Economy in crisis: Borrowing spree must stop – CEPA

GSE All Share Index +63.35% (all figures are year-to-date as of Oct. 31, in local currencies) The best-performing stock market in the world, this small, illiquid exchange dominated by mining, commodities, and banking companies is up nearly two-thirds (after gaining 32% last year). Hopes remain high for the Ghanaian economy, with International Monetary Fund estimates of 7.5% annual growth from 2009 to 2011, thanks to factors like rising cocoa and other commodity prices and the country's first significant oil production set for 2010.

Economic and policy think tank, the Center for Policy Analysis (CEPA) has warned that Ghana is in financial crisis and cannot continue the borrowing spree.

“We cannot continue to be borrowing from the international bond market and be delaying or deferring repayments”, Executive Director of CEPA, Joe Abbey said. Dr Abbey was speaking at a recent round table conference in Accra on the topic ‘Monetary and Exchange Rate Policy Challenges.”

The conference was attended by stakeholders such as the Association of Ghana Industries, the Ghana Bankers Association and the Ghana Integrity initiative among others. According to CEPA, it is wrong for the monetary policy rate which still stands at 26 per cent to be higher than Treasury bill rates.

Dr Abbey questioned why monetary policy was proving inefficient, pointing out that “this is as a result of the way the Finance Minister has managed the debt market; the Minister is also not interested in the inflation targeting framework.”

He blamed government for the teething challenges in the Ghanaian economy, saying there is no coherence between the fiscal and monetary policies.

“Another issue is the stability of the financial system which has been characterized by high non performing loans which threatens the banking sector,” Dr Abbey added.

He explained that the current economic conditions-rising inflation, volatile exchange rate, growing public debt call for immediate and sound macroeconomic policies if stability is to be established.

“In situations where fiscal policy is headed down an unsustainable path, monetary policy on its own cannot succeed at anchoring inflation expectations and its ability to deliver on price stability may be eroded. Under such extreme fiscal conditions, monetary policy may even become irrelevant”, the economic think tank added.

CEPA also criticized the country’s economic management team for lack of fiscal discipline, resulting in slippages in the economy.

Dr Abbey said “there must be a clear commitment to fiscal consolidation that is credible and achievable. Such a programme can be expected to have short-run contractionary effects on output, which in turn could contain inflation.”

On how to improve the monetary policy framework and develop the bond market, the CEPA boss urged the Bank of Ghana to strengthen the role of the Monetary Policy Rate in monetary policy implementation to enhance policy credibility and strengthen the transmission mechanism as well as rely on market-based rather than administrative measures in managing liquidity.

He also advised the Central Bank to assign greater priority to increase its level of reserves to about 3 months of import cover, lower than its sub Saharan African peers, and just above the minimum benchmark of 20 percent of broad money supply.

He also urged the regulator to take a more proactive role in developing the interbank foreign exchange market to facilitate price discovery and improve the depth and liquidity of the market.

“Bank of Ghana needs to make provisions for adequate buffers for potential outflows to foreign investors exiting the local debt market ahead of maturity”, he noted.

Ghana presently has the highest interest rate and inflation in Sub Sahara Africa, a situation which impedes growth


Source: Thefinderonline