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Ghana's Economy Catching Dutch Disease   
 
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09-May-2012  
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Dr Kwabena Duffuor
 
 
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With the continuous fall in the prices of some major commodities excluding oil and the over concentration on gold, Ghana’s economy is on the verge of catching the Dutch Disease.

According to the Institute of Economic Affairs (IEA), although the manufacturing and agricultural sectors among many other sectors of the economy have been declining in the last few years before the oil discovery, the situation has persisted and it was becoming even more dangerous now.

A Senior Economist at IEA, Dr J. K. Kwakye, has, therefore, called for urgent interventions by the government to stop the fast decline of the key sectors of the national economy.

“Let’s spread our economic growth from the oil sector to the non-oil sector because that is the area where we will be able to generate more employment for the people”, he said when addressing a news conference on the performance on the economy as at the first quarter of the year.

According to the Budget Statement and the Government’s Economic Policy for the 2012 financial year, The agricultural sector expanded by 2.8 per cent as against a targeted growth of 5.3 per cent and an actual outturn of 5.3 per cent in 2010.

For the manufacturing sector, it also fell below target as it recorded a growth of 1.7 per cent as against a target of seven per cent.

Most of the services sector also suffered declines as they were also unable to meet their targets.

For instance real estate sector failed to meet its target of six per cent to record a growth of 2.4 per cent; financial intermediation recorded 1.0 per cent as against 17 per cent; business and other service activities also dipped to -1.0 per cent as against a target of 10 per cent.

However, the other community and social and personal service activities hit 12 per cent as against a target of 5.0 per cent.

DUTCH DISEASE

This could result from the negative consequences arising from large increases in a country's income. Dutch disease is primarily associated with a natural resource discovery as in the case of Ghana finding oil, but it can result from any large increase in foreign
currency, including foreign direct investment, foreign aid or a substantial increase in natural resource

Dutch disease has two main effects: A decrease in the price competitiveness, and thus the export, of the affected country's manufactured goods and second, an increase in imports

In the long run, both of these factors can contribute to manufacturing jobs being moved to lower-cost countries. The end result is that non-resource industries are hurt by the increase in wealth generated by the resource-based industries.

The term "Dutch disease" originates from a crisis in the Netherlands in the 1960s that resulted from discoveries of vast natural gas deposits in the North Sea.

The newfound wealth caused the Dutch guilder to rise, making exports of all non-oil products less competitive on the world market.

In the 1970s, the same economic condition occurred in Great Britain, when the price of oil quadrupled and it became economically viable to drill for North Sea Oil off the coast of Scotland. By the late 1970s, Britain had become a net exporter of oil; it had previously been a net importer.

The pound soared in value, but the country fell into recession when British workers demanded higher wages and exports became uncompetitive.

THE GHANA SITUATION

The signs of the Dutch Disease in Ghana seem to have persisted over many years even before the discovery of oil but analysts fear the challenge could be aggravated in the wake of the oil find.

In the third quarter of 2011, the country recorded a total of US$337.3 million from the first three liftings of 2,980,720 of oil from the Jubilee Fields and there are demands and there are high demands on the government to increase salaries of public workers.

The trade balanced between Ghana and its trading partners has tilted further because of the neglect of the manufacturing sector in the country.

More people seem to be going to China and other Asian countries to import all manner of goods and services and they change a lot of funds locally into dollars before they depart, a situation which has contributed to the pressure on the cedi as against the major foreign currencies, particularly the US dollar.

Dr Kwakye was of the view that to change the trend, the government needed to invest more in the manufacturing and agricultural sectors of the economy to be able to revive them.

These are the main sectors of the economy which can provide employment for the mass of the people in the country.

Presently there are no statistics on the country unemployment situation but the lack of jobs in the is evident from the large number of hawkers scattered in every part of the country among other things.

Dr Kwakye said it was also incumbent on the government to ensure that the large public debt accrued is invested in productive sectors of the economy where returns would be maximized to able the state to redeem the debts when they mature.

According to figures released from the IEA, Ghana’s total debt increased by 10 per cent to GH˘23,608.5 million at the close of 2011, representing 39.9 per cent of Gross Domestic product (GDP).

He urged an increase in the country’s foreign reserves to at least four months because “countries with less flexible exchange rate regimes need higher reserves to protect the exchange rate”.
 
 
Source: Daily Graphic/Ghana
 
 

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