The road ahead
Peter Harrold
Published: 01-JAN-02

While tough action from Ghana's new government is helping to turn the economy around, much more needs to be done to stimulate economic activity. Peter Harrold, World Bank Country Director, gives his views

In order to look at the Ghanaian economy now, we should recall the background to the development of the economy over the past three years.

One key remains the major external shocks that Ghana received on the halving of the cocoa price, then tripling of the price in 1999, and its full impact on Ghana in 2000. This called for a major adjustment in the economy.

We saw that adjustment on the external side of the economy, with the very sharp depreciation of the cedi, and the consequent sharp decline in import levels. Sadly, we did not see the same type of adjustment on the domestic side through the fiscal programme. Indeed, far from an adjustment, the deficit that occurred in 2000 was very high.

We thus had the worst of both worlds: a rapidly depreciating exchange rate pushing up domestic prices, and a very high fiscal deficit forcing up real interest rates. We thus ended up with nominal interest rates that were way beyond those at which sensible people would wish to borrow.

So the position in early 2001 was very dangerous. Interest expenses for domestic debt were using over half of domestic fiscal revenues, and (if we include the TOR debt) the stock of domestic public debt had doubled in 2000. This clearly could not go on with- out spiraling out of control.

Added to this was a peak in external debt service, taking up over a third of the now shrunken level of export earnings, and reserves had fallen to dangerously low levels, such that the Bank of Ghana could not even intervene to smooth out foreign exchange cash flow or sudden speculative movements.

This needed some tough action, and we have seen it, essentially in four areas:

  • A tight fiscal programme that ruthlessly limited expenditures to available cash;
  • A monetary policy that tightened cedi availability and reduced dollar demand;
  • The decision to seek HIPC relief; and
  • The restructuring of domestic debt and the issuance of index-linked bonds.
These approaches are clearly paying off. The exchange rate has remained stable, the inflation rate has fallen sharply (and the monthly rate of change of prices appear now to be very low indeed), and interest rates have begun to fall, and reserves to rise. We can expect these trends to continue next year, ("specially as the falling interest rate and lower financing of domestic interest payments begin to be felt. The HIPC relief will be felt in full next year, enabling the government to raise spending in key areas such as education, health, agriculture, rural roads and water supply.

The macroeconomic position is there- fore turning around sharply from where it was at the beginning of the year. Any macroeconomic programme such as we have had in 2001 has a cost. The cost for Ghana this year has been the very low level of activity in the economy. But if the macroeconomic situation really is turning around the way it appears to be, and if we can credibly expect the effort to continue, we now need to think about what has to be done to stimulate activity.

In the aftermath of the events of September 11, the World Bank has expressed serious concerns about the possible impact on Africa and on the world's poor.

These are very real concerns, as commodity prices decline, aid budgets get stretched thinly, and as the world's economy slows down, and world trade grows by at best 2 percent, and perhaps not at all. Is this time to be talking about what we can do to stimulate the economy and to encourage the growth of exports?

For Africa as a whole these could be troubling times. Africa's exports are a mere one percent of the world's exports. Ghana accounts for probably about 5 percent of Africa's trade. Thus Ghana's exports are about 0.05 percent of world exports.

What this means is that while prospects for the continent as a whole may be good, the fate of any one country remains within its own hands, and any one country could achieve a doubling of its export without it causing a ripple in world markets a whole.

So, while paying attention to economic developments in the world and their impact especially on the prices of cocoa, gold and oil, it is on internal factors that Ghana must focus its attention.

So what do we need to focus on if we are to stimulate activity? Let's first look at the business sector. What is missing? What is holding things back? For a long time, it was clear that the two biggest obstacles to private sector development were the interest rate and government-private sector relations.

If the private sector perceives rightly or wrongly that the government is hostile towards it, it is hardly likely to invest. These two concerns were, 1 feel, by far the key factor until recently.

What are the remaining obstacles, if any, to the realisation of Ghana's enormous potential for growth in these areas? We will only know when the first two are out of the way, but three factors seem to be key:

  • Customs - getting it working, especially the duty drawback mechanism, speed of clearance and the inspection function;
  • Land - this remains a clear obstacle to many activities and creates much too much noise in the system; and
  • Access to technology, market information and business organisation: this remains difficult and without public support.
If these three issues could be addressed, what could stop Ghanaian business? Who knows best how to address them?

What is stopping the agricultural sector from growing? Obviously, land is again a factor, and reducing uncertainty of tenure for farmers. The interest rate is also key in lowering costs as is investment in rural roads.

But beyond that are two key factors. First, government services to farmers - in extension, in research and in support to farmers' organisations - have to be much more efficient and timely than they currently are.

But second, there are all those services that are best provided by the private sector: support in marketing, in food storage, food processing (so that less is wasted and value is added) and supplies of seeds and fertilisers.

Many of these are things that the government used to do, but not very well. But how do we stimulate the private sector to enter and fill the gaps?

We need a genuine public-private partnership to identify the constraints and eliminate them. We need to use the public sector's ability to reduce risk to combine with the private sector's ability to get things done. There needs to be more conversation between the public and private sectors about this key area of development.

The third area is one that is receiving a lot of public attention at the moment, and this is the area of human development, and especially education, for an educated population is truly the key to development over time.

We hear a lot of noise about the level of resources. Of course, that could be improved, and will be after the HIPC resources kick in. But there is already a huge level of public resources going into education, more than any other sector. The key issue facing the sector is not the availability of resources, but the efficient use of those resources.

The key must surely lie with a much greater involvement of the user - parents, students and teachers - in managing these resources.

There is a common theme in my comments. As basic economic conditions improve, our focus and energies should turn to the efficiency of key services that the state is providing to the private sector. As we seek solutions for increasing efficiency, we should look more to the beneficiaries and the users of those solutions rather than just trying to work it out in government, or, dare I say it, just with the advice of the World Bank and other development partners.

This is an edited version of Harrold's speech at the relaunch of the Business Et Financial Times in Ghana

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