fiscal and monetary policies (ghana and india )
TRANSCRIPT
1SEIDU Moro Email: [email protected]
FISCAL AND MONETARY POLICIES (GHANA AND INDIA )
By
SEIDU Moro
DEPARTMENT OF AGRICULTURAL ECONOMICS COLLEGE OF AGRICULTURE,
CCS HAU
30th January, 2014
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Overview of presentation Brief Background of Ghana and India
Fiscal and Monetary Policies Principle
Policy Makers
Policy tools/ Instruments
Objectives
Limitation
Comparison of Policy Impacts of Ghana and India in terms of Economic growth
Price Stability
Unemployment Rate
Effect of tools on output indicators
Major Policies Interventions adopted by Ghana & India
Conclusion
References
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Background -Ghana Ghana, nation in West Africa, a former British colony
known as the Gold Coast until 1957. That year Ghana became the first state in sub-Saharan Africa to gain political independence from European colonial rule.
Following independence, Ghana assumed the leadership role in the African continent’s struggle for national liberation.
Ghana has one of the strongest economies in West Africa, yet the country’s economic base continues to be agriculture
Gold mining, the production of cocoa (used to make chocolate), and tourism are the main sources of revenue.
Major food crops: cassava, yam, maize, millet, rice Area -238500 sq. km. Population- 25.37million (2013) Capital – Accra Currency- Cedi (₵)
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Background -IndiaIndia ranks second only to China among the world’s most populous
countries.
. The Indian economy heavily dependent on agriculture, industry and
services
Economic reforms in 1991 dramatically altered economic policy to
privatize state-owned enterprises and to promote competition and
investment.
The economic focus of the country has since changed from one based
on self-sufficiency to one based on trade with other countries.
India’s most important crops include cotton, tea, rice, wheat, and
sugarcane.
Other important cash crops include jute, groundnuts, coffee, oil seeds,
and spices.
Another central feature of India’s agricultural economy is the raising
of livestock, particularly horned cattle, buffalo, and goats.
Capital: New Delhi Area: 3165596 sq. km Pop:1.27bn
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FISCAL & MONETARY POLICIES
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Economic policy-makers are said to have two kinds of tools to influence a country's economy: fiscal and monetary.
When these policies are used to stimulate the economy during a recession, it is said that the government is pursuing expansionary economic policies. And when they are used to contract the economy during an overheated expansion, it is said that the government is pursuing contractionary economic policies.
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Fiscal Policies
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Meaning of Fiscal Policy Fiscal policy relates to government spending and revenue collection.
Fiscal policy deals with the taxation and expenditure decisions of the government. These include, tax policy, expenditure policy, investment or disinvestment strategies and debt or surplus management - Kaushik Basu ( Former Chief Economic Adviser )
Principle of Fiscal Policy Manipulating the level of aggregate demand in the economy to achieve
economic objectives of price stability, full employment, and economic growth.
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Fiscal Policies
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Policy Makers of Fiscal PolicyThe legislative and executive branches of government control fiscal policy.
In Ghana, this is the President's administration and the Parliament that
passes laws.
Similarly in India the Prime Mister administration is in charge of fiscal
policies.
H.E. JOHN DRAMANI MAHAMAH.E NARENDRA MODI
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Fiscal Policies (Cont.)
Policy ToolsRevenue Budget
Tax RevenueDirect Tax (e.g. Income & Corporate tax) Indirect Tax (central excise, VAT, service & custom tax)
Non Tax Revenue (e.g. revenue from state natural resources) Public Debt
Internal borrowingExternal borrowing
Expenditure Budget Consumption Investment
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Revenue Budget
Taxes revenue
Public debt
Non Tax
revenue
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Fiscal Policies (Cont.)
Objectives of fiscal policies To increase capital formation To Improve degree of growth To achieve desirable price level To achieve desirable level of consumption To achieve desirable level of employment To achieve desirable level of income distribution
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Fiscal Policies (Cont.)
