Fuel price hike: Ghana’s answer to fiscal discipline

On social media, radio and television, Ghanaians have greeted hikes of fuel prices by the John Mahama administration with surprise, but foreign investors will be happy to see the West African nation tighten its fiscal policy.

Ghana, which is increasingly cited by fund managers and investment bankers as a safe haven of peace and stability recorded economic growth of 14.4 per cent in 2011 — the fastest in the world thanks to oil. However, the majority of its over 24 million people live on less than US$2 a day.

Latest increases in petrol and diesel prices by 20 per cent have brought warnings – hurting the ordinary Ghanaians and small businesses, will likely push inflation higher and threaten economic growth.

But analysts say the move was in order to boost investor confidence by showing Ghana is willing to bring budget deficits down.

“This will come as a welcome sign of the authorities’ intention to close the fiscal deficit sooner, even if it means taking potentially unpopular action.
“Investors will welcome this, but it will not deal with the entire fallout from 2012’s deficit overruns,” Razia Khan, an analyst at Standard Chartered Bank told ghanabusinessnews.com

Khan said investors are still concerned about the level of fiscal visibility that they have, adding that Ghana’s debt servicing costs are likely to remain high.

According to Ghana’s central bank, the country’s 2012 deficit jumped 12.1 per cent of gross domestic product (GDP), due to excess public sector wages, shortfall in projected tax revenue and widening fuel subsidies.

The move to hike fuel prices came days after Fitch rating agency revised its outlook on Ghana from stable to negative due to severe deterioration in the fiscal deficit in the run up to the December 2012 election.

“This is nearly double the government’s target of 6.7 per cent set in July’s supplementary budget and well above the initial budget of 4.8 per cent agreed at the start of the year. The deterioration suggests a serious loss of fiscal control and reduced credibility,” said Fitch.

“The government has funded the budget deficit mainly through borrowing at high interest rates on the domestic market, at 22.8 per cent for 91-day T-bills,” added Fitch.

Inflationary impact

Analysts expect Ghana’s inflation to hit slightly higher in the coming months due to the fuel price hikes.

“It is fairly likely that inflation will be pressured higher as a result of the fuel price increase.  However, any inflation impact will likely be offset somewhat by the continuation of tight monetary policy in 2013 as well as a budget for this year that aims to achieve faster fiscal consolidation.  It is doubtful that these factors alone will be sufficient to offset fully any likely inflation fallout,” said Kahn.

Ghana’s inflation remained unchanged at 8.8 per cent for January due to the slight appreciation of the cedi against the dollar and the stable rate of food prices. This paved way for the central bank to maintain its policy rate at 15 per cent.

But the central bank forecasts that inflation will remain broadly stable within a projected band of 9.0 ± 2 per cent by end 2013. However, this may be revised with the expected revision of the CPI basket by the Ghana Statistical Service in March.

Challenges ahead

According to Khan, while the growth outlook remains robust, more is needed to achieve fiscal consolidation, reduce levels of public debt and create a stable macroeconomic outlook for the future.

“It is important that Ghana remains vigilant in its attempt to avoid the resource curse.  The classic signs of succumbing to the resource curse would include government becoming very big, too much spending – especially on subsidies that are regressive in nature (they benefit the rich who consume more fuel and electricity, at the expense of the poor).

“And an over-emphasis on the hydrocarbons sector, at the expense of all other sectors.  If we see evidence of a big boost to agriculture and manufacturing over the coming years, we will know that Ghana remains on the right track,” said Khan.

By Michael Sarpong Bruce
Email: [email protected]