World Bank’s Country Director, Pierre Laporte gave a Key Note Address at Ghana’s 73rd New Year School. The event was held on January 25th, 2022 at the University of Ghana, Legon.
His delivery touched on the major shockwaves to Ghana’s economy as a result of the Covid-19 pandemic. He highlighted these three points.
- How was Ghana’s economy affected by COVID?
- How have the government and the WBG responded?
- What are key lessons on the way forward?
Below is a portion of his speech.
1. The first shockwave was a major supply shock that drove a growth slow-down in 2020
Ghana was growing fast before the pandemic, but economic activity came almost to a halt in 2020. This was due mostly to restrictions to trade and normal economic activity, that came with lockdowns and other vital containment measures. Then came second-round effects (for instance as the slowdown in advanced economies affected demand for oil).
In this environment, I believe the GoG did the right thing: namely (i) a strong health response (ii) expansionary fiscal policy to counteract the decline in private activity and provide safety nets, and (iii) relative monetary accommodation.
Indeed, in these cases, the priority is to “weather the storm” and “keep the lights on” and ensure that companies and households don’t go bankrupt, as a result of a shock that is temporary and exogenous, and can spring back when it’s over.
However, this is easier said than done, because governments need to find what can be described as a ‘goldilocks’ response: either
– too little support and problems are delayed but not ultimately averted, or
– too much support and you exhaust your resources, weaken the financial sector, fuel inflation, and so on.
Your Excellency this brings me to the second shock
2. The second shock is a large increase in public debt:
Those of you who have followed the recent launch of the Bank’s Global Economic Prospects publication will know that the public debt of the developing world has increased dramatically in the wake of the crisis.
Ghana is a case in point, with public debt rising from 60% of GDP in 2019 to the high 70s in November 2021 – and as a result higher costs of debt servicing.
Unfortunately, in this case, the options are limited for Ghana. The priority is to lay out a roadmap for returning to a state of equilibrium that is credible, which means that it will require efforts not only from creditors but also from taxpayers and the beneficiaries of government spending
Again the challenge is to find a ‘goldilocks’ spot, to ensure that the adjustment is enough to restore macroeconomic stability without undermining social protection and the recovery of growth.
Our role at the World Bank in these circumstances is to support the government; and we do this in various ways including through analytics on debt, revenue mobilization, and of course concessional financing. I should also highlight that the IMF has made significant resources available through an exceptional Special Drawing Rights allocation and possibly a new ‘Resilience and Growth Trust’
The key lesson, in hindsight, is that notwithstanding Ghana’s strong pre-COVID growth, it came into this crisis with some degree of fiscal fragility – with a level of borrowing that was not matched with the required level of revenue mobilization – and Ghana paid the price when the crisis hit -even if that event was not of its own doing.
As one of the lead authors of the Global Economic Prospects, Ahyan Kose said “[Access to international financial markets] is a wonderful thing to have when there is cheap money out there, but there might be a different view as conditions tighten.”
3. The third shock is an increase in inflation:
Now you have a third shock coming in the form of inflation.
As you know, inflation in Ghana has exceeded the Central Bank’s targets since October last year largely driven by global inflation, which is then ‘imported’ to Ghana.
There are many reasons to be concerned
First, because inflation is a terrible thing for the economy and for the poor
Second dealing with inflation, through monetary policy tightening is also costly because it increases the price of credit for firms and also for the Government precisely when it is needed.
We will see how the government responds to this most recent crisis.
Our focus will continue to be to advocate for (i) protecting the poor -for instance through targeted social safety net programs – programs and (ii) boosting the productive capacity of the economy, which is the most sustainable way of dealing with inflation.
Finally, Your Excellency, I have been asked to share some thoughts on the way forward and strategies for the future
I don’t believe in “picking the winners” strategies. However, three facts about the future are clear and we need to prepare for them:
- We are not done with the COVID-19 pandemic, and even when we do eventually overcome it, pandemics will recur in the future: Ghana needs to bolster the responsiveness of the health system but also social safety nets
- Ghana’s population will continue to grow and that means it’s imperative to prioritize education and jobs
- Finally, climate change will continue to translate into warmer temperatures and more frequent and extreme climate events. Ghana needs to do its share to reduce emissions but even more urgently to adapt its agriculture, cities, infrastructure and economy to avoid major losses.
I do not want to take more of your time – especially given that you have a very exciting program ahead of you.
On this note, I thank you very much for your kind attention.
Source: The WorldBank