Limitations of fiscal policies To increase capital formation
Lack Of accurate Forecasting
Delay in Decision
Poor Tax Administration
Inequality Of income
Failure in Public Sector
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Fiscal Policies of Ghana at a Glance
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Government Revenue, Expenditure and deficits/surplus from1978 to 2008
1978 1983 1988 1993 1998 2003 2008 2009 2010 2011 2012
-15
-10
-5
0
5
10
15
20
25
30
35
10.1
5.2
14.114 15
13.114.5
13 14
17.5 17.118
9
1418.6 19.1 20
26.5
22.424.9
23.8
28.6
-7.9
-3.8
0.0999999999999998
-4.6 -4.1
-6.9
-12-9.4
-10.9
-6.3
-11.5
RevenueExpenditureDeficit/Surplus
Gov
ernm
ent R
even
ue, E
xpen
ditu
re a
nd d
efic
its/su
rplu
s (%
G
DP)
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Fiscal Policies of India at a Glance
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Government Revenue, Expenditure and deficits/surplus from 1988 to 2011
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MONETARY POLICIESMeaning of Monetary Policy Monetary policy is the process by which the monetary authority of a
country controls the supply of money, often targeting a rate of interest
to attain a set of objectives oriented towards the growth and stability of
the economy.
Principle of Monetary Policy Manipulating the supply of money as well as interest rates to influence
outcomes like economic growth, inflation, exchange rates with other
currencies and unemployment
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MONETARY POLICIES (CONT.)Policy Makers Monetary policy is controlled by the Central Bank. the organization is largely
independent and is free to take any measures to meet its dual mandate: stable prices and low unemployment
Bank of Ghana (BoG) - Ghana Reserve Bank of India (RBI)- India
Policy Making Tools Bank/Discount rate; Cash Reserve Ratio; Repo & Reverse Repo Rate; Statutory Liquidity Ratio; Open market operations; Moral Persuasion
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Dr. D. Subbarao Dr. A.K. Henry Wampah
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MONETARY POLICIES (CONT.)Policy Making Tools Bank /Discount ratesIt is the rate at which the central bank of a country lends to the commercial banks. If bank rate is increased, then commercial banks also charge higher rate of interest on loans given by banks to public and vise versa. Higher rate of interest will contract credit in the economy i.e. public will take lesser loans because of higher rate of interest. The bank rate for India is 8.75% (October, 2013) & Ghana is 15.5% (2014)
Cash Reserve RatioIs the percentage of bank deposits which banks are required to keep with Central banks in the form of reserves or balances . By changing the CRR requirement for banks, the Central bank can control the amount of lending in the economy, and therefore the money supply. As of January 2013, the CRR is 4.00 % and 9.00% for Ghana respectively
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MONETARY POLICIES (CONT.)Policy Making Tools Repo RateRepo rate is the rate at which the Central bank lends to commercial banks generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. As of 2013, the repo rate is 7.25 % (India) and 14.25% (Ghana)
Reverse Repo rateThis is exact opposite of Repo rate. Reverse Repo rate is the rate at which Central bank borrows money from commercial banks. The Central uses this tool when it feels there is too much money floating in the banking system. An increase in Reverse repo rate can cause the banks to transfer more funds to central banks due to these attractive interest rates.As of August 2013, the reverse repo rate is 6.25 (India) and 13.5% (Ghana)
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MONETARY POLICIES (CONT.)Policy Making Tools Statutory Liquidity Ratio; SLR
It is the amount a commercial bank needs to maintain in the form of cash, or gold
or govt. approved securities (Bonds) before providing credit to its customers. SLR
rate is determined and maintained by the Central bank in order to control the
expansion of bank credit. If SLR is more then banks have to keep more part of
deposits in specified securities and banks will have less surplus funds for granting
loans. It will contract credit. RBI usually fix SLR ranging between 24% to 39%.
However, the current SLR is 23% (India) and that of Ghana is 19.5%.
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MONETARY POLICIES (CONT.)Policy Making Tools Marginal Standing Facility (MSF)MSF is the rate at which scheduled banks could borrow funds overnight from the Central bank against approved government securities. The basic difference between Repo and MSF scheme is that in MSF banks can use the securities under SLR to get loans from Central bank and hence MSF rate is 1% more than repo rate.
Open market operationsThe Central bank can create money out of thin air and inject it into the economy by buying government bonds (e.g. treasuries). This raises the level of government debt, increases the money supply and devalues the currency causing inflation. However, the resulting inflation supports asset prices such as real estate and stocks.
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MONETARY POLICIES (CONT.)Policy Making Tools Credit CeilingIn this operation Central bank issues prior information or direction that loans to the commercial banks will be given up to a certain limit. In this case commercial bank will be tight in advancing loans to the public. They will allocate loans to limited sectors.
Moral PersuasionReserve bank can also exercise moral influence upon the members’ banks with a view to pursue its monetary policy. RBI convinces banks to curb loan to unproductive sectors. From time to time reserve bank holds meetings with the member banks seeking their cooperation in effectively controlling the monetary system of the country. It advices them to extend more credit to priority sector.
