Rising commodity prices bolster economy's recovery efforts
Prices of crude oil, gold and cocoa have risen cumulatively by an average of 20.3 per cent between December 2015 and May, this year, brightening prospects of the ongoing economic recovery.
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A comparative analysis of the price trend showed that crude oil, which led the pack of gainers, rose by an average of 37.1 per cent between December, when the price stabilised at US$35 per a barrel and mid-May, this year, when it strengthened to US$48 per a barrel.
Prices of gold, which ended last year at a record low of US$1,050 per ounce, also climbed by some 24.3 per cent to sell at US$1,305 per ounce in the week ending May 27.
Cocoa prices were the least bullish within the period. The commodity added 8.8 per cent in price between late December 2015 and May 27, this year.
"Generally, better prices will improve the trade balance and the balance of payment. That is the first direct impact. The secondary benefit will be if mining companies earn more revenue, then they will pay more taxes," Mr Leslie Dwight-Mensah, an economist with policy think-tank, the Institute for Fiscal Studies (IFS), said in an interview.
Sweet surprise
The improving prices could also accelerate the recovery of the economy, Mr Dwight-Mensah said, pointing to the general positive outlook good prices have on the country's revenue base.
Given that more revenue is needed to plug the fiscal deficit the economy is grappling with, he admitted that increased prices of cocoa, gold and crude oil would mean that "the context of the recovery is improving."
"In our attempts to adjust the public finance and try to restore balance and reduce macro instability, the efforts were partly hindered by weak commodity prices because just when you needed more revenue to close your revenue gap, prices of your key commodities started dwindling and so it made the consolidation efforts a little harder.
"Because of that the context of the recovery was not as conducive as would have been desirable. But with prices now improving, then the context for building on the recovery that we are seeing will improve," he said.
He also added that the recovery would also be a good surprise to the International Monetary Fund (IMF), which had initially expressed worry that government's revenue forecast would be hard to meet.
As a result, the fund earlier in the year revised down its external indicators for the country, citing an expected decline in commodity prices.
"So, now that things are picking up, it means that the external performance will be better than we anticipated under the IMF programme," he said, referring to the three-year extended credit facility Programme that the country entered into with the fund in April, last year.
Impact on economy
Beyond increasing the country's foreign exchange numbers, strong improvements in prices of gold, crude oil and cocoa are generally good news for the economy, as it enhances the revenue prospects of companies in the mining, petroleum and cocoa sectors. This would then make it possible for the government to collect more revenue in direct and indirect taxes from those companies to help plug the fiscal deficit, which is estimated to end 2016 at 5.3 per cent.
In the 2016 budget, the government estimates to collect US$720 million in export taxes from cocoa.
Earnings from the three commodities currently account for nearly 70 per cent of the country's export revenue and bearish prices, as happened last year, normally take a toll on fiscal targets and the balance of paymenst (BoP) in particular.
But with the prices now rallying, mainly on the back of weakened supplies and an improvement in the general performance the global economy, it is obvious that the government would be assured of increased revenues, in the form of taxes and royalties, and an improvement in the BoP deficit.
The trade deficit was US$384.6 million, equivalent to one per cent of gross domestic product (GDP) in March, last year, but almost doubled to US$700 million, equivalent to 1.8 per cent of GDP, in March, this year
The overall BoP deficit, however, improved to US$448.9 million (1.2 per cent of GDP) in March, this year from US$848.6 million, equivalent to 2.2 per cent of GDP in March, 2015. The moderation was mainly as a result of the improving prices within the period, data from the Bank of Ghana (BoG) showed. — GB