Ghana economic mismanagement dilemma: when thrift is not a virtue Signs are beginning to emerge that Ghana's new administration will finally have to stir itself out of the self-imposed stupor of extreme thrift by which it hopes to dampen hitherto high macroeconomic pressures that threaten the health of the country's economy. Social services that those in the lower-income brackets were beginning to take for granted, such as the public metro mass-transit (MMT), school feeding programme, and the National Health Insurance Scheme (NHIS), as well as the Livelihoods Empowerment against Poverry (LEAP) programme, are all experiencing challenges in their implementation. Of course, government says those programmes are innately flawed - for which reason it is devising comprehensive plans to overhaul them and make them more effective. "It is obvious that some of the buses imported by the previous administration for the MMT programme are not strong enough. They are not well suited to our environment and we are looking to import a type that is more robust," the Minister of Transport, Mike Hammah, told Parliament in defence of why about 70 percent of the MMT's fleet is currently grounded. Three days to the commencement of the academic year, in mid-September, government disclosed that about 40 percent of caterers participating in the school feeding programme were operating without contracts. They were therefore instructed to stop serving food at schools till their operations have been regularized. Some school-pupils therefore have not been receiving their one meal a day under the programme since schools reopened. Designated clinics and pharmacies in the NHIS programme in some regions of the country have also announced they are suspending their services under the scheme, citing delays in payments from government for services rendered which jeopardising their cash flows and thus undermining their operations. Experts say stagnant public spending is largely to blame for the administration's poor showing in the provision of social services. The Centre for Policy Analysis (CEPA), a local civil society political economy think-tank, in a critique of government's economic policy as outlined in the 2009 Budget Statement has been vocal against the reduction in government total expenditure from 42 percent of GDP in 2008 to 36.6 percent in 2009, a reduction of 5.4 percentage points. The planned decline in government total expenditure is to enable the achievement of a budget deficit of 9.4 percent of GDP, down from the almost 15 per cent deficit run from last year. CEPA says the new targets, which are requirements for an IMF support package, will affect expenditure items whose outturns have been identified as critical to the overall outcome of government's economic stabilisation programme which includes the public sector wage bill; energy subsidies; interest payments on the public debt; public capital expenditures; and poverty-related expenditures. The Mills administration in 2009 inherited an economy with macroeconomic indicators running wild. The country had recorded a GDP growth rate of 7.3 percent in 2008, the highest in decades and significantly so in a year of global economic downturn. However, that came at a tremendous cost in macro-economic terms; inflation had raced up to 18.1 percent at the end of 2008 and still counting, from 12.8 percent at the beginning of that year. The cedi depreciated by 20.1 percent and 16.3 percent against the dollar and the euro respectively. The rising inflation coupled with the depreciating cedi has effectively eroded purchasing power generally, but it is affecting more severely, those in the lower income bracket. Government's budget Statement for 2009 signalled a clear intention to reduce spending significantly. The expressed intention is to bring the deficit down/to 9.5% of GDP, albeit various official statements have expressed the desire to maintain a number of expenditures in view of their 'strategic' significance - including subsidies on utilities, which has always been a controversial issue. While the decline in government spending is expected to achieve substantial cost saving targets, it will be focusing on sharply reducing the rate of inflation to 12.5 percent by year-end from the current 19.65 percent through stabilisation of price and exchange rates on the market. Recent statistics show government may be succeeding. A mid-year review of the economy by the Institute of Social StatisticaJ & Economic Research of the University of Ghana (ISSER) indicates that government has achieved 85 percent of its policy targets at macroeconomic stabilisation. However, ISSER says that stabilisation may be coming at a cost that ultimately may unravel the economy, undermining growth-gains made over recent years. The report hints at the danger of government taking "the narrow road of seeking immediate stabilisation and compromising future growth by sacrificing essential investment expenditures." ISSER calculates that between 2002 and 2008, average annual real per capita GDP growth has been 3.54 percent, and at current growth rates it will take 20 years to double to US$900 the current per capita GDP of about US$450, and a minimum of six percent annual real per capita growth is needed to hit US$900 in a decade. The country's 2008 real GDP growth rate of 7.3 percent translated into a higher real per capita GDP growth rate of 4.8 percent (based on a population growth rate of 2.5 percent in 2008), up from 4.0 percent in 2007. The growth rate, remarkable particularly as it was achieved at a time of global economic downturn, mostly reflects a general increase in government consumption, spending, and investment. Now most experts caution that the targetted growth rate of 4.5 percent for 2009 - due to the drastic reduction in government spending in pursuance of macroeconomic stabilization - could actually be undermining social stability. Reasons for increased public spending in a time of economic crisis, states ISSER, may be drawn from the argument that the different shocks have affected the poor in relative terms much more than they have affected the non-poor. The poor were disproportionately affected by the earlier rises in food and petroleum prices and they will be most affected by slower economic growth. Since the poor have less access to health, education, water, energy and other infrastructure and services, they depend much more on public services and when these are not available they tend to suffer considerably more. In CEPA's view, not only are the near to medium-term forecasts of inflation incorporated in the 2009 Budget Statement over-optimistic and unlikely to be realised, but the 4.5 GDP growth target for the year is rather mediocre and inappropriate to help lift the country out of the lower rungs of poverty in the next decade as envisaged in all long-term forecasts of the country's economic development. "The implications of this magnitude of slowdown for jobs and poverty need to be carefully analysed and steps will have to be taken to ensure that the poor are not used as cannon-fodder in this drive at macroeconomic stabilisation," says CEPA's Executive Director, Dr. Joe Abbey. CEPA concludes that for a low-income country like Ghana, faced with twin financial crises one home-grown and calling for the restoration of fiscal discipline, and the other a global financial crisis and recession requiring fiscal and monetary stimuli - the challenge is how to avoid the curse of stagflation, the phenomenon of low or even negative economic growth combined with rising unemployment and high inflation. The Director of ISSER, Professor Ernest Aryeetey, says higher growth targets than targetred in the 2009 Budget Statement are imperative "if gains made toward halving poverty as envisaged in the Millennium Development Goals are not to be undermined; and that will primarily be determined by the magnitude and quality of public spending. "If the quality is poor, this could lead to unsustainable growth; that is, growth not accompanied by commensurate development. Such growth produces little employment-creation and limited diversification within the economy," he says. With the flak coming in thick and fast, perhaps now is time for the new administration to think of how to spend more since it seems not to impress anyone with its policy of extreme frugality - not least those in the low-income bracket who may have been excited about the government's professed social democratic ideology. ISSER suggests how best to spend: "The main growth constraints are the infrastructure gaps particularly in energy, water, ICT and some areas of transport - and low agricultural productivity; there is no doubt that a consistent policy on these areas remains an imperative." Source: B&FT