UTCHE OKWUOSAH
Atta Mills’ administration has inherited a very daunting challenge getting the economy back on a level footing to begin the much desired growth
It is now clear, beyond all doubts, that the Atta Mills’ administration has inherited a very daunting challenge getting the economy back on a level footing to begin the much desired growth. With so much domestic and external debt that keep expanding on a daily basis, over US$8 billion, government is now in such a dire strait situation that it has been compelled to bite the bullet, as the President of the Association of Ghana Industries, referred to the option of resorting to the Bretton Woods institutions for solution.
Discomfortingly, the whole scenario flashes reminiscences of the scene that greeted NPP’s Kufuor administration when they took over power from this same NDC in 2000. Kufuor inherited such a huge and somewhat clueless debt (198.3 percent of national income) that it was also compelled to go the HIPC option.
Today, the same scenario is being played out again, revealing a running thread of some vicious cycle of governance irresponsibility, where a departing government seemingly strives to ensure that the in-coming one comes in to meet an economy that is bereft of all financial gains that may have been achieved in order to make governance difficult for the new government. This is why, now, Atta Mills is being compelled to, once more, look in the direction of the IMF for a way out, inspite of his party’s criticism of relationships with the Bretton Woods’.
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Fact
Ghana’s national debt is currently estimated at about $8 billion and still rising because of the obvious fact of the absence of sufficient revenue inflows.
In addition to that, government is faced with the challenging task of sourcing financing to fill a 39.4 percent gap in the 2009 budget, from an economy that is nursing increasing multiple deficits.
At the back of the continuing global price declines and weak demand, owing to the global financial and economic crisis, export is being affected, and will continue to be more severely affected, by the declining production of export products and services because of the lack of enabling infrastructures and funding for productive activities (high interest rates). Consequently, foreign exchange revenue position is deteriorating, as caused by widening international trade with its effect of dwindling the stock of international reserves in terms of months of import cover which, currently, is less than 1.8 months cover.
As the global recession eats away at the economies of the developed world, remittances into Ghana, which brings in about $3 billion annually, also continues to decline as job losses abroad take their toll on inflows, thus adding to the pressure on the cedi which has, so far, recorded an annual depreciation of 31 percent, and more than 10 percent decline this year; while the recent downgrading of Ghana’s sovereign ratings is adding to the slow down in foreign direct investment (FDI).
Not surprisingly, during the recent travel of President Atta Mills to the United Kingdom , he was reported to have admitted to his audience at the Royal Institute of International Affairs, otherwise known as Chatham House, that Ghana’s economy was really facing serious worrisome challenges.
The economic downturn will result in very, very serious repercussions for our economy, he had confessed. Already we are seeing signs of a reduction in remittances from abroad. We also expect a decline in donor support (and) a decline in trade.
His trip, expected to consolidate the hope of more support from the British government and offer an opportunity to woo investors, did, indeed achieve all of those. But that was as far as that expectation went because, at the end of the day, lasting solution was not in that shopping bag. Of course, President Mills was aware of this truth and said it, inspite of himself, that Ghana must(!) now begin to shirk itself of the ignoble dependency syndrome which has continued whirling the vicious growth debilitating cycle.
Our team is capable of putting the economy on a strong foundation, the Prof had assured, suggesting a new awakening; a new awakening that must, of necessity, make domestic revenue generation and uncompromised fiscal prudence the fundamental force of its drive.
Unfortunately, clear paths to transforming the potential domestic revenue generation resources into the actual yielding environment that it should be, is what economists have complained was not contained in the current budget. At least, the path to that achievement, they say, is not made clear, even though the budget states clearly that domestic revenue mobilization was the way out, considering the present unfavorable global economic environment and Ghana’s not too good standing as a borrower for now.
The Pathway
Throughout the financial and business community, the sigh of relief released recently at the knowledge that, at long last, government was now beginning to take definite and concrete steps in some direction to address the lingering economic doldrum was very palpable when it was revealed that some significant fund injection into the economy was in the offing from both the IMF and the World Bank.
