The latest data from the Bank of Ghana announced earlier last week by the Bank of Ghana’s Monetary Policy Committee points to economic growth that may be faster than anything enjoyed by the country since 2017, and possibly since 2011 when the commencement of upstream oil and gas production propelled it to become the fastest growing economy in the world for that year.
The central bank’s latest Composite Index of Economic Activity (CIEA) recorded an increase of 33.1 percent for the 12 months up to May, its biggest recorded year on year increase to date.
Although buoyed by base drift effects, it still reflects a sharp increase in economic activity which is expected to translate into significantly accelerated actual economic growth when the Ghana Statistical Service eventually discloses its growth data for the second quarter.
We note that the BoG’s CIEA computations and the GSS’s economic growth computations are fundamentally different. While the CIEA tracks changes in the level of economic activity, economic growth as measured by the GSS measures changes in the value of the economy resulting from such economic activity. But although differently measured, both tend to move in the same direction with some degree of quantitative correlation.
Instructively the CIEA’s unprecedented 10.2 percent contraction recorded for the 12-month period up to May 2020 translated to a 3.2 percent economic contraction for the second quarter of last year.
Using basic back of the envelope quantitative correlations, this would imply that the latest 33.1 percent increase on the index suggests a close to 10 percent economic growth rate for the second quarter of this year. However we agree that such speculative computations are both overly simplistic and overly optimistic; but nevertheless this indicates that Ghana’s economic growth will not only accelerate beyond the 3.1 percent achieved for the first quarter of this year, but will most likely exceed the 5.0 percent targeted for the full year 2021.
Consequent to all this we fret that further monetary easing at the current time could result in the economy overheating – a situation well recognized by the BoG in retaining the current MPR – as all the current data points towards a severe narrowing of the output gap occasioned by COVID 19 ‘s impact, which has allowed for monetary easing to support the economic rebound without triggering debilitating inflationary pressures.
But with the output gap now narrowing, fiscal deficit pressures could generate inflationary pressures. Indeed, the fiscal deficit for the first five months of 2021, at 4.6 percent of Gross Domestic Product was marginally higher than the 4.4 percent target for the period, which itself would be considered inordinately high under normal circumstances. Besides we note that government’s fiscal deficit figures do not consider the cost of the financial sector clean up and legacy energy sector debts; the IMF does and forecasts an all-inclusive 13.9 percent deficit for the full year, which is significantly higher than government’s stated 9.6 percent target.
Add to this impending tariff hikes for electricity and possibly water, as well as inevitable rising petroleum price costs as the global crude oil price continues to rise. Also money supply is rising sharply as a result of fiscal policy to counteract the effects of COVID 19 on economic activity.
So far inflation has been kept tame by the output gap and exchange rate stability. While the latter seems set to remain on place the former is dissolving. So with economic growth surging attention needs to move back to containing inflation. If not that accelerated growth would become decreasingly real and increasingly nominal.