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MONETARY POLICIES (CONT.)Table 1: Summary of Policy tools (2013-…)
Interest ratesInterest rate is the cost of borrowing or, essentially, the price of money. By manipulating interest rates, the central bank can make it easier or harder to borrow money. When money is cheap, there is more borrowing and more economic activity. NB: ALMOST ALL THE MONETARY POLICY MAKING TOOLS HAVE DIRECT OR INDIRECT IMPACT ON INTEREST RATE
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Rates / Reserve Ratios India Ghana
Bank Rate 8.75 % 15.5%
Repo Rate 8 % 14.25%
Reverse Repo Rate 7 % 13.5%
Cash Reserve Ratio (CRR) 4.00% 9%
Statutory Liquidity Ratio (SLR) 23% 19.5%
Marginal Standing Facility (MSF) 9% 15.25%
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MONETARY POLICIES (CONT.)
Objectives of Monetary Policies To achieve price stability
To enhance adequate flow of credit to the productive Sectors of the
economy to support economic growth
To encourage rapid growth
To achieve full employment
Balance of payment equilibrium
Equal income distribution
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MONETARY POLICIES (CONT.)
Limitation of Monetary Policies
Poor Banking Habit
Underdeveloped Money Market
Existence of Black Money
Conflicting Objectives
Lack of Coordination with Fiscal Policy
Lack of Banking Facilities
Limitations of Monetary Instruments
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Basic Concept of Fiscal & Monetary Policies
Fiscal Policies +
Monetary Policies
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Economic growth +Stable Prices
+Full Employment
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Comparison of F&M Policies Impacts on The Economies of
Ghana and India
25SEIDU Moro Email: [email protected]
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
35.5 37.4 39.4 42.5 44.44 48.2754.86
60 31.13 34.2 35.99 61.97
75.9
1,805
2,2002,400
2,660
3,033
3,319
3,666
4,156
2,966
3,297
3,680
4,060
4,515
GDP (purchasing power parity) of India vrs Ghana
GhanaIndia
Period/years
GD
P (P
UR
CH
ASI
NG
PO
WE
R P
AR
ITY
)/BIL
LIO
N$
26SEIDU Moro Email: [email protected]
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130
2
4
6
8
10
12
14
16GROWTH RATE OF INDIA AGAINST GHANA
GhanaIndia
TIME/YEARS
GD
P-R
EA
L G
RO
WT
H R
AT
E/%
27SEIDU Moro Email: [email protected]
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130
3
6
9
12
15
18
21
24
27
30
12.8
22.8
25
14.5
26.7
13
15.1
10.9 10.7
16.5
19.3
10.9
8.77.9 7.4
0.47
3.48
5.16
3.2 3.72 3.78
5.576.53
5.51
9.7
14.97
9.47
6.49
11.1711.08
Inflation rate of India vrs Ghana
GhanaIndia
Period/ Years
Infla
tion
rate
(con
sum
er p
rice
s) (%
)
28
.
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130
2
4
6
8
10
12
14Unemployment rate of India vrs Ghana
IndiaGhana
Period/years
Une
mpl
oym
entr
ate
(%of
Lab
our
Forc
e)
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
5
10
15
20
25
30
14.5
6.2 6.2 5.74.4
6 6.27 7
4.25 4.28
6.1
8.3 8 7.75
24
27.5
22
18
12.5 1213
17.118
1312
1516
Interest Rates of India vrs Ghana
IndiaGhana
Period/Years
Inte
rest
rat
e/%
31SEIDU Moro Email: [email protected]
Low savings Borrowing increases Increase in money supply Increase in Demand of goods Increase in business activities Increase in GDP Growth Rate Increase in the Average
income of people and corporate
Increase in Tax Revenue of the government
Decrease in fiscal deficit of the government for the period
Decrease in Value of domestic currency
Inflation Increases
Increase in Exchange Rate
Increase in Export of goods Increase in inflow of foreign
currency Decrease in Current Account
Deficit
Interest rate effect on Economy (Decrease)
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.
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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130
2
4
6
8
10
12
14
16Interest Rate againt output indicator of India Economy (%)
Interest rateInflationUnemploymentGDP
33
.
