From a catastrophic situation at the start of
the 1980s, Ghana has made significant progress in important economic and
social indicators. But structural weaknesses remain, and will not be solved
by privatization (see article Steady progress on privatization) or
by the boom in gold mining (see article Boom in Ghana's golden enclave).
Issues facing the nation include its heavy dependence on foreign aid,
low growth in agriculture, stagnation in industry, inflation, and the free-falling
currency.Most Ghanaians are in for harder times as the government struggles with a tough structural adjustment programme that its main creditors insist should be tightened up further. Heady visions of becoming a middle-income country by 2020 have of late been tempered by sober assessments of the road ahead. A basic concern is the country's heavy dependence on foreign aid which, the World Bank says, is "neither feasible nor desirable." Other worries include low growth in agriculture, stagnation in industry, inflation, the free-falling currency and the "dollarization" of a largely cash economy.
Opening the 1998 session of Parliament in Accra on 15 January, President Jerry Rawlings lamented the slump in world prices of gold (Ghana's biggest export) which he said was threatening the economy. "Even if there is a rapid recovery this year, and this is entirely outside our control, the losses... suffered by our mining industry will affect us for some time to come." Warning Ghanaians to expect a difficult year ahead, President Rawlings promised continued efforts to reduce inflation, widely seen as one of the biggest problems of the economy.
The President was setting
the scene for an austere 1998 budget (due in late January but still not
presented as we went to press). Under pressure to cut spending and raise
revenue, the government programme is likely to raise the political temperature.
It includes the re-introduction of a value-added tax (VAT) and higher utility
prices. Also planned are further cuts in the civil service and faster privatization.
These are among the commitments made to foreign creditors which have warned
against backsliding.
Ghana faces a vicious cycle of rising debt, accelerating inflation, slower growth and spreading poverty unless the government balances its books quickly and sustainably, the World Bank has said. Noting the country's "difficult financial situation" due to significant fiscal and external deficits, the International Monetary Fund (IMF) Executive Board adds that Ghana's growth rate of the past decade, higher than in most African countries, "may not be sustainable."
Although no longer Africa's shining "star" of structural adjustment -- Uganda now enjoys that privilege -- Ghana is still in good standing with its main creditors. It got aid pledges of $1.6 bn for 1998-99 from over 20 donor countries and institutions at a World Bank-chaired Consultative Group (CG) meeting in Paris last November. But donors stressed that disbursement rates would depend on compliance with agreed policy measures. Pointing to the budget deficit of over 10 per cent of gross domestic product (GDP) in 1996, and an inflation rate that hit 70 per cent at the end of 1995, donors called for "vigorous measures" to, among other things, slow inflation from around 30 per cent in late 1997 to single digits by 1999.
Unusually, the CG meeting was convened although Ghana did not have an active programme with the IMF. This was possible only because an agreement was deemed imminent. The IMF and Ghana have finalized a Policy Framework Paper for 1998-99, for presentation to the IMF Board in mid-February. This indicates the imminent resumption of the enhanced structural adjustment facility (ESAF) which Ghana started in 1995.
Again unusually, Ghana was allowed a break in its ESAF in mid-1996, after
only one year -- the tightly-monitored programme normally runs three consecutive
years. An IMF official said the government had not wanted to commit itself
to ESAF discipline in the run-up to the December 1996 elections, particularly
as the Fund was warning against a repeat of the 80 per cent public sector
wage hike of 1992 which had destroyed monetary and budgetary targets. That
wage rise "triggered a large fiscal deficit, renewed inflation and
exchange rate depreciation," causing Ghana's programme to come "off
track" in November 1992-June 1993, the Bank says, explaining why it
held back aid disbursements. Another IMF source says the government had
needed more time to take the "prior actions" that enable resumption
of ESAF lending. The government seems to have made the required policy commitments;
the tricky part now is implementation.
Photo: UN / G. Kinch
Although the World Bank acknowledges a "substantial" erosion of real wages in 1994-96 and predicts political problems for the government on the wage front over the next three years, it insists that a much smaller public sector is a priority. The plan is for further cuts in wage-related spending (by 1.4 per cent of GDP) and in development spending (by 1.3 per cent of GDP). These cuts will mean further shrinkage of formal sector employment, which had already plunged 53 per cent in 1988-91.
