News

Another bailout won’t solve Ghana’s economic crisis

20 OCT 2022  /  BY ENOCH RANDY AIKINS

As debt soars, Ghana must take ownership of its financial troubles, starting with slashing public expenditure.

Ghana’s economic woes continue as the country seeks International Monetary Fund (IMF) support for the 17th time. The bailout was necessary after the new electronic transaction levy (e-levy) – a 1.5% tax on all electronic transfers above GHS100 – failed to yield the expected results.

Previous IMF programmes have improved macroeconomic stability in Ghana. Fiscal discipline in the country often depends on these programmes, as self-imposed controls are rare. Nonetheless, the solution to Ghana’s crisis lies with its government and people.

The economy has suffered significantly since early 2022, plunging the country into a full-blown economic recession. Inflation rose from 13.9% in January to 37.2% in September, and some analysts believe the actual level is more than twice the official rate – possibly as high as 98%. Petrol and diesel prices have jumped by 88.6% and 128.6% respectively. Most public transport fares have increased by over 100% since January.

Likewise, water and electricity tariffs have risen by 27.2% and 21.6% respectively this year. According to the World Bank, Ghana has the highest food prices in sub-Saharan Africa, with prices soaring by 122% since January.

The country’s interest rate of 30% and lending rate of 35% are the highest in Africa. Bloomberg says the Ghana cedi is now the worst-performing currency globally, and the IMF revised Ghana’s projected growth rate for 2022 from 5.2% to 3.2%.

Fiscal discipline in Ghana often depends on IMF programmes, as self-imposed controls are rare

Problems began when international credit rating agencies downgraded the country to junk status due to its unsustainable and growing debt. The relegation denied access to global capital markets, and prevented the raising of the US$2-3 billion Eurobond required to service its debts and support the Ghana cedi, which then went into freefall.

The major problem now is rising debt, which stands above 80% of GDP and is projected to reach 104% by the end of 2022. Ghana has been thrust into debt distress as 70% of its total revenue must go towards debt servicing. This leaves little room for other statutory obligations or investment in education, health and infrastructure.

While the government blames the economic crisis on COVID-19 and Russia’s invasion of Ukraine, the political opposition and some civil society organisations believe state mismanagement is largely responsible.

Several structural problems must be fixed. For instance, the country’s inability to produce for export and its reliance on imports for daily consumption has led to a perpetual deficit in its balance of trade. That means the Ghanaian currency is fated to be inherently weak compared to the dollar, leading to high import prices that hit consumers.

Poor public financial management is also a factor, especially the high levels of unproductive and profligate government expenditure. From 2017 to 2020, Ghana – a small country – had over 120 ministers and 1 000 presidential staffers. These lucrative appointments drained the public purse.

The major problem is rising debt, which stands above 80% of GDP and is projected to reach 104% by year end

The crisis was further aggravated by government spending on flagship programmes that didn’t yield the expected results, such as NABCO (a graduate apprenticeship programme) and One Village, One Dam.

The 2018 financial sector clean-up cost Ghana about US$4 billion in borrowed funds, says the government – a figure experts believe could have been less had implementation been more efficient. Debt was also driven by the 2014 capacity charges agreement that enabled independent power producers to address energy shortages. The government says the country paid US$937.5 million in capacity charges between 2017 and 2020.

Ghanaian governments also have a history of large fiscal deficits in election years. In 2020, the deficit was 15.2% of GDP compared to the 8% average from 2017 to 2019.

Domestic revenue mobilisation is also weak due to tax exemptions for large corporations, government cronies and corruption. The country loses about GHS2.2 billion (US$300 million) annually this way. According to the Auditor-General, public sector irregularities from 2016 to 2020 amounted to about GHS48 billion (over US$8 billion). And a recent report to Parliament flagged GHS17.4 billion (US$3 billion) in financial irregularities in 2021, 36% higher than in 2020.

To achieve macroeconomic stability, the government has applied for a US$3 billion IMF bailout programme starting in the first quarter of 2023, with discussions focused on debt restructuring to give the government fiscal space. Meanwhile, the state can boost public confidence in the economy through other measures.

Having over 120 ministers and 1 000 presidential staffers was a drain on Ghana’s public purse

First, the Fiscal Responsibility Act capping government deficit at 5% of total revenue that was suspended in 2020 due to COVID-19 should be restored. Second, measures are needed to drastically reduce government’s size, including allowances and bonuses. Foreign travel and new vehicle purchases should be banned unless vital. Initiatives such as the Free Senior High School programme must be reviewed to improve their efficiency.

Third, revenue mobilisation measures are needed. The newly passed tax exemption bill, which has clear eligibility criteria and provides for monitoring and evaluation, should be implemented. The new bill could reduce tax exemptions to at least GHS500 million (US$66.7 million).

