Discipline in Economic Management: The Key to Sustainable Growth and Prosperity - The Economy: 1983-2000

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Created on Friday, 22 November 2013 00:00

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1983-2000

In its 1983 Budget, the PNDC moved Ghana away from Kwame Nkrumahs’s socialist economic philosophy towards Busia and Danquah’s capitalist free market philosophy that the government railed so much against at its inception. The PNDC proceeded to implement an IMF supported Structural Adjustment Programme (SAP).

One of the most important reforms of the SAP was to allow a gradual liberalization of the market for foreign exchange. The official exchange rate was adjusted in stages from ¢2.75/US$ in 1983 to ¢90.0/US$ by January 1986. In February 1987, the official exchange rates were unified at ¢150/US$. To bridge the gap between parallel and official exchange rates, foreign exchange bureaus were established in February 1988, leading to the virtual absorption of the parallel foreign exchange market. The cedi exchange rate therefore became market determined.

A major plank of the SAP was the rehabilitation and provision of physical infrastructure to help improve productivity. The economy responded positively and output increased. GDP growth, which was negative and declining in the three years before the SAP, recorded a remarkable recovery to register an average of some 5.0 percent per annum between 1984 and 1991.

Macroeconomic stability was also restored between 1984 and 1991 and the stability was not attained at the expense of growth. Inflation declined from some 122 percent in 1983 to 10.0 percent by 1991 reflecting fiscal discipline.

Mr. Chairman, The economy, between 1983 and 1991, benefited from a disciplined implementation of the government’s vision along with the fiscal and monetary discipline to accompany its implementation. However, the economic policy framework which had brought about macroeconomic success in the 1983-1991 began to unravel with the transition from the PNDC to the NDC after the 1992 elections. The economic and structural reforms slowed just as the gains of the market reforms became evident. Fiscal and monetary policy were not firm, and the public sector’s borrowing led to a large build up of external as well as domestic debt, with an increased dependence on external donor inflows. The core problem of the lack of fiscal and monetary discipline in economic management that had plagued successive governments between 1957 and 1983 had reared its ugly head once again.

In the run-up to the 1992 elections, government expenditure increased dramatically as tax administration weakened. Notwithstanding the decline in government revenue, government expenditure increased at a rapid pace in the election year. As a result of these developments, the overall government budget deficit, which had declined to 1.3 percent of GDP in 1991 increased sharply to 9.4 percent of GDP in 1992.

In the run up to the 1996 elections, fiscal indiscipline reared its head again. As in 1992, there was significant erosion in the government’s revenue base, including a shortfall in petroleum revenue. The shortfall in petroleum tax was the result of the suspension of the automatic price adjustment formula as the elections drew closer. Again, notwithstanding the revenue shortfall, expenditure was maintained at about the same levels as a percentage of GDP (some 30 percent of GDP) as had been the case since 1993. The fiscal stance in 1996 resulted in an overall budget deficit of 9.5 percent of GDP (the same as in 1992). In response to the policy slippages, the IMF and World Bank suspended support to Ghana as they had done in 1992.

The vulnerability of the Ghanaian economy in the face of persistently high fiscal deficits and declining foreign exchange reserves was to be exposed when after the economy was hit in 1999/2000 with falling prices for Ghana’s two main exports, cocoa and gold and rising prices for oil. The excessive fiscal expansion in the run-up to the 2000 Presidential and Parliamentary elections tipped the economy into a cycle of inflation and currency depreciation. In the short span of one year ending December 2000, the cedi, lost 50 percent of its value vis-à-vis the US dollar. The country’s gross international reserves were so depleted that it could not cover a month’s imports.

The debt burden of the economy increased dramatically during the structural adjustment period, with external debt/GDP ratio rising from 27 percent of GDP in 1984 to 103 percent of GDP by 1994 and rose further to 182 percent of GDP by 2000. The country was having difficulty servicing its debts.

It was against this background that the December 2000 Presidential and Parliamentary elections took place and were won by the New Patriotic Party (NPP) under the leadership of President John Agyekum Kufuor, ably supported by H.E. Alhaji Aliu Mahama.