Budget 2024: Unveiling the complexities of the fiscal landscape

As Ghana charts its economic course into the medium term, the recent budget highlights reveal a landscape marked by both achievements and hurdles. Anchored on the International Monetary Fund’s (IMF) fiscal and macroeconomic framework, the 2023 macroeconomic performance and medium-term targets (2024-2027) provide insights into the country’s economic trajectory. In this article, we delve into the intricacies of Ghana’s economic challenges, examining the difficulties highlighted in the latest data.

2023 Macroeconomic Performance

The mid-year statistics for 2023 paint a nuanced picture of Ghana’s economic health. Overall real GDP and Non-Oil real GDP both stood at 1.5% in June, indicating a modest growth trajectory. However, the specter of inflation looms large, with end-period inflation reaching 31.3% and current inflation soaring to 35.2% – well beyond the comfort zone. The fiscal landscape is characterized by a 2.1% overall budget deficit as a percentage of GDP, with a notable primary surplus of 2.6% of GDP. However, the debt-to-GDP ratio remains a concern at 66.4%, suggesting the challenges of managing public finances. Moreover, the Gross International Reserves, a crucial measure of economic resilience, covers a mere 0.8 months of imports, underscoring vulnerability in the external sector.

Medium-Term Macroeconomic Targets (2024-2027)

Looking ahead, the medium-term targets set for 2024-2027 indicate a cautious optimism. The overall real GDP is projected to grow at an average rate of 2.8%, with Non-Oil real GDP expected to follow suit at 2.1%. Inflation, a persistent concern, is targeted to be within the band of 8±2 percent. Committing to fiscal prudence, the primary balance is projected to average 0.5% of GDP from 2023 to 2026. To bolster external resilience, the goal is to enhance Gross International Reserves, aiming for coverage of at least 3.5 months of imports. While these targets suggest a forward-looking approach, the journey to achieving them is rife with challenges.

Sectoral Performance

Examining the sectoral growth data reveals a mixed bag of fortunes. Agriculture has exhibited resilience but given food inflation currently around 45% is a worry, with a notable growth of 6.3% in the first half of 2023. However, the industry sector faced headwinds, contracting by 2.2% indicating one district one factory remain at best a slogan. The services sector, on the other hand, showed promise with a growth rate of 6.3%. These sectoral dynamics highlight the need for targeted interventions to ensure a more balanced and sustainable growth trajectory in order the create sustainable jobs and better levels.

Exchange Rate Volatility

Exchange Rate Volatility: A crucial gauge of economic stability, the Cedi/Dollar exchange rate has experienced significant turbulence, depreciating by 22.9% as of September. This sharp depreciation, coming on the heels of a more than 50% decline in the previous year, underscores the heightened volatility in the foreign exchange market. The exchange rate’s substantial decline reflects external pressures, introducing formidable challenges for importers and exacerbating the broader concerns surrounding inflation.

The repercussions of such exchange rate instability are profound, particularly for industry players and citizens alike. Importers grapple with increased costs for imported goods and raw materials, impacting the overall cost structure of businesses. This, in turn, can lead to higher prices for domestically produced goods and services, contributing to inflationary pressures.

Conclusion:

Ghana’s economic journey, as illuminated by the latest statistics, is marked by a delicate balancing act. The challenges of high inflation, a precarious debt-to-GDP ratio, and insufficient international reserves require careful navigation. While the medium-term targets outline a vision for growth and stability, the realization of these goals hinges on adept policy measures and a proactive approach to address sector-specific challenges. As Ghana strives for economic resilience, the complexities revealed in the latest data underscore the need for comprehensive strategies to navigate the uncertainties ahead.

Challenges

1. High Inflation: The inflation rates, both at the end of the period and the current inflation, are well above the target band of 8±2 percent. This high inflationary pressure is a significant concern as it erodes the purchasing power of the currency, impacts consumer spending, and adds complexity to monetary policy decisions.
2. Low Gross International Reserves: With Gross International Reserves covering only 0.8 months of imports, the external sector vulnerability is evident. Low reserves could pose challenges in managing external shocks, meeting import obligations, and maintaining overall economic stability.
3. Debt-to-GDP Ratio: The debt-to-GDP ratio is at 66.4%, indicating a relatively high level of indebtedness. Managing this debt burden becomes crucial to prevent potential fiscal risks, debt distress, and maintain investor confidence.
4. Sectoral Disparities: The sectoral performance presents a mixed picture. While agriculture has shown resilience, the industry sector faces contraction, and the services sector displays growth. Balancing these sectors and ensuring a more equitable distribution of growth across the economy will be a challenge.
5. Exchange Rate Depreciation: The depreciation of the Cedi by 22.9% against the Dollar raises concerns about currency stability. A volatile exchange rate can affect import costs, contributing to higher inflation and potentially impacting businesses that rely on imports.
6. Fiscal Deficit: Although there is a primary surplus of 2.6% of GDP, the overall budget deficit as a percentage of GDP is 2.1%. Striking a balance between necessary government spending for economic stimulus and fiscal consolidation to curb deficits will be a challenge.
7. Medium-Term Growth Targets: While the medium-term targets are set with an average overall real GDP growth rate of 2.8%, achieving this in the face of current challenges, including high inflation and sectoral disparities, poses a considerable challenge.
8. External Financing: The dependence on external financing, particularly in the context of the IMF-supported fiscal and macroeconomic framework, brings challenges. The success of the program and the ability to secure external financing as projected will be crucial for implementing necessary reforms.

In summary, the difficulties facing Ghana’s economy in the coming years include managing high inflation, addressing external vulnerabilities, balancing sectoral disparities, navigating the impact of exchange rate depreciation, and ensuring sustainable fiscal policies to cope with the current economic challenges. A comprehensive and proactive approach is necessary to overcome these hurdles and set the economy on a path of stable and sustainable growth.

The writer is an Economic Policy & Financial Analyst