Using technology, the government could improve property tax collection, which has been sporadic and low due to poor information about ownership and accurate valuations. The extractive industry could bring in revenue if the tax regime is tightened and properly implemented. The government must also seal the leaks at ports to realise more from excise and import duties.

Parliament should enact legislation to establish a debt limit and cap government borrowing to prevent the crisis from recurring. Constitutional amendments to limit the number of ministers and appointees in government, abolish ex-gratia payments and review emoluments to public servants must be considered.

Finally, Ghana needs a national industrialisation plan anchored in its strong manufacturing sector with links to agriculture. The country must establish import-substitution and export-driven industries based on its comparative advantages. The One District One Factory industrialisation agenda should be reviewed and better implemented. These measures can improve the country’s trade balance and government revenue.

Enoch Randy Aikins, Researcher, African Futures and Innovation, ISS Pretoria

Image: © Nipah Dennis/AFP

Exclusive rights to re-publish ISS Today articles have been given to Daily Maverick in South Africa and Premium Times in Nigeria. For media based outside South Africa and Nigeria that want to re-publish articles, or for queries about our re-publishing policy, email us.

Development partners

The ISS is grateful for support from the members of the ISS Partnership Forum: the Hanns Seidel Foundation, the European Union, the Open Society Foundations and the governments of Denmark, Ireland, the Netherlands, Norway and Sweden.

   

The major problem is rising debt, which stands above 80% of GDP and is projected to reach 104% by year end

The crisis was further aggravated by government spending on flagship programmes that didn’t yield the expected results, such as NABCO (a graduate apprenticeship programme) and One Village, One Dam.

The 2018 financial sector clean-up cost Ghana about US$4 billion in borrowed funds, says the government – a figure experts believe could have been less had implementation been more efficient. Debt was also driven by the 2014 capacity charges agreement that enabled independent power producers to address energy shortages. The government says the country paid US$937.5 million in capacity charges between 2017 and 2020.

Ghanaian governments also have a history of large fiscal deficits in election years. In 2020, the deficit was 15.2% of GDP compared to the 8% average from 2017 to 2019.

Domestic revenue mobilisation is also weak due to tax exemptions for large corporations, government cronies and corruption. The country loses about GHS2.2 billion (US$300 million) annually this way. According to the Auditor-General, public sector irregularities from 2016 to 2020 amounted to about GHS48 billion (over US$8 billion). And a recent report to Parliament flagged GHS17.4 billion (US$3 billion) in financial irregularities in 2021, 36% higher than in 2020.

To achieve macroeconomic stability, the government has applied for a US$3 billion IMF bailout programme starting in the first quarter of 2023, with discussions focused on debt restructuring to give the government fiscal space. Meanwhile, the state can boost public confidence in the economy through other measures.

Having over 120 ministers and 1 000 presidential staffers was a drain on Ghana’s public purse

First, the Fiscal Responsibility Act capping government deficit at 5% of total revenue that was suspended in 2020 due to COVID-19 should be restored. Second, measures are needed to drastically reduce government’s size, including allowances and bonuses. Foreign travel and new vehicle purchases should be banned unless vital. Initiatives such as the Free Senior High School programme must be reviewed to improve their efficiency.

Third, revenue mobilisation measures are needed. The newly passed tax exemption bill, which has clear eligibility criteria and provides for monitoring and evaluation, should be implemented. The new bill could reduce tax exemptions to at least GHS500 million (US$66.7 million).

Using technology, the government could improve property tax collection, which has been sporadic and low due to poor information about ownership and accurate valuations. The extractive industry could bring in revenue if the tax regime is tightened and properly implemented. The government must also seal the leaks at ports to realise more from excise and import duties.

Parliament should enact legislation to establish a debt limit and cap government borrowing to prevent the crisis from recurring. Constitutional amendments to limit the number of ministers and appointees in government, abolish ex-gratia payments and review emoluments to public servants must be considered.

Finally, Ghana needs a national industrialisation plan anchored in its strong manufacturing sector with links to agriculture. The country must establish import-substitution and export-driven industries based on its comparative advantages. The One District One Factory industrialisation agenda should be reviewed and better implemented. These measures can improve the country’s trade balance and government revenue.

Enoch Randy Aikins, Researcher, African Futures and Innovation, ISS Pretoria

Exclusive rights to re-publish ISS Today articles have been given to Daily Maverick in South Africa and Premium Times in Nigeria. For media based outside South Africa and Nigeria that want to re-publish articles, or for queries about our re-publishing policy, email us.

Development partners

The ISS is grateful for support from the members of the ISS Partnership Forum: the Hanns Seidel Foundation, the European Union, the Open Society Foundations and the governments of Denmark, Ireland, the Netherlands, Norway and Sweden.

   

Read the story from where it originally appeared on the ISS Today

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