing quite well, with GDP growthrojected at 6.8 per cent for 2020, following an equally impressive performance in 2019. This rate of growth was high per African and international standards.”

Inflation was within the Bank of Ghana’s 8 percent band, and the overall budget deficit was projected at 4.7 percent.

This year also, the budget deficit was projected to be 4.7 percent which was still below the five percent cap set by the Fiscal Responsibility Act. Although the country’s public debt was on the rise, Dr. Kwakye said as a debt to GDP ratio, the debt was growing at a slower pace than the immediate past. He further indicated that interest rates were also declining, and although banks’ lending rates were still unacceptably high, they were trending downwards. The external sector of the economy had improved, driven by good export performance.

“However, because of the fiscal consolidation program, the government was keeping spending and the deficit down. The financial sector crisis had affected banks and some workers had lost their jobs. The Menzgold saga had also affected peoples’ investments. All of these had combined to create some liquidity crunch in the economy.“It was therefore understandable to hear people say there was no money in the economy due to the liquidity crunch but on the whole, if you put everything together, the economy was doing very well before COVID struck,” - Dr. Kwakye

Impact of COVID on economy

International research institutions and multilateral organisations, including the International Monetary Fund; the World Bank, the UNECA, the Economic Intelligence Unit, and Fitch Solutions are all projecting significant slowdown of global GDP growth with most predicting a recession or a severe economic contraction.

Though the IMF had indicated earlier in March 2020 that the impact of the COVID-19 on global growth was difficult to predict, the Bretton Woods Institution was certain that 2020 growth will slow down significantly from the projected 3.3 percent to rates far below the 2019 outturn of 2.9 percent. UNECA predicts that the Africa 2020 projected GDP growth will drop by 1.4 percentage points from 3.2 percent to 1.8 percent. The World Bank also estimates that a 1 percent decline in developing countries’ growth rates traps an additional 20 million people into poverty.

Presenting an update on the economic impact of the virus to Parliament on March 30, the Minister of Finance of Ghana, Mr. Ken Ofori-Atta, said a preliminary analysis of the impact of the Coronavirus menace on Ghana’s economy showed that the 2020 projected real GDP growth rate could decline from 6.8 percent to 1.5 percent.

In his view, Dr. Kwakye submitted that the assessment of the Finance Ministry paints a very gloomy picture of the Ghanaian economy.

“I recall that the Minister made a statement to Parliament and provided an assessment of the impact of the pandemic on the economy and then said that growth was projected to be between 1.5 percent or 2.6 percent, depending on the severity and the duration of the pandemic.”

With crude oil prices falling to all-time low as a result of the pandemic, preliminary analysis by the Ministry of Finance showed that at an average crude oil price of US$30 per barrel for year 2020, government would register a shortfall in crude oil receipts amounting to GHȼ5.6 billion. The anticipated decline in import volumes and values, as well as the slowdown in economic activities, is also expected to lead to shortfalls in both import duties and other tax revenues. Based on the performance of import duties to date, as well as assumptions on projected decline in import volumes and values, preliminary analysis shows that import duties will fall short of target by GHȼ808 million for the 2020 fiscal year.

Similarly, the projected slowdown in non-oil GDP as a result of the pandemic is expected to result in shortfalls in tax revenues (excluding oil tax revenues and import duties) amounting to GHȼ1.44 billion, bringing the total estimated shortfall in non-oil tax revenues to GHȼ2.25 billion. In all, the total estimated fiscal impact of the pandemic is expected to be GHȼ9.5 billion.

The country’s overall fiscal deficit for 2020 which was projected to be 4.7 percent of GDP is now projected to slip to 7.8 percent of GDP. In considering the situation, Dr. Kwakye indicated the situation did not look good for the economy. “Now the fiscal deficit is being projected to be over 7 percent compared with the original projection of 4.7 percent. Public debt is rising, export revenues will be lower because of the closing of borders, oil prices have also slumped and we are going to lose revenue from there.” Remittances are also going to be lower because the virus has severely affected countries where most of Ghana’s remittances come from; tourism receipts are also expected to be lower which would all affect the economy and the Bank of Ghana’s reserves. Businesses have also been affected which would impact on employment and people’s livelihoods.

Impact on public debt

The fiscal impact of the pandemic has left the government with no other option than to borrow more.

Commenting on this development, Dr. Kwakye argued that this was something that was happening everywhere, as every country would have to borrow in the wake of the pandemic, with the exception of a handful of countries who may have reserves that they can dip their hands into. The government has so far borrowed US$1 billion from the IMF and also borrowed GH¢10 billion from the Bank of Ghana to support the 2020 budget.

