Accra, Ghana//-Ghanaians will notice that in recent times, some policymakers have become fixated at accusing COVID-19 as the main cause of the ills of the Ghanaian economy.
It is, therefore, my duty this afternoon to present to my audience an ex-ante and ex-post performance of the Ghanaian economy, using key macroeconomic data from the real sector, the fiscal sector, the monetary sector, and the external sector.
This is a data-driven analysis and presentation and at the end of the day, I will be pleading to borrow the words of our Vice President, Mohammudu Bawumia that: “if you disagree, bring your data.”
I am very confident that by the time I am done with this lecture, the good people of this country will be able to judge for themselves whether the Ghanaian economy is a victim of Covid-19 or pre-existing conditions.
The underlying question that we are seeking to answer is whether the current state of the economy is the result of susceptible pre-existing economic conditions or purely as a result of the impact of COVID-19 as our government officials would have us believe.
The lecture will draw from some of the views and data presented by Government and our development partners such as the IMF, World Bank and some interested stakeholders such as the Economic Intelligence Unit, Rating agencies and rand research findings.
The work of other think thanks such IFS, Integrity Initiative and others may be relied upon to the extent that they help us understand and answer key questions on the economy.
The lecture is structured as follows: by order of sequence, I will begin with discussion on issues on the real sector, followed by the fiscal sector, and the monetary and external sector. Those discussions will lead us to a conclusion to answer the question arising from our theme as well as recommendations on how to better manage the economy for the betterment of you and I.
Real Sector Developments (2016 to 2024)
The generic measure of the contribution of various factors of production located within a country to the output produced at any given time is its gross domestic product (GDP), both at the nominal level and the rate of growth.
So, at any given time, it is expected that factors within the Agriculture, Industry, and the Services sectors of the Ghanaian economy will contribute to the production of a given level of output.
However, the commercial production of oil in Ghana since 2011 resulted in the disaggregation of our GDP into oil and non-oil GDP. The oil sector, in most cases is considered an enclave, hence may not depict the real performance of general economic activities.
In my discussions of growth as it has always been presented in most empirical literature, let me state emphatically that it is investment that creates Output and growth. By way of data, I will carefully analyse and examine trends in government investment expenditure (capital expenditure) and relate that to GDP growth from 2015 to date as well as the medium-term projections.
Figure 1 clearly depicts the trend in GDP growth and investment expenditure from 2014 through to 2020 and the forecast for 2021 and the medium term. In growth accounting, lags and lead effects play an important role in explaining the main drivers of growth. These two concepts help economist explain why “A seed does not geminate the very day it is sown no matter how many times you water it”.
From figure 1 above, the highest peak in capital expenditure was recorded between 2014 and 2016, however, economic growth was relatively modest around that time. Growth peaked in 2017, driven largely by the investment made in the past (before 2017).
Ghanaians will recall that huge investments were made by the John Mahama Administration to transform the face of infrastructure. The seeds sown in that time is what yielded growth in 2017.
Power was handed over to this current administration right in 2017. Before they could put the necessary government machinery and start initiating policies that will translate into any meaningful economic growth, the economy was already bearing fruits from the seeds sown by H.E John Dramani Mahama from 2014 to 2016.
The rebound of world commodity prices and a return to oil production after solving the turret bearing problems in the Jubilee Fields, together with the onset of a return to stable power supply resulted in remarkable growth in oil GDP and in particular, a recovery of non-oil GDP.
Ghana was poised to unleash further growth in subsequent years if the trajectory of improved investments to address Ghana’s infrastructure gap necessary to eliminate lack of competitiveness and create the enabling environment for the private sector was sustained.
Unfortunately however, the momentum around the investment in capital expenditure waned from 20217 onwards. This declining investment in capital projects and its projected steep deterioration is a major cause for concern.
As a country grows and expands with increasing population, new settlements and urbanisation, the need to invest significant proportion of the national cake becomes paramount.
For purposes of renewal of existing infrastructure and providing additional ones such as roads, schools, hospitals, energy etc, there ought to be measured in relation to the size of the economy to provide the appropriate capacity for the economy to renew, sustain and create further opportunities for enhanced.
