Economics: Ghana’s ray of Hope?

Economics: Ghana’s ray of hope?

The importance of economics in Ghana has never been so much felt than the past couple of years. Politicians in their bid to harness and maintain political power are resulting more to economic indicators to measure their performance. The Government’s primary function is to protect the citizenry both internally and externally and also to take full control over the management of the economy. With the average Ghanaian becoming more informed and sophisticated, a lot of emphasis is being placed on facts and evidence-based performance and policies than vague reports and empty promises that past politicians used to feed us.

During the course of 2012, economic issues formed a more than significant portion of issues discussed on our media. Politicians struggled to explain to their Ghanaian populace what Ghana achieving lower middle income status really meant for them. It became common-place to hear people explaining decreasing rates of inflation to mean that prices have actually reduced. So confused were a lot of Ghanaians when we realized that although politicians were making big news of the fact that Ghana has achieved single digit inflation, prices of goods and services were still increasing. We were even more dumbfounded when during the period that those good economic indicators (middle income status, high economic growth rate, single digit inflation, increases in credit ratings, etc.) were being reported, the cedi was going through one of its worst depreciation phases against the US dollar and other major foreign currencies.

Unable to make the head and tail of it, people begun losing trust and confidence in economic indicators, seeing them as propaganda machinery deployed by the government to trick them into blindly following their policies. This led to an increase in demand for economists to play more significant roles in the management of the country. The New Patriotic Party appointed for the second consecutive time, Dr. Mahamudu Bawumia a renowned economist and former deputy Governor of the Bank of Ghana as its vice presidential candidate. Shortly after this he delivered a lecture he entitled “what is the real state of our economy” bringing to the fore how a deeper understanding of economics can help explain much of the economic phenomena in the country.  In a seemingly indirect response, the ruling party, the New Democratic Congress also appointed Mr. Kwesi Amissah Arthur, an economist and Governor of Bank of Ghana as its vice presidential candidate. This ensured that no matter what the case might be we will have an economist at the forefront of the affairs of the country. But then, will an economist serving as Vice President of the republic help to make economic indicators much better communicated and understood and bring about the so much desired transformational economic policies that we yearn  for? Or perhaps is all these yet another gimmick being used by politicians to get our votes?

Nonetheless, it is clear what needs to be done in the country. For there to be substantive and sustainable economic growth, economic principles and statistics must first be understood by at least those at the helm of affairs to enable them pursue informed and research-based country-tailored policies.

We are not in any way calling for the country to be ruled by economists only, but then just as you will seek the services of a mechanic before buying a car or that of a lawyer when faced with legal issues, matters of economic concern should also first pass through stringent economic consultations. In that vein, we clearly support the position of our Vice Chancellor, Ernest Aryeeteye that Ghana needs a research-based university where country-specific solutions and policies are churned out on a regular basis as done by most advanced countries. The era of trial and error is long dead and gone. It is time Ghana fashions policies that will really solve the numerous problems faced by its people.

P.S. I wrote this article originally as the editorial forward for “The Legon Economist” , the annual magazine of the University of Ghana Economics Students Society (UGESS) which will be released later this year. Please let me know what you think of it. As you know…when it goes to hard copy, it can’t be edited. Thanks for reading!

A last look at the “falling cedi” and inflation

During the course of the year, one economic phenomenon that made it to the households of most Ghanaians was inflation (general increases in the price level) and the “falling cedi” (depreciation). The Mills-led Government from the onset made clear their agenda of pushing Ghana to have single digit inflation. This they did through massive expenditure cuts which led to Mills’ first two years of office being described as years of “no-action”.

We did get single digit inflation, but one strange phenomenon that was experienced during that period was the falling of the cedi which reached very disturbing levels.

The cedi for a very long time has been counted among the weakest currency on the continent. Even the introduction of the “Ghana Cedi” and major interventions by the Government seem futile in curbing this very worrying trend. A fall in the cedi was normally associated with increases in the general price levels, so stranger still was the fact that this time around inflation was on the decline.

So then what really happened? Did the falling cedi affect the inflation rate or was it rather inflation affecting the falling cedi? Or perhaps there was no causality between the two.

Let’s start with the basics.

• Price inflation is primarily caused by monetary inflation. In other words as the money supply increases things cost more.
•  The government controls the money supply to a certain extent through tightening or loosening credit.
•  The economy is extremely complex and many other factors come into play. Such as international exchange and the supply and demand for goods and services.

At first, it might appear that the falling cedi would cause deflation because the cedi is going down. But if the cedi is going down that means the purchasing power of the cedi is decreasing on a worldwide scale. In other words, a cedi would buy less if you traveled to another country. That is another way of saying that it takes more cedis to buy the same thing. That sounds pretty much like inflation, doesn’t it?

However, does that mean that things at our local supermarket will cost more? Probably not (at least not at first). If the foodstuffs are produced locally the value of the cedi on the world market will have little effect on the prices of products.

However, if foodstuffs like onions come from Niger they will be more expensive. Because the cedi is worth less in Niger. So you might choose to buy onions locally from Bawku since they will be relatively less expensive.

