The Centre for Policy Analysis (CEPA) says it intends to rally political leaders, academics and economists for a declaration of “fiscal responsibility” ahead of the presidential and legislative polls in December.
CEPA believes the declaration will moderate the stereotype of an imprudent free-spender that Ghana has come to represent in election years, which if left unmitigated could fuel behaviour that hurts the economy.
“We have sent letters out to experts and institutions who think like us, inviting them to join us to analyse the issues and send a clear, credible message to the whole world that we are going to be fiscally responsible in this election year,” said CEPA boss, Dr. Joe Abbey.
“We would also like the political leaders to sign onto a code of being fiscally responsible in election years, and to understand clearly that though they can be pressured into overspending, voters will punish them for doing so.”
In three of the five democratic elections held since 1992, the government’s budget deficit widened significantly in the election year -- and was often associated with a large external deficit that set off high inflation and currency depreciation.
During the last episode in 2008, Ghana’s budget-hole ballooned to 8.5% of GDP (14.5% of old GDP) from 5.6% in 2007, and the external deficit rocketed to 11% of GDP, the highest for the decade.
Between December 2008 and June 2009, consumer inflation rose from 18.1% to 20.7% and the cedi lost 20% of its value against the US dollar.
With this history as a backdrop, every analysis of the economy since the turn of 2012 has cited the risk of an election-induced public-spending spree as a real threat to macroeconomic stability and investor confidence.
Investment bank Renaissance Capital said this week that Ghana is likely to see larger domestic and external deficits in 2012, mainly on account of election-spending risks.
Renaissance forecast that the budget deficit will widen to 5.1% of GDP this year against the authorities’ expectations of 4.8% of GDP, with the current account gap growing to 8.7% of GDP from 8.5% in 2011.
In January, ratings agency Fitch warned that the risk of fiscal slippage, through high wage increases and election-related spending, “remains significant”.
Western donors have been equally nervy. At a meeting last year with government officials, they warned: “There are high risks of fiscal slippages in the period ahead... relating to the upcoming elections which will increase the political pressures for spending.
“[Our] call on the government is to avoid the easy temptations of deficit-led growth in the coming period. The costs of stabilisation that the country had to bear in the past three years attest to the destructive nature of these short-term and myopic temptations.”
Dr. Abbey said the Central Bank’s recent rate-hike was justified, in order to claw back losses in the value of the cedi since the third quarter of 2011. He reckons the seasonal increase in demand for the dollar by importers had been exacerbated by speculative activities around the cedi at the start of this year -- and action was needed to reverse the trend.
A subsequent sale of three-year bonds by the Central Bank saw significant offshore interest, leading to more than half of the bids being submitted by overseas investors.
“I think the bank should be commended for selling the bond at this time. And it’s even better that it was oversubscribed because it’s a signal of renewed confidence in the economy,” Dr. Abbey said.
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