A reduction in the proportion of the economy to fund infrastructure will ultimately compromise future growth outlook of the country, worsen infrastructure deficits, collapse social services such as health care, education and security and create further unemployment.
No wonder our educational system is in a mess, health care still reliant on only the facilities inherited by the Mahama administration in the face of mounting pressure on these inadequate facilities, our security services are poorly resourced leading to the citizenry living in insecurity, among others.
Ghana, after experiencing alignment of capital expenditure in response to the needs of the expanding economy from 2014 to 2016 was poised for a sustained take off.
Unfortunately, this forward match was to be rudely curtailed in response to the implementation of propagandist policies that were derived from the propaganda and rhetoric lectures of Mahmoud Bawumia, now aptly called BawuLIAR, that became the thrust of the NPP manifesto, going into the 2016 general elections.
As a matter of fact, I had warned the NPP Government in 2017 that one could be forgiven for delivering series of propaganda lectures and allow these lectures, to metamorphose into your manifesto but if you allow these propaganda lectures no matter how cunningly eloquent and confident they were delivered to become Government Policies, implementation will expose you.
The famous policy of moving the economy from taxation to production died a still birth. One Village, One Dam (1V1D) is an example of a reckless waste of public resources while One District, One Factory (1D1F) that was touted as the panacea to Ghana’s industrial revolution became a ruse.
After 2016, investment expenditure continued to decline from 2017 through to 2019, attaining its lowest dip in 2018. The figure above is self-explanatory and I am sure my audience are left wondering what policies the government was putting in place to transform and grow the economy apart from being fixated with sloganeering and getting busy with unsustainable policy announcements.
My first big question is whether the weak economic growth in 2020 is the result of susceptible pre-existing economic conditions or purely the result of the impact of Covid-19. I am sure Ghanaians can answer for themselves. Again, it can be inferred from Figure 1 that investment expenditure is projected to decline after 2020. We are right to conclude that the medium-term growth projections cannot be trusted.
Fiscal Developments (2016 to 2024)
Before I delve into detailed discussions of revenue, expenditure and the overall fiscal performance, let me highlight some ills that have bedeviled Ghana’s public finances. Some of these issues have become very topical in recent times and have been extensively discussed and also drawn the attention of our development partners such as the IMF and World Bank.
Among them are:
- Unconventional treatment of crystalized contingent liabilities such as payment due energy sector independent power producers (IPPs). Government since 2018 continue to treat the payments due IPPs as part of amortization to artificially suppress the fiscal deficit. These payments conventionally should have been classified and treated as expenditure and being financed as part of deficit below the line. By treating them below the line means that Government is consciously taking away part of its deficit borrowed funds as it never borrowed.
- Ghana is not an island but part of the global community and must apply the stringent internationally accepted public financial accounting rules and standards. The IMF has consistently rejected the position adopted by Government since it does comply with international rules/. This is the reason the IMF reports the deficit with and without IPP payments.
- The crystallization of contingent liabilities is not new. Let me remind Ghanaians of the famous Single Spine Salary Scheme that left some liabilities for the then government to inherit. As conventions demand, they were treated like any other form of Government expenditure.
- The exclusion of the cost incurred in cleaning up the financial sector from the overall fiscal deficit. The unpardonable high costs of collapsing over 400 banks and other financial institutions against good advice, a policy decision that was underpinned by a brutish plan to go after institutions competing against some known financial institutions owned by them and after businesses of political enemies, must reflect in the deficit calculation. This must be properly captured to reflect the recklessness of heavy handedness on the fiscal purse and not disguised to hide its true effect.
- The passage of the Earmarked Fund Capping and Realignment Act. The passage of the Act in 2017 saw the capping of all Earmarked Funds to about 25% of tax revenue. By this, all Earmarked Funds were no longer fully entitled to the resource allocation due them as required by the respective laws that established them. This Act has almost killed all Statutory Funds since they do not have the resources to effectively carry out their primary mandates. In fact, some of them are forced to borrow on their balance sheet by securitizing their future inflow, thereby compromising their survival.
