SAGA Progress Report

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SAGA Progress Report
October, 2002

ATTACHMENT 1. GHANA—KEY POLICY ISSUES

Ernest Aryeetey

1. Introduction: The Nature of Ghana’s Economic Problems

Long-Term:

High levels of poverty;
Income distribution worsening;
No structural transformation;
Growth pattern is inconsistent.

Short-Term:

Absorption remains high;
Largely a consequence of the unbridled expansion of public spending on social services and other economic services;
Inflation in the 30%-50% range is becoming 'normal';
Rapid nominal depreciation of cedi, but considerable real appreciation for long periods;
Debt situation has become unsustainable, hence HIPC;
External finance is increasingly difficult;
Urban unemployment is worsening.

2. There has been a tension in policy orientation and resource allocation between long-term growth and poverty-reduction on the one hand and macroeconomic stabilization on the other.

There has been a tendency to view them as separate issues and best dealt with by different groups of people and organizations in an uncoordinated manner;
The result is that recent programs for poverty-reduction have paid little attention to macro stabilization and those negotiating support for stabilization have shown very little understanding for the requirements for future growth and poverty-reduction, despite PRSP.

3. The most significant policy issue has thus become how to achieve macroeconomic stabilization in the shortest possible time without compromising steady long-term growth, structural transformation and significantly reduced poverty.

To what extent will reduced growth in public spending affect private production?

[Everyone agrees (at the national forum) that it depends on where the cuts occur]; No systematic study of public expenditures.
Following from above, we have not focused adequately on how best to prioritize public spending with both short and long-term goals in mind (both policy and institutional constraints);
Also, while we 'agree' periodically on where to place cuts, albeit arbitrarily, there is hardly ever a strong commitment to this in the budget process, MTEF notwithstanding; (institutional problem?)
Hardly any attention is paid to essential expenditure-switches for both consumers and producers in relation to tradables and non-tradables with a view to reduced absorption; (thus not clear what the goal of the exchange rate policy is).
The growing financing of public spending from both domestic and external sources is acknowledged to be problematic, particularly since it deprives the private sector of finance in addition to worsening the macroeconomic imbalance;
In the long term, there are no strong indications that the private sector is adequately prepared to make the commitments that will facilitate long term growth (significant structural problems).

4. Solving the macro imbalance problem obviously requires reduced absorption as well as exchange rate re-alignment to facilitate expenditure switching (not guaranteed!). Recent experience shows that this will achieve stable conditions in the short term. In the long term, removing structural problems will require increased investment spending and institution-building. It is not clear how this can be done except if there is a major overhaul of external financing arrangements that will include a change in the composition of external support, moving increasingly towards a greater role for FDI.

The Noguchi Statement has several suggestions for achieving macroeconomic stabilization including the setting of inflation targets as well as targets for annual nominal depreciations of the Cedi. Emphasis is on removing waste in the public sector and strengthening Bank of Ghana.
Strengthening institutions that will facilitate direct investments is crucial. It will have to go beyond simply erecting new public offices to re-orienting the rules, regulations and norms that govern economic endeavor. In addition to those institutions essential for attracting foreign investment, such as the restructuring of the legal system and the existence of rule of law, it is most important that institutions governing access to domestic resources are rationalized. Examples are the inadequacies of the land tenure system and the non-existence of agricultural land markets, the dysfunctional credit market and the rigidities of the labor market due to poor human capital.

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