Dr. Kwakye, said although this will cause the country’s debt to rise, it was a necessary evil because the government has no choice at the moment.

“Given the size of money that we need, we cannot afford not to borrow so even though we should be concerned about the rising debt, immediately what we should be thinking of is how to survive. We need to survive now and we will deal with the debt situation later.”

BoG’s support of the budget

To help the government address the economic challenges of COVID-19, the Bank of Ghana (BoG) in its May Monetary Policy Committee (MPC) press release indicated that it has triggered the emergency financing provisions, which permit the central bank to increase the limit of its purchases of government securities in the event of any emergency to help finance the residual financing gap, in line with section 30 of the Bank of Ghana Act, 2002 (Act 612) as amended.

Dr. Kwakye, who is a member of the Monetary Policy Committee threw his support behind the central bank’s decision, stating that

“I am happy that the BoG is providing some of the money to support government in these times.”

Under its Asset Purchase Programme, the central bank purchased a Government of Ghana COVID-19 relief bond with a face value of GH¢5.5 billion at the Monetary Policy Rate with a 10-year tenor and a moratorium of two (2) years (principal and interest). The Bank also indicated that it stands ready to continue with its Asset Purchase Programme up to GH¢10 billion in line with the current estimates of the financing gap from the COVID-19 pandemic.

“If BoG was not providing part of the money, it will mean that government would have to borrow the amount from outside which might come at a higher interest rate. What I know as an economist is that, it is more prudent to increase domestic debt than external debt. The debt level will rise but we should just make sure that we use the money prudently,” he professed.

On the decision of the central bank to finance government budget despite an MoU with the Government not to do so, Dr. Kwakye intimated that

“the MoU was applied in normal times but we are not in normal times now.”

Before the MoU, there was a lending ceiling of 10 percent but under the IMF programme, the BoG signed a memorandum with Government to reduce its lending to zero percent.

Dr. Kwakye noted that this was a gentleman’s agreement which had not been enacted into the Bank of Ghana act yet, and thus saw nothing wrong with the central bank supporting the government is such times.

“We are not in normal times and government needs to borrow from the BoG. In abnormal times, the central bank must be open to support government.” Because the money was being borrowed from the BoG, he believes it could be negotiated at a cheaper rate than what the government would have gotten from the international market or the domestic bond market.

There have been concerns from some economists and the Minority in Parliament that the decision of the central bank to support the government’s budget would increase money supply in the economy which may lead to higher inflation. This, Dr. Kwakye corroborated but was quick to say that inflation was a lesser evil at this time.

“Our survival is critical, so let’s survive today and if it causes inflation, we will see how we can tackle that post-Covid-19. It is better for government to owe its own central bank than to owe foreigners.”

Other measures from the BoG

As part of measures to contain the impact of the COVID-19 on the Ghanaian economy, the central bank at its March MPC press conference announced some measures to help banks to lend more to the private sector in these times. The Primary Reserve Requirement was reduced from 10 percent to 8 percent to provide more liquidity to banks to support critical sectors of the Economy, and the Capital Conservation Buffer (CCB) for banks of 3 percent was also reduced to 1.5 percent to enable the banks provide the needed financial support to the economy. This effectively reduced the Capital Adequacy Requirement from 13 percent to 11.5 percent.

In his view, Dr. Kwakye said this was the right thing to do, noting that

“in this time that we need to support the economy, we needed to free some resources for banks to be able to lend more to the private sector.

He intimated there must, however, be a stakeholder committee to ensure that the banks don’t use the freed up cash to purchase government securities. He suggested the stakeholder committee must include BoG, Ministry of Finance, representatives of the banks, AGI and CSOs.

The central bank as part of the measures moreover lowered the Monetary Policy Rate 150 basis points to 14.5 percent to enable banks to lend to customers at a reduced rate. In response to these measures, banks in the country also reduced their lending rates, provided some loan repayment holidays to their customers and granted new loans to businesses which have been hardly hit by the pandemic. The Ghana Association Bankers, has pointed out that banks had, as at end of May, supported businesses in different forms to the tune of GH¢3.6 billion. The amount was in the form of new loans; rescheduling of loan repayments; interest write offs, among others.

Furthermore, Dr. Kwakye, said figures available to him indicated that banks’ lending rates had come down a bit.

“We don’t expect the lending rates to come down in the same magnitude as the reduction in policy rate. From history, when we reduce the policy rate, there is some kind of inertia from the banks in reducing their lending rates.”