- Accumulation of arrears due contractors. This is affecting the flow of liquidity within the financial system because contractors cannot repay their loans, creating a cycle that results in liquidity crunch. I may be right if I attribute the supposed banking crises to the failure of government to pay contractors who were owed in excess of GH¢5.7 billion. As at the end of 2020, both road and non-road arrears was estimated at some staggering GH¢8.2 billion. As a requirement of the stringent rules of IFRS9, banks are likely going to write off GH¢8.2 billion from their capital in addition to the numerous loans they were compelled by Covid-19 and the Bank of Ghana directives to restructure.
- Using factoring arrangement with commercial banks to pay contractors. At the time contractors needed funds to support their businesses, they were compelled by Government to enter an agreement with Fidelity Bank and the monies owed them were paid a discount ranging between 10% and 14%. This was a clear strategy to take these monies from contractors against their wish. This arrangement, which led to payment of an estimated GH¢5 billion, is clearly unconventional since the expenditures are processed and paid by bypassing the GIFMIS system, thereby suppressing Government expenditure arrears clearance.
- Securitization of future streams of revenue inflows. For instance, our mineral royalties are being securitized in the name of setting up a Special Purpose Vehicle called Agyapa with very stinking agreements that were fiercely resisted by Ghanaians.
- The proceeds from GETFund is securitized to procure loans and bonds totalling $1.5 billion. The recently laid GETFUND formula for 2021 revenue distribution shows clearly the securitisation of its future revenues has basically collapsed GETFUND. With outstanding loans and bonds of GH¢1.8 billion by the end of 2020, GETFUND is spending about GH¢1.5 billion to service its debts for 2020 and 2021. Meanwhile, the total inflows to GETFund for 2020 was about GH¢1 billion with over GH¢600 million spent to service the debt while about GH¢1.4 billion is expected from GETFUND levy to GETFUND with over 60% of it (GH¢860million) to be used to service debts. Unfortunately, this arrangement could last between 7 to 10 years. Clearly, we have mortgaged and collapsed GETFUND and the dreams of the illustrious Jerry John Rawlings and the NDC in setting up GETFUND is up in smoke, courtesy Bawumia
- Ironically, just like Agyapa Royalties with an unsuspecting name aimed at duping the country, the name of the special purpose vehicle used for the unholy financial engineering to collapse GETFUND is Daakye PLC. I thought Daakye connotes a good future and yet this future that has been visited on GETFUND is one of doom and gloom, with the once enviable vehicle for accelerated educational infrastructure development bleeding GH¢1.5 billion in debt service in two years. Should this continue, GETFUND is in line to bleed to death sooner than later.
- See below the utilisation of GETFUND Proceeds in 2020
| Sub-sector | Allocation for 2020 | Percentage of Proceeds |
| Debt Service | 686,655,000 | 56% |
| Tertiary Education | 225,000,000 | 18% |
| Second Cycle Education | 106,665,000 | 9% |
| Basic Education | 97,476,000 | 8% |
Source: GETFUND’s 2020 redistribution formular submitted to Parliament
- From the above, it is clear that the most important activity and pre-occupation of GETFUND now is debt service and how to pay for the loans and bonds Daakye PLC has borrowed for them. With only 18% of funds spent on Tertiary Education (Ghc225million] to expand facilities for students, do not be surprised to see several public universities and tertiary institutions following the footsteps of the University Ghana by introducing double track admissions and academic program.
- In an era where parents and students in senior high schools are anxiously waiting for the abolition of the double track system for a return to normal academic program, GETFUND now allocates only 9% to second cycle education with a paltry GH¢106 million. I now understand why Government is jittery when one calls for a review of Free SHS to make it better. To them, the double track system has come to stay and their minds are made up about it. They do not want anyone to confuse them with the facts.
- Ghana’s unmined bauxite was also used as a security for the opaque Synohydro loan facility. We were told that Ghana would pay for it with mined bauxite despite the deferred payment agreement envisaging transfers into escrow account for debt service without recourse to inflows from bauxite proceeds. Ladies and Gentlemen, where is the bauxite mine that will produce to pay for the deferred payment arrangements after almost 4 years of signing the agreement?