Attending the last Spring meeting of the Bretton Woods’ institutions, the Kwabena Duffuor, Minister of Finance, led delegation had used the occasion to do serious business talking the institutions into increasing and modifying Ghana’s fund allocations for effective application to dire needs. A total of US$1 billion is expected to start flowing from the IMF, though in tranches, into the economy as from the third quarter of this year. Ministry of Finance’s report explains: indications are that the Fund’s support could be in the order of around US$600 million over a two- to three-year period, which together with the additional SDR allocation, would boost Ghana’s gross foreign exchange reserves by around US$1 billion.
Also, an additional funding is coming from the World Bank. As the delegation’s report revealed, the amount of US$375 million shall be front-loaded to Ghana from the next quarter from its budget support allocation of US$525 million spread over a three-year period.
The report read in part: The Bank management reiterated that US$1.2 billion has been allocated to Ghana for Budget/Sector Support Programmes and Projects for the ensuing three-year period. Of this amount US$450 million had been earmarked for budget support. (Prior to the trip to Washington the World Bank Country Director in Ghana had informed the Minister that an additional amount of USS$75 million has recently been allocated to Ghana . The Minister had asked for this amount to be added to the Budget Support Program thus increasing the amount to US$525 million for the three-year period).
Under the World Bank’s Budget Support Facility “Poverty Reduction Support Credit Seven (PRSC7) “there were intensive discussions, to frontload US$375 million out of a tentative allocation to Ghana of US$525 million over three years.
But then, this is only a stop-gap coming as a welcome alternative in the absence of the preferred private international credit market option devoid of those suspicious conditionalities that have nightmarishly distorted developing countries’ economies. It would serve to take care of the interim period within which government’s multi-sectoral structural and financial interventionary efforts would be maturing to effective growth catalysts – what economists call the intervention lag period.
But, whilst that is in play, economists have unanimously agreed that there are those fundamental policies pertaining to domestic growth that government should sincerely be busy at implementing in order to ensure that enduring growth would be achieved.
With a target that aims to generate revenue close to GHc10 million in 2009, tilling the domestic field for such a yield becomes a challenging task against the background of the global economic crisis. No doubt, historically, Ghana has had a fairly good record of domestic revenue performance, at least, in recent times but, this period’s case has become a challenging one because of the realities of the current harsh global economic environment.
Yet, the budget found the impetus to project the total receipts for the 2009 fiscal year at GH¢9,793.1 million, equivalent to 45.8 per cent of GDP. A 2.7 per cent increase over the outturn for 2008. Although government still recognized the daunting task it faces in meeting its target in the face of the economic challenge.
The apparent marginal increase in projected total receipts for 2009 over the outturn for 2008 can be attributed to the exceptionally huge inflows from divestiture receipts and the draw-down on receipts from the sovereign bond in 2008. This led to the large amount of total receipts recorded during the year. In 2009, however, these exceptional receipts will not recur, the 2009 budget statement explained in acknowledgement of the challenges ahead.
Details of the revenue projection include: Domestic revenue, consisting of tax and non-tax revenue, is projected at GH¢5,935.1 million, a 23.6 per cent increase over the outturn for 2008. Total tax revenue comprising revenues from the Internal Revenue Service (IRS), Customs Excise and Preventive Service (CEPS) and Value Added Tax Service (VATS) is projected at GH¢5,117.1 million, representing 23.9 per cent of GDP. The 2009 estimate for tax revenue shows an increase of 19.0 per cent over the outturn for 2008.
Out of the projected tax revenue, direct taxes are estimated at GH¢1,554.5 million, accounting for 30.4 per cent of total tax revenue. This amount indicates a 24.0 per cent increase over the outturn for 2008.
Indirect taxes are projected to increase by 25.1 per cent from the 2008 level to GH¢1,917.4 million in 2009. The estimate for 2009 is made up of GH¢1,418.5 million for total VAT, with petroleum and excise taxes yielding GH¢436.2 million and GH¢62.7 million, respectively.