But in the long run as more foreign raw materials and imported items circulate through the economy the effect will begin to be felt in everything.

On the flip side however, a weaker cedi, means that foreigners find our products cheaper. China has artificially kept their currency low for years boosting their ability to export cheap goods to Ghana and other countries.

Major global players have been trying to get them to raise their exchange rate through diplomatic means to very little avail. However the lowering of the cedi has achieved much the same thing and has reduced the currency exchange advantage the US and other trading partners have had against us.

This means that Ghana should be able to increase its exports. In other words imports will become more expensive while exports become cheaper. This should encourage more people to buy “Made in Ghana goods” both domestically and over-seas. This will boost our economy by creating jobs.

But what effect will it have on our money supply? Remember the rule of inflation is that it is primarily a function of the supply of money compared to the supply of goods.

The value of the cedi on the world exchange market does not have an effect on the quantity of those cedis, so money supply will not be affected. What about supply of goods? Well the supply of goods will also stay the same although some substitution might occur as people buy Bawku onions instead of Niger onions.

The major change will be in the demand for goods as people make those substitutions. Bawku onions might rise in price a bit because of the increase in demand while Niger onions fall a bit until they reach a new equilibrium.

But since the majority of products purchased by Ghanaian consumers are produced overseas the net effect will still be that we are paying more cedis for the same goods. So although the money supply is unaffected prices are higher so it might appear as inflation but in a way it is pseudo-inflation.

But the effect is still the same… a year from now you will be paying higher prices. Thus the net effect of the depreciation of the cedi is that there will be an increase in inflation in the near future. To curb this, we need to increase the entrepreneurial spirit in Ghana and produce more “made in Ghana” products.

Also, we as consumers need a change of attitude to buy more made in Ghana products to reward the efforts of our entrepreneurs and also give them an incentive to invest more helping to create jobs and improving the economy on the whole. However, entrepreneurs should note that the modern Ghanaian consumer is very sophisticated and hence would not blindly follow the “buy made in Ghana” cliché unless they are getting real value for their money.

Africa’s 2012 growth prospects appear bright, but downside risks could dampen momentum

Sub-Saharan African countries bucked the slowdown in the global economy and grew at a robust pace in 2011 (see Africia’s Pulse, February 2012 Update).

The region’s output expanded by an estimated 4.9 percent, faster than in 2010 and just shy of the pre-crisis (average of 2003-08) level of 5 percent.  Excluding South Africa, the regional growth rate was 5.9 percent.  Particularly notable is the fact that this growth was widespread:  over a third of countries posted 6 percent or higher growth; another 40 percent grew at between 4-6 percent.  Equally important is the fact that several countries saw sustained growth rates of over 6 percent a year in both 2010 and 2011.

So what can Sub-Saharan Africa expect in 2012?  Barring a serious deterioration in the global economy, the outlook for the region seems bright, with a pickup in GDP growth to 5.3 percent in 2012 and 5.6 percent in 2013.  High commodity prices and strong domestic demand, especially buoyant private consumption, are expected to sustain the expansion.

But these factors also point to Africa’s vulnerability.  Most African countries are dependent on two or three primary commodities for their export revenues (see figure).  Those that export consumer goods, such as Mauritius, Seychelles and Cape Verde, sell 70-90 percent to the European Union.

Median share of the largest 3 commodities in total exports in SSA by country group
 
Sources: COMTRADE and staff calculation based on SITC3 classification 4-digit subgroups

A sharp contraction in Europe, therefore, would pull down global demand, significantly depressing commodity prices and trade and lowering growth rates in Africa. Moreover, with many African countries entering 2012 with less fiscal and monetary policy space than in 2008-09, it will be harder for these countries to respond to global shocks as they did in the wake of the 2008 global financial crisis.  Finally, parts of Africa remain susceptible to food price shocks—the Horn of Africa last year, possibly the Sahelian countries of Mali, Niger, Chad and Mauritania this year.
You can see the full analysis on Africa’s economic outlook on the latest update of the World Bank’s Africa Pulse here.

African countries are among the fastest growing economies in the world

Despite a slowdown in the global economic recovery and an increasingly difficult global environment, Sub-Saharan African countries are continuing to post solid growth.

Following a 4.6 percent expansion in 2010, the region’s output is expected to grow by 4.8 percent this year (5.8 percent excluding South Africa) and by more than 5 percent in 2012 and 2013.

Indeed, African countries are amongst the fastest growing countries in the world: Ghana is projected to grow by well over 10 percent this year; and nearly 40 percent of the countries in the region are likely to see 6 percent or higher growth rates.  Growth in Africa remains closely linked to the evolution of international commodity prices—oil, metals, and non-food agricultural commodities—which have remained generally buoyant.
Not surprisingly, a sharp deterioration in global conditions would weigh down on the region’s prospects.  Moreover, this time around African countries will be more constrained in their policy options: because they have less fiscal space than they had in the wake of the 2008 global financial and economic crisis.