These are all part of government’s agenda to artificially create cosmetic fiscal deficits whilst saddling the people of Ghana with hidden debts and collapsed institutions.
Revenue and Expenditure Performance
The commitment to improving our revenue and expenditure performance has not been given the attention they deserve. In order to anchor the finances of a country on sound footing, two key this have to happen; A Government must aggressively pursue progressive tax policies that take proportionately more from the rich while ensuring that a reasonable proportion of national income is available to Government to pursue programs that improve livelihood, better service delivery and an enabling environment for the domestic private sector to take the commanding heights of value and wealth creation for prosperity for all.
Secondly, Government spending from the revenues so collected is efficient, effective and delivers value for money through appropriate systems of control, monitoring, reporting, assurance and sanctions regime for violations.
With the foregoing in mind, I will now pay my attention to Government’s fiscal management from 2013 to 2016, 2017 to 2020 and the projected medium-term outlook from 2021 to 2024.
Figure 2: Average Performance in Revenue (% of GDP)
Source: MoF (https://www.mofep.gov.gh/index.php/fiscal-data)
Figure 2 and Figure 3 above depict Ghana’s revenue performance in the last four years. Please note that all revenue classifications are expressed as a percent of GDP. The average of each revenue type for the period (2013 – 2016) is compared with the average for the period (2017 – 2020).
Simply put, the chart shows revenue performance under four years of the NDC government headed by H.E John Dramani Mahama and four years under the first term of the current NPP government of Nana Addo Danquah Akufo Addo, ably supported by the parroting economist, who heads the economic management team. From Figure 2, revenue performance on average for the period (2013 – 2016) is higher than it was for the period (2017 – 2020).
I am sure Ghanaians still recall the famous slogan “we will shift the focus of economic management from taxation to production”. Tax revenue (non-oil) measures the real sector contribution to tax revenue. It depends solely on the productivity of the real (non-oil) sector of the Ghanaian economy.
It is important to note that a fiscal policy measure aimed at moving the economy from taxation to production would mean that the non-oil real sector of the economy as the spare parts dealers at Abbossay Okai, Kokompe and Suame, market women at Makola, Mallam Atta Market, Kejetia and Ayia in Bolgatanga will see astronomical growth in the sales volumes and profitability as they plough back the tax cancellations and or reductions to expand their businesses.
Government will now be able to rake in more revenue by taxing this expanded growth in national income and disposable income. This was the simplistic view of the Ghanaian economy and value chain that was championed by the Know All BawuLIAR from his spin lectures that he was also using to lay the foundation for an internal contest to take over the NPP.
What has been the response of the sector in terms of its contribution to tax revenue since the superfluous and ill-conceived, simplistic understanding of Ghana’s economy leading to the supposed introduction of the policy to move from taxation to production in 2017?
That policy, which was more of sloganeering than in practice, should have indeed translated into increased productivity to sustain the growth in tax revenue. On the contrary, the year-on-year growth in non-oil tax revenue started declining after 2017 (see figure 3 below).
Figure 3: y/y growth in tax revenue (non-oil)
Source: MoF (https://www.mofep.gov.gh/index.php/fiscal-data)
You will recall that in 2017, during the budget debate in Parliament I warned the Minister for Finance, Ken Ofori Atta and Bawumia that they could not use ‘ceteris parabus’ principles to manage the Ghanaian economy with complex institutional and structural rigidities.
That the simplistic view that the lower the taxes, the higher the output of the private sector and the higher the non-oil tax revenue strangely ignored the complexities of challenges confronting the formal and non-formal private sector that needed to be addressed to unleash the desired growth.
What is worrying is that the fiscal path in the medium-term from the above shows that Government expects a 580% improvement in non-oil tax revenue but afterwards (when COVID-19 is expected to be history and the economy back to normalcy), non-oil tax revenue will deteriorate below its worse performance during the pre-COVID-19 period.
The whole rhetoric on the shift from taxation to production was borne out pure propaganda and backed by a nibbling appreciation of the realities of the economy. Paragraph 19 of the 2017 Budget read “Mr. Speaker, the Budget will set the pace for job creation and accelerated growth by empowering the private sector.
