Ghana: Adjustment, Reform and Growth

In: Public Sector Deficits and Macroeconomic Performance

When Ghana became independent in 1957, its resource base was large, its population was well educated, and its economic infrastructure was strong. By 1983, however, the economy was a shambles, with income per capita more than 10 percent lower than in 1957. In April 1983 the government initiated the Economic Recovery Programme (mRP) in an attempt to rescue the economy. Since then, the economy of Ghana has made steady progress: the average annual growth rate of real GDP during 1984-90 was 4.5 percent, compared with -0.5 percent during 1978-83. This chapter investigates the role that fiscal deficits have played in Ghana's economic dedine and renewal. Our main conclusion is that Ghana's high money-financed fiscal deficits, in conjunction with the direct controls imposed on the economy, caused severe macroeconomic imbalances and reduced growth until 1983. Lower fiscal deficits, liberalization of the economy, and access to foreign financing led to improved economic performance after 1983. The first section presents an overview of economic policy and the control regime that has been in place since the early 1960s. It then discusses some of the principal factors that have affected Ghana's deficit. The second section focuses on fiscal deficits and financial markets. It considers the effect of inflationary financing on the demand for money and quasi money and for long-run- seigniorage, and it addresses the sustainability of the deficit. The third section assesses the impact of the fiscal deficit on private consumption and investment. The fourth section develops the relationship between fiscal deficits, the trade balance, and the real exchange rate. The fifth section presents our conclusions.