Another important measure, the VAT, is already under fire despite government efforts to "sell" the expected benefits. Public education about the tax is under way before VAT takes effect -- behind schedule -- later this year. The first attempt in 1995 was poorly prepared. Prices shot up and the opposition "Alliance for Change" organized huge demonstrations in major cities and towns against the "killer VAT." The first protest, held in Accra, was dubbed kume preko ("you might as well kill me now"). Indeed, four people died, reportedly at the hands of pro-government personnel. Another casualty was the government's attempt to move from taxing trade to taxing consumption.
These mass protests -- inspired by the general hardships -- were in some ways the most serious that any Rawlings government has faced since his "second coming" in December 1981. Earlier protests included those in 1982, against the appointment of some allegedly "reactionary" officials, and in 1983, against the inception of the Economic Recovery Programme (ERP).
The ERP, an orthodox structural adjustment programme, radically transformed the populist face of the government. Based on massive devaluation of the currency, and other stabilization measures, the ERP aimed to reduce the government's direct role in the economy, gradually eliminate subsidies, and boost private-sector and export-led growth. From a catastrophic situation in the late 1970s and early 1980s, Ghana has made progress in some areas, with macroeconomic indicators that place it above sub-Saharan averages. But in the 1990s, structural problems that were obscured by relatively high GDP growth, massive aid infusions, and Bretton Woods fanfare have become prominent. And after two successful, democratic elections -- 1992 and 1996 -- both Finance Minister Kwame Peprah and the World Bank have noted that it is harder to implement tough adjustment policies in a democracy.
Another issue of hot public debate is that of electricity prices. Power bills for industrial users was raised in early February and household electricity bills are to double soon. Increases of several hundred per cent were announced last year, then withdrawn under public fire. They will now be phased in over three years to reflect real costs: the Electricity Corporation puts its costs for supplying one kilowatt hour (kWh) at 6 US cents; after another price rise this September, industries will still be paying only 3.9 cents per kWh. The situation is aggravated by low water levels at the Akosombo Dam, which have cut power supply by some 30 per cent and there may be outages and rationing for months to come.
Debts
and deficitsThe above measures aim to help the government out of the cycle of deficit financing which pushes inflation and deprives the productive sectors of much needed resources. Revenue rose by an average 40.5 per cent in 1990-95, but expenditure rose by 43.2 per cent a year. With foreign aid as a vital cushion, the government also has made money supply rise by an average of 40 per cent a year since 1992. More budget support has come from privatization receipts, which, some argue, is a bad exchange of capital assets for consumption. Also important has been the vigorous sale of treasury bills, which yielded 42.8 per cent in interest last year (now down to 39 per cent).
Due to heavy government borrowing, the public sector took 65 per cent of total domestic credit in 1996. This played a role in "crowding out the private sector," but the banks also bear some responsibility, preferring safer investments in the more profitable money market than extending credit. In 1995, for example, banks lent out only 30 per cent of mobilized savings. "Now banks are like traders with risk-free government paper," said Mr. J.K. Richardson, then President of the Association of Ghana Industries. This behaviour, although rational, points to the lack of competition and development in the financial sector after a decade of reforms, observed the Institute of Statistical, Social and Economic Research (ISSER) in Accra.
Some analysts say that selling high-yield government paper is failing to mop up excess liquidity and may be fuelling inflation. It has certainly contributed to the ominous growth of domestic debt, up by 62 per cent in 1996. Interest payments on this debt rose 86.5 per cent that year and could become the biggest item of recurrent spending in coming years.
In contrast, public spending on agriculture, education and health is falling, while private sector development is hampered by, among other things, lending rates that averaged 47 per cent in 1996. Development spending is also suffering: interest payments on national debt exceeded capital spending for three consecutive years (1993-95), notes the Centre for Policy Analysis (CEPA) in Accra.
Agriculture
still the bedrockGhana has become a "nation of traders," says one analyst, noting that half of GDP comes from the services sector, and mainly from trading. But the real problem, CEPA argues, is the "unacceptably low" growth of agriculture and industry.