To accomplish this, we will shift the focus of economic management from taxation to production. This will reduce the cost of doing business and create a conducive climate for investment and job creation. In this regard, a number of taxes that impede growth will be reviewed, and if necessary, abolished.
Government will reverse the recent low growth trend by boosting agriculture and industrial productivity. The NPP government at the time was determined to eliminate a number of taxes that were considered nuisance taxes and inimical to private sector growth.
Accordingly, the following taxes were eliminated as indicated in Paragraph 796 of the 2017 Budget. The estimated loss in revenue due to elimination of these taxes according to paragraph 206 of 2018 midyear budget was about GH₵1 billion.
- abolish the 1 percent Special Import Levy.
- abolish the 17.5 percent VAT/NHIL on financial services.
- abolish the 17.5 percent VAT/NHIL on selected imported medicines, that are not produced locally.
- initiate steps to remove import duties on raw materials and machinery for production within the context of the ECOWAS Common External Tariff (CET) Protocol.
- abolish the 17.5 percent VAT/NHIL on domestic airline tickets.
- abolish the 5 percent VAT/NHIL on Real Estate sales.
- abolish excise duty on petroleum.
- reduce special petroleum tax rate from 17.5 percent to 15 percent.
- abolish duty on the importation of spare parts.
- abolish levies imposed on ‘kayayei’ by local authorities.
- abolish levies imposed on religious institutions by local authorities.
- exempt from taxation, the gains from realization of securities listed on the Ghana Stock Exchange or publicly held securities approved by the Securities and Exchange Commission (SEC).
- reduce National Electrification Scheme Levy from 5 percent to 3 percent.
- reduce Public Lighting Levy from 5 percent to 2 percent.
- replace the 17.5 VAT/NHIL rate with a flat rate of 3 percent for traders; and
- implement tax credits and other incentives for businesses that hire young graduates.
The funfair that greeted these announcements was short-lived since government began to introduce more burdensome taxes. Among the list of taxes that were introduced between the time of the 2018 midyear budget and the end year 2020 include:
Luxury vehicle levy on vehicles with engine capacities of 3.0 litres and above (paragraph 225 of 2018 midyear budget) which was later scrapped after a fierce protest;
Upward adjustment of Road Fund levy (paragraph 135 of 2019 midyear);
Upward adjustment of the energy debt recovery levy (paragraph 135) of 2019 midyear and
Upward adjustment of price stabilization and recovery levy to bring the ratio close to twenty-one percent (paragraph 135 of 2019 midyear).
3 percent points increase in CST, from 6% to 9% (paragraph 135 of 2019 midyear).
The introduction of these new taxes and or the upward adjustment in existing taxes has generated over GH₵4 billion in revenue. Intuitively, government supposedly gave Ghanaians GH₵1 billion with the left hand in the name of elimination of nuisance taxes, so-called and took back over GH₵4 billion from Ghanaians.
The above taxes that took over GH¢4 billion from Ghanaians were introduced between 2018 and 2019 when there was no covid. Clearly, the introduction of new taxes or the upwards adjustment of existing taxes began even before the outbreak of Covid-19.
Therefore, the introduction of new taxes in the 2021 Budget in the name of burden sharing due to Covid-19 is absolutely a deception, a ruse and akin to the clandestine behaviour of Bawumia and his Economic Management Team.
RISING FISCAL RISKS
There are also some worrying developments in the expenditure front. Debt service alone takes about 75 percent of our tax revenue. Only 25% of tax revenue is available for other critical spending.
The implications of government’s increased appetite for borrowing started manifesting in 2019 when debt service (interest and amortization) as a percent of tax revenue exceeded 70 percent. This trajectory will be maintained even in the medium term and will reach 91.6 percent in 2021. Figure 4 below provides clearly the precarious nature of Ghana’s debt service.
Figure 4: Debt Service as Percent of Tax Revenue
Source: MoF (https://www.mofep.gov.gh/index.php/fiscal-data)
The table shows that by 2019, Ghana’s debt service was the singular most important element of fiscal and public debt risks to the country, deteriorating by 17% from 55.8% of tax revenue to 72.5.