Banks have over the years tended to be more responsive when the policy rate goes up but there is generally an inertia in the transmission of monetary policy. This has become a problem because currently the BoG cannot force any bank to reduce its lending rates, leaving the central bank with moral suasion as the only tool to convince the banks to reduce their lending rates.

Dr. Kwakye, however, believes the central bank must be more forceful in this regard.

“We should be more forceful and make a case that the policy rate has come down so they also need to come down. The gap between lending rates and deposit rates is also too wide and I am not happy with the extent to which banks respond to policy rate reductions. If we leave the banks to do their own thing, my concern is that they may not readily bring down the lending rates and may not lend their free reserves to the private sector.”

Ghana’s Post-COVID recovery process and time frame

The issue of how long the Ghanaian economy will take to recover from the COVID pandemic has dominated discussions in recent times, with the Finance Minister indicating that the economy might take up to three years to fully recover. However, Dr. Kwakye said it was difficult to predict how long it will take for the economy to recover. Every country is definitely going to recover at some point and some may take longer. Some will have a V-shape recovery where they go down the cliff and after COVID they come up sharply, while others will have a U- shape, implying that when they go down, they stay down for a much longer time before they climb up again.

But, Dr. Kwakye hinted it would be difficult to predict how Ghana’s case would be due to the many uncertainties surrounding the pandemic.

“The recovery will also depend on how quickly we are able to lift the restrictions we have imposed on the economy. I won’t be able to put a timeline on it though because the factors are too many and uncertain.”

How to quicken the country’s recovery?

While the period to recover is uncertain, Dr. Kwakye outlined some measures that the government could put in place to quicken the country’s recovery. Many have argued that the pandemic provides an opportunity for countries to rethink their economic policies and Dr. Kwakye believes it was time for Ghana also to rethink its entire economic policy going forward.

“It’s time to rethink our entire economic policy going forward. We have to create a more resilient, self-reliant and robust economy, leveraging our natural resources. The pandemic has disrupted the world economy and value chains and we need to move away from strictly specializing in a small number of economic activities and products. We should not concentrate on producing just a few low value-added products but rather position ourselves to self-sufficient.”

The country cannot continue to depend on others to produce things for us. We cannot produce everything, but there are some critical things that we must begin to produce ourselves locally. The government must therefore take the necessary steps to restructure the economy. Dr. Kwakye said this could be done by leveraging the country’s natural resources to transform agriculture and manufacturing.

He said data available to the IEA suggested that the country’s natural resources, which include; oil, gas, gold, bauxite, manganese and iron ore was valued at over US$12 trillion. Over US$12 trillion of natural resources is buried under ground and you ask yourself why as a country we have not been able to exploit this to develop and transform the economy.

“The portions that we have exploited, we have given them away through concession contracts to foreigners and our portion of it is very minimal. We are giving out what we are exploiting to foreign investors and their cohorts in Ghana when we should be using our natural resources judiciously to transform our agriculture and manufacturing sectors,” - Dr. Kwakye

Protecting local industries

In a bid to industrialize, many have called for the need to introduce policies that will protect local industries and impose tariffs on goods that could be produced locally. Responding to such suggestions, Dr. Kwakye subscribed to this school of thought, stating that

“I am doing research looking at the liberal policies that we have been implementing all these years. Liberal policies like: open trade, privatizing all our public enterprises, not providing subsidies and other incentives, liberalization of the financial sector, production concentration, etc. One of the problems is the open trade that western financiers have been preaching to us and because of that we have removed quotas on all goods and reduced tariffs to very minimal levels and as a result our country is being flooded with cheap imports from outside which is killing the local infant industries. If we need to put in quotas and increase tariffs to protect our industries, then we should do that. I am not talking about across board restrictions, but we should be selective in protecting our local industries. The advanced countries who have been preaching open trade to us, when they were developing, did not practice what they now preach.”

Stimulus package

As part of measures to alleviate the impact of the pandemic on small businesses, the government launched a GH¢1 billion stimulus package to provide relief to Micro, Small and Medium Enteprises (MSMEs) who have been hardly hit. In addressing which sectors the stimulus package should target, Dr. Kwakye averred the package must target businesses in the agriculture and manufacturing sectors.

“These are the bedrocks of the economy but unfortunately for us it looks like the services sector has shot up to become the lead contributor to GDP. If you look at the development of countries; countries develop by using agriculture and the manufacturing sectors as the base of their economy. We should therefore not ignore these two sectors. The extractives sector is doing well but it does not generate enough employment like agriculture and manufacturing,” Dr. Kwakye concluded.

Dr. John Kwakye Director of Research at the Institute of Economic Affairs IEADr. John Kwakye, Director of Research at the Institute of Economic Affairs (IEA)