Agricultural growth averaged under 2 per cent for over a decade but, boosted by a surge in cocoa production, slightly exceeded 4 per cent in 1995 and 1996, easily ahead of population growth. But to reach its medium-term target of 5-8 per cent annual growth, the sector faces a "sustainability crisis," says the World Bank. It says that fallow periods are shorter and yields are low, while soil fertility loss, soil erosion and deforestation may cost up to 4 per cent of GDP a year.
Year-round availability of inexpensive food and agricultural raw materials is a "prerequisite" for stable growth, development and poverty reduction, Mr. Peprah said in 1997. This acknowledged the need to reduce overall inflation by eliminating the strong influence of food prices -- they rose over 55 per cent in 1996 -- 10 points higher than in 1995.
Long seen as the base for industrial development, agriculture has not played this role. The sector operates far below potential, with poor storage and processing facilities contributing to post-harvest food losses of 20 per cent, says the Ministry of Food and Agriculture. Farmers' problems include high input prices, marketing bottlenecks, the lack of affordable credit and low earnings.
Part of the blame for the poor results lies with the government's reliance on market forces to increase the efficiency of resource use and allocation, says CEPA. Several known factors limit the productivity of land and labour, and in any case, "subsistence farming is hardly susceptible to the influence of price incentives," it adds.
Government and Bank officials have produced a new agricultural growth strategy (the second this decade) and a sector investment programme was launched at the end of last year. The aim is to increase productivity and export production while paying more attention to sustainability. With public spending on agriculture in steady decline -- from an already low 3.9 per cent of recurrent spending in 1990 to 1.4 per cent in 1996 -- it remains to be seen what steps are taken to revitalize a sector that remains crucial to national development and poverty eradication.
Severe
contraction in manufacturingAmong the factors holding back faster development and job-creation is the decade-long stagnation of the industrial sector at some 14 per cent of GDP. The main causes are inflation, "impossible interest rates," and excessive taxation, says Mr. Richardson. Instead of favouring foreign investors, the government should help local production to be more competitive with imports, he told Africa Recovery in a mid-1996 interview.
He called for medium-term loans at interest rates of 10-15 per cent, compared to commercial rates that then stood at 45 per cent. Divestiture receipts should support the private sector and beef up the Business Assistance Fund which the government launched in 1994. This soft-loan fund of C10 bn was "good in theory" but its impact was eroded by inflation, rapid currency depreciation and tight eligibility criteria. He proposed levying a surcharge on the burgeoning treasury bill sales, with the proceeds directed to a private sector credit facility.
"We can do without imported cornflakes," Mr. Richardson said, urging genuine support for agro-based industry. "We must feed ourselves and our factories," he said. "Once we can do both, then we're moving somewhere to strengthen the cedi, and inflation, exchange and interest rates will start to fall."
The future of manufacturing is unclear after the shake-out which saw manufacturing jobs fall by 64 per cent in 1987-91, CEPA says. And the current investment promotion drive is having only a modest impact on job-creation. New investment in manufacturing worth over $129 mn in 1996 may create nearly 4,000 jobs (a 15 per cent rise in total manufacturing jobs), notes ISSER. But this does not represent a decisive turnaround. The contraction of industry remains disturbing because, as CEPA says, industrial growth "remains the single most powerful force that can propel economic growth, generate employment, and increase the economy's competitiveness."
Also addressing these broad concerns, ISSER stresses that the government must make its spending more productive. One example is to make rural electrification programmes part of a "coherent trade and industry development programme that allows rural development to pay for itself in the long run."
Such solid advice is not lacking in the country. But as in other African countries, the demands of crisis-management obstruct the planning needed to remove, over time, the causes of the crises. Ghana is pushing ahead with structural adjustment policies that may not be laying the foundations for sustainable growth and development. The country remains locked in the tight embrace of the IMF and World Bank. By the end of March 1997, Bank loans to Ghana totalled $3.5 bn (more than half the country's foreign debt), making it the biggest portfolio in the Bank's Africa region. The institution therefore has some interest in Ghana's progress, but not as big, and not the same, as that of Ghana's people.