As a matter of fact, even though debt service experienced elevated levels of vulnerability in 2020 with lower levels of revenue and increased borrowing, the situation of the deterioration in 2019 and flowing from the trajectory, it is clear that Ghana was in unsustainable debt service quagmire. In fact, the deterioration in 2020 of about 11% was far better than the 17% suffered in 2019.
Overall Fiscal Deficit Dynamics
It has been an era of cosmetic fiscal deficit reporting since 2017. As previously stated, a number of alien schemes are explored by government to artificially suppress the fiscal deficit.
This purpose has, however, not been achieved because the IMF has keenly followed the development within Ghana’s public finances. Figure 5 below compares fiscal deficits reported by government with those reported by the IMF.
After 2017, Ghana’s fiscal deficit as reported by the IMF was on the rise, reaching 7.3% of GDP by 2019, an indication that our public finances were worsening. Government ignored these signals and consistently reported cosmetic fiscal deficits which were not the true reflection of the state of public financing. Ghana’s public finance management started deteriorating even before COVID-19.
Figure 5: Trend in Fiscal Deficit (% of GDP) – IMF vrs GoG
Source: IMF WEO (https://www.imf.org/en/Publications/WEO/weo-database/2021/April/weo-), MoF (https://www.mofep.gov.gh/index.php/fiscal-data)
Public Debt Sustainability and External Vulnerabilities
There has been growing concerns about Ghana’s public debt dynamics since the ‘Known it All’ Bawumia became the head of the EMT. In measuring and evaluating public debt and its sustainability, the focus has to be on both the quantum or size of the public debt and the quality of the debt in relation to its inherent risks to the fiscal health of the country, growth of the economy and the impact on external vulnerability.
The quantum of the public debt pose serious questions regarding the efficiency of utilisation of domestic revenue and borrowed funds in pursuit of critical national development needs and how it has impacted the size of the economy.
When Ghana’s public debt grows from about GHC120 billion to about Ghc300 billion in just four years, legitimate enquiries must be made into what the monies were used for, especially when we have very deplorable roads, children in SHS are running a traffic light-like school system, new hospitals have not been built, the old ones are ill-equipped and health workers are poorly remunerated to deliver fit-for-purpose health care.
The second issue of grave concern is how the elephantiasis-like public debt is expanding the size of the economy and creating a pool of national income for increased revenue mobilisation of tax and non-tax revenue to service the debt, amortise it when due and still leave a reasonable fiscal space to fund critical national development.
All over the well, good economies ensure that government’s borrowing program are aligned to growing the economy and funding growth-enhancing expenditures such as infrastructure to give the country and its citizenry a chance at enhanced livelihood and economic well-being through jobs, improve social service delivery and enabled private sector. This is often measured by measuring the present value of public debt as a percentage of the size of the economy, called the GDP.
There has been worrying development in Ghana’s public debt. As shown in figure 6, public debt has increased from GH₵120 billion (56.8% of GDP) in 2016 to about GH₵300 billion (76.1% of GDP) in 2020.
An amount of about GH₵180 billion was added to our debt stock within a space of 4 years, an indication that Akufo-Addo and Bawumia have accounted for more than 60 per cent of Ghana’s debt stock since Independence.
No wonder a section of the populace rightfully refer to him as Borrowmia. Between 2016 and 2019 alone, government added GH₵96.1 billion, bringing the public debt to GH₵218.2 (62.4% of GDP).
Thus, the appetite to borrow gained significant momentum by 2019 and we were all witnesses to it when Ken Ofori-Atta held a kenkey party at the Ministry of Finance to celebrate his version of successful borrowing. At the time of this reckless display of a desire to borrow the country into heaven, COVID-19 was nowhere to be found.
Thus, the pandemic only paved the way for this appetite to be fully manifested in a way that benefits Ofori-Atta through the fees and commissions paid to his firm, Databank.
Another issue of grave concern is the ability of the economy to sustain the pace of the debt accumulation. Ghana’s debt-to-GDP ratio shows that while our public debt is growing at a faster rate, the economy is growing at a slower pace and that is unable to anchor debt sustainability.
