Bank of Ghana warns Government on fiscal policy

Government has been advised to be cautious in its spending and pricing of petroleum products in order not to impact negatively the 2011 budget.

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In its latest analysis of the fiscal situation of the country, the Bank of Ghana (BoG) noted that the huge arrears of contractors, in particular, pose a huge challenge to the fiscal stability of the economy.

“Government arrears clearance has brought to the fore, the linkage between financial stability and fiscal risk. Even though the effort is likely to enhance financial stability by way of reducing the exposure of the financial system to government, the sources of financing these arrears should be guided by the sustainability of public debt,” the Central Bank disclosed.

Government is struggling to pay the huge arrears of contractors though it had earlier promised to clear it by March, this year.

Domestic and external borrowing has also shot up alarmingly, and since the end of the first quarter of this year, Ghana’s total public debt has increased sharply to hit GH¢19.02 7 billion compared to GH¢17.2 billion at the end of December 2010, equivalent to 35.65 percent of Gross Domestic Product (GDP). This excludes arrears of contractors and other service providers, delays in the transfer of statutory funds and debt of key institutions including the Tema Oil Refinery (TOR), the Volta River Authority (VRA) and the Electricity Company of Ghana (ECG).

Ghana’s fiscal deficit for the first quarter of 2011 also increased to GH¢869.6 million (1.6 percent of GDP), compared to a deficit of GH¢621.4 million (1.4 percent of GDP) during the same period in 2010.

Meanwhile, the Monetary Policy Committee (MPC) of the Bank of Ghana will meet the press later in the week to brief them about developments in country’s economy in the last three months.

It is expected that the MPC will maintain the Prime Rate at 13 percent because inflation is expected to remain within the 9-10 percent band for sometime whilst the local currency continue to remain resolute against the major foreign currencies.

Some economic indicators such as the country’s fiscal and trade deficits, foreign reserves, among other important indicators, are also expected to be announced while the necessary projections for the next quarter of this year would be made.