A Review of the Economy and Outlook Ahead of the 2018 Budget

1. A Review of the Economy and Outlook Ahead of the 2018 Budget By Institute for Fiscal Studies

2. Ahead of the 2018 Budget Statement, IFS wishes to share its views on the economy. • Outline: • Economic Growth • Inflation • Exchange Rate Develoments • External Sector Developments • Fiscal Developments (very brief)

3. Economic Growth

5. Significant difference between Y/Y total GDP growth (7.8%) and nonoil GDP growth (4.0%) in H-1. • Difference being oil.

6. Sectoral Developments

11. Nonoil growth has been relatively low since 2014 • The result of depressed commodity prices, energy shortages, other infrastructure bottlenecks, effects of macroeconomic instability, etc. • This year’s (nonoil) growth has been additionally affected by low imports and fiscal retrenchment.

13. The projected nonoil growth for the year is 4.6%, same as last year. • Fiscal retrenchment still poses a downside risk to the growth outlook. • The effect of fiscal consolidation may be partly offset by stable energy supply—if sustained—and expected kick-in of various measures to incentivize the private sector.

14. However, with Y/Y H1-2017 (nonoil) growth of 4.0% (cf. 5.9% in H1-2016), achieving the projected annual growth of 4.6% will be challenging. • We are, therefore, more inclined to agree with the IMF projection of 4.0%. • It must, however, be pointed out that while this may be low by our standards, it will be above the average of 2.6% projected for SSA by IMF (REO, SSA, April 2017).

15. Key Message: Revamp the Nonoil Sector to Accelerate Medium- to Long-term Growth and Job Creation • Government has projected nonoil growth to average about 5.6% during 2017-19 • IMF says it will then converge to what it regards as “its potential level of 5.0% in the long-run.” • Ghana should be able to do better than this if the right policies are pursued to revamp the agricultural and manufacturing sectors.

16. We note Government’s policy initiatives in agriculture and industry. • These are issues that IFS will devote some attention to as more detail becomes available. • That said, we expect that the policies would be informed by Ghana’s historical experience as well as best international practices to ensure that they deliver maximum returns.

17. Inflation

19. Downward trend in inflation this year been aided by tight fiscal and monetary policies; relatively stable exchange rate; and stable administered prices for most of the period. • Government’s target of 11.2% for end-2017 looks achievable. • The goal should be to bring inflation further down to the Bank of Ghana’s medium-term target of 8% +/- 2% or single-digit inflation, for that matter.

20. Key Message: Adopt a Multi-faceted Approach to Fighting Inflation • Keeping inflation permanently under control requires policies to tackle both the demand and supply (or cost-push) determinants: • Demand: Largely, monetisation of fiscal deficits. • Supply/cost-push: Food supply volatilities; exchange rate instability; upward adjustment of fuel and utility prices. • Sustained fiscal consolidation and reduced access to central bank financing will be important in containing demand pressures.

21. Given the weight of food in the CPI basket (44%), ensuring adequate supply of food all year round through policies along the production to storage to marketing chain will help in dampening inflation. • The exchange rate effect can be contained through economic transformation aimed at increasing export earnings and reducing demand for imports. • Ensuring efficiency in operations of utility companies will reduce the impact of their operational costs on the general price level through high tariffs.

22. The Exchange Rate

23. Exchange Rate

25. Note: • Cedi been relatively stable vis-à-vis dollar. • However, depreciated much faster versus pound and euro—effect of cross rates. • Relative stability against dollar helped by: • ---improved inflows from bond issues, exports and cocoa loan, and reduced import demand.

26. The exchange rate is likely to remain stable through rest of year, given BoG reserve cushion (See reserves below). • Key Message: Transform Economy to Support Exchange Rate Stability • Sustaining the exchange stability on a permanent basis requires policies to add vale to export products and diversify the economy so as to increase export earnings and reduce import demand.

27. External Sector

28. Table 8: Exports and Imports Source: Bank of Ghana

29. Note: • Higher earnings from gold and cocoa due to higher volumes as prices were lower. • Cocoa products volume virtually stagnated during 2015-17. • Suggests lack of progress in refining.

30. Developments in Non-Oil Imports Source: Bank of Ghana

31. Note: • Imports lower across all products: capital, consumption, intermediate, other. • Dip in capital and intermediate imports likely to have negative impact on investment and growth.

32. Table 9: Ghana’s Balance of Payments Source: Bank of Ghana

33. Table 10: International Reserves ($’m) Source: Bank of Ghana

34. Key Message: Transform the Economy to Strengthen the External Position • It is suicidal to continue to produce and export cocoa and gold mostly in their raw form, given their low values in international markets. • Need to add value to exports and diversify economy, including through industrialization.

35. Transformation of the economy been long recognized. • But largely lip-service. • Cannot put it off any longer. • Expect the 2018 budget to outline in concrete terms measures to transform the economy so as to bring lasting sanity to our foreign exchange system.

36. Fiscal Performance

37. Fiscal issues form the subject matter of the main presentation for today by our Executive Director. • So not going to dwell on it. • Just want to say that fiscal developments this year have been somewhat mixed. • There has been a significant shortfall in revenue during January-July. • This has been met with an equally significant reduction in expenditure in order to stay within the budgeted deficit.

38. The fiscal retrenchment that has taken place must have contributed to slow down the economy, which, in turn, must have affected revenue. • Going forward, reinforced efforts will be needed to mobilize revenue to support critical expenditures in order not to endanger the economy’s growth prospects. • But, as I said, my Executive Director will provide more details • So I can stop here.

39. THANK YOU VERY MUCH.