International Trade taxes, comprising import and export duties, are projected at GH¢922.5 million, representing 4.3 per cent of GDP and 17.8 per cent of total tax revenue. The estimate indicates a 28.2 per cent increase over the outturn for 2008. Import duties constitute about 95 per cent of the projected international trade taxes for 2009.
National Health Insurance Levy (NHIL) is estimated to yield an amount of GH¢375.2 million, representing 1.8 per cent of GDP and an increase of 17.9 per cent over the outturn for 2008. The yield from the NHIL includes an amount of GH¢117.4 million from the Social Security and National Insurance Trust (SSNIT).
Non-Tax Revenue is projected at GH¢590.9 million, equivalent to 2.8 per cent of GDP. Out of this amount, GH¢386.9 million is to be retained by the MDAs and GH¢204.0 million will be lodged for general government budgetary support.
How realistic is the expectation to achieve these targets?
Private Enterprise Foundation, in their review of the budget, opined that meeting the targets is not that realistic. This position was informed by their estimation that global recession would impact on Ghana’s exports “volume and prices – and that this would have serious consequences on foreign exchange receipts and the ability to maintain an external balance.
Secondly, they say, The lagged effects of the global recession would remain with us into the next year. Hence, projected tax revenues may not come on stream. And, above all, (in order to have a broader perspective on their position), they reasoned that, since the projected growth is being driven mainly by the agric sector, and the proposed government interventions would come with a lag, the impacts of the interventions would not be felt this year. Consequently, they concluded, the growth targets (projected at 5.9 percent) should be revised downwards (between 4.5% -5%).
For Databank economists, on the other hand, the targets are achievable granted that certain fundamental things are done. They made some recommendations.
They premised their opinion on a fundamental judgement: Reducing the overall budget deficit from 14.9% in 2008 to 9.4% in 2009 though still high, is realistic and laudable. Then they make an assertion: Policy orientation must focus on sectoral reforms with emphasis on domestic and international comparative advantage, as well as, the improvement of fiscal space. This will make the economy more resilient to exogenous shocks and create employment.
They agree that domestic revenue has a significant role to play in the sourcing of capital for the financing of the 2009 budget: The financing gap will be financed through domestic borrowing and foreign resources increased from 33.0% in 2008 to 39.4% in 2009. But they suspect that government may not efficiently plug the perennial holes inherent in tax revenue mobilization and sees government leaning towards domestic borrowing as an easier alternative measure to access funds. They caution: Intense domestic borrowing will crowd-out the private sector and slow, in particular, the growth of the industrial and services sectors in 2009.
Hence they recommend: To reduce the impact of higher domestic borrowing on the economy we expect government to improve the bond market by lengthening the country’s yield curve; as excessive short-term borrowing could crowd-out the private sector and facilitate higher inflation.
The deficit that will result from the long-term borrowing must be spent in growth catalytic areas. This will ensure that the economy expands to meet the maturity profile of the debt. In our view, this could help offset demand led inflation.
Thus, to stimulate growth, they said, government needs to adopt mild interest rate adjustments accompanied by the lengthening of the term structure of interest rates and a normal yield curve. This is likely to give room for government’s borrowing but at the long end of the auction market because, we anticipate domestic borrowing would be high especially in the second half of the year when the execution of the budget intensifies.
The conclusion, therefore, would be that government could pull through meeting its targets ONLY if it sincerely and diligently kept to it’s studiously formulated and outlined fiscal and budgetary policy measures. After all, the 14.9 per cent budget deficit weighing the economy down today was incurred from reckless expenditure exceeding revenue, when avowed prudent management was thrown out the window. As the Centre for Policy Analysis (CEPA) put it: The primary reason for the deteriorating fiscal performance over the last four years has been the rapid growth of expenditure. In each of these years, expenditure (had risen) faster than national income and (had) overshot the budgetary provision by considerable margins.
It would seem that earning reasonably sufficient revenue from domestic resources has not been the problem, but managing the harvest has been. This ultimately means that the 2009 budget can, potentially speaking, be financed, and, if government’s pledge of austere and prudent management is anything to go by, then Ghana is on to a good year’s end.