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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130
5
10
15
20
25
30Interest Rate against output indicators of Ghana Economy (%)
Interest rateInflationUnemploymentGDP
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Some Fiscal and Monetary Policies Intervention being adopted by India and Ghana to arrest their current situation
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India (Some F&M Policy Interventions) Stepping up Public Investment Reduction of repo rate under liquidity adjusted facility to 7.5% to 7.25% Reverse repo rate reduced from 7.0% to 6.25% MSF reduce from 9% to 8.25 Bank rates still stands at 8.5% (used to be 9.0%) Cash Reserve Ratio (CRR) of scheduled banks retained at 4% (used to be
4.75%)of their net demand and time liabilities Allows FIIs to hedge their currency risk by using exchange traded currency
futures in the domestic exchanges Efforts to reduce supply bottle necks Introducing a long- term fixed interest rate loan products by banks Improving governance Improving government revenue collection Managing government expenditure
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Ghana (Some F&M Policy Interventions) Achieving and maintaining inflation at single digits and maintaining
it for long period of time
Reducing unemployment rate in the country
Reducing Budget deficit By Increasing revenue collection
to strengthen tax collection Widen the tax net
Reducing government Expenditure
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Cont…
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Ghana (Some F&M Policy Interventions)Increasing revenue collection (By Strengthening its Collection)Increase in the corporate tax rate from 25 % to 35 % on specified subsectors,
mostly in the Services sector (National Stabilization Levy)
Restructuring of revenue administration. E.g. integrating revenue services (IRS, VAT, CEPS) under the Ghana Revenue Authority;
Streamlined tax exemption. The budget also limited the tax exemptions for real estate developers to projects which provide affordable housing in partnership with the Ministry of Water Resources, Works and Housing.
Reinforcing tax collection at the port and other key customs location using computerized valuation systems and other automated procedures that limit administrative discretion
Reinforcing the taxation of the self-employed.
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Cont…
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Ghana (Some F&M Policy Interventions)Increasing revenue collection (By Widening Tax net)
Review of the salary structure to bring down wage pressure
Introduction of profit tax of 10 % for the mining sector
Introduction of capital allowance of 20 % for five years in
the mining and oil and gas sectors.
Extending the coverage of the communication service tax,
Implementing new measures to tax the informal sector
amongst others
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Cont…
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Ghana (Some F&M Policy Interventions)Reducing government Expenditure
Developing more realistic and strategic expenditure budgets, and the reinstatement of quarterly ceilings for managing spending
E orts to address payment of arrears with the re-instatement of commitment ffcontrols thus regularisation of the informal Debt
Establishment of a comprehensive database to facilitate monitoring of commitments.
The O ce of the President (in October 2010) mandating all MDAs to seek ffiauthorisation through Commencement Certificates before committing government to contractual obligations
Government has also put in place a strategy for regularising payment arrears by 2015 using a mix of bonds and cash
Restructuring of the salary system to Single Spine Structure
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Cont…
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ConclusionRelatively comparing the F & M Policies of India to Ghana the following are Identified: The policy actions taken are expected to:
India Stabilise growth around its
current post-crisis trend Contain risks of inflation and
inflation expectations re-surging
Enhance the liquidity cushion available to the system.
Stepping up Public Investment Try to recover an economic shock
or crisis
Ghana Reduce deficits and if possible
create surplus Ruduce inflation to achieve
single digit (price and currency stabilty)
Encourage savings of the public to curtail the high money supply
Still finding means to boost the economy
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Conclusion
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Fiscal and Monetary policies are dynamic process and occasionally adjusted to reflect prevailing conditions.
Fiscal and Monetary policies can be effective in managing economic growth both in the short run and the long run.
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References
SEIDU Moro Email: [email protected]
Afonso, Antonio and Alegre, Juan G. (2008). Economic Growth and Budgetary Components: A Panel Assessment for the EU. Working Paper series, European Central Bank, No 848. http://www.iseg.utl.pt/departamentos/economia/wp/wp0292007deuece.pdf
Aryeetey E., Harrigan J. And Nissanke M. (2000). Economic Reforms in Ghana: The Miracle and the Mirage. Woeli Publishing Service, Accra; James Currey, Oxford and; Africa World Press, Trenton, NJ.
http://www.global-rates.com http://www.hindustantimes.com http://www.indexmundi.com http://data.worldbank.org http://currentaffairs-businessnews.com http://trak.in http://www.inflation.eu http://www.tradingeconomics.com http://en.wikipedia.org http://www.riksbank.se http://in.reuters.com http://www.business-standard.com http://www.bankofghana.gh http://www.reservebankofindia.in