In order words, we are not growing the income earning opportunities of Ghanaians enough such that Ghana can generate the pool of income necessary to ensure that we can generate significant resources from the economy to pay for and service these debts.
Debt-to-GDP ratio improved slightly in 2017 from 56% in 2016 to 55% in 2017 consistent with the improvement in the economy from the seeds sowed by H.E John Dramani Mahama. From 2018, the debt to GDP began to worsen to 57% above the 2016 levels and increased further to 62% in 2019.
Clearly, Ghana’s economy and the trajectory of debt accumulation had long gotten worse by 2019 and could only get worse in 2020. No wonder then that the end-year 2020 debt-to-GDP ratio crossed the dreaded 70% to 72%.
What is worrying is that Government and the IMF projections show that it is getting scary as Ghana’s debt-to-GDP’s medium-term path shows a period-end figure of 86% by the end of 2024.
Another important measure of the quality of Ghana’s public debt is our ability to service both the interest and principal payments when they fall due.
A key measure of this risk of default is the proportion of tax revenue we use to pay for debt service. Do we have enough room or fiscal space based on the public debt service, size of the economy in relation to tax, non-tax and other domestic revenue mobilisation?
Ghana, which used to spend about 66% of its tax revenue to service its debt, spent about 72% of its tax revenue in 2019 to service its debts, leaving only 28% of tax revenue to fund critical infrastructure. This was not induced by COVID-19.
By the end of 2021, Ghana is projected to use about 91% of its tax revenue to pay for debt service, leaving only 9% for other critical infrastructure. In the medium term, Ghana’s debt service-to-GDP is expected to increase from 66% in 2016 to about 78% in 2024. Indeed, Ghana’s economy is in dire straits and need more than an intensive care unit to revive it. I do not say this lightly.
I say it with a heavy heart, knowing what it means to you, the Ghanaian; the average person on the streets who was deceived by master trickery by then Candidate Akufo-Addo and his parroting prodigy on how they needed your mandate to government the country without borrowing.
The primary anchor of debt sustainability is the primary balance. According to the IMF, Ghana’s primary balance started worsening after 2017 due to the rising interest cost arising from the increasing debt levels as Shown in the Chart 7 above. The primary balance suffered steep deterioration in 2019, when COVID-19 was not in Ghana, and that only continued into 2020.
Based on the rate of increase in debt, the World Bank and the IMF joint DSA analyses under the Joint Bank-Fund Debt Sustainability Framework for Low Income Countries for 2019 and published in April 2020 showed that Ghana’s risk of external debt distress and the risk of overall debt distress was high (https://www.worldbank.org/en/programs/debt-toolkit/dsa).
According to the report, the high risk of debt distress was due to higher projected deficits and debt service. The findings further showed that external debt service continues to absorb a third of government revenues and remains well above thresholds for most of the forecast period.
The present values of external and public debt-to-GDP ratios exceed their thresholds. This was the country’s debt situation back in 2019, when Ghana and indeed, the world, neither knew nor heard anything called COVID-19.
In managing public debt, it is important to build adequate buffers to prepare for headwinds when they occur. A country is faced with the possibility of several external and internal shocks that may dislocate fiscal and external stability.
To deal with this, a country must be adequately prepared to weather the storm. These factors must be analysed to determine the quality of a country’s public debt.
Any time Ghana borrows foreign currency denominated loans, we expand the country’s obligations in foreign currency and must build buffers of foreign reserves to pay for interest and the principal when they fall due or when non-resident holders of those bonds decide to sell off and exit the market with their monies.
Of course, these investors are paid either in foreign currency or in cedis, but they must return to their countries with foreign currency and not the cedi.
It is for this reason that a country like Ghana that has about 50% foreign currency denominated debts and a further 30% of its domestic cedi denominated bonds held by non-residents who brought foreign currencies to the country, sold the foreign currencies to their banks for cedi and bought our cedi bonds, need a lot of foreign currency buffers. More loans in foreign currency is akin to drinking more poison as your foreign currency obligations soar, leading to heightened external vulnerability and exchange rate pressures.
There are several measures of a country’s vulnerability resulting from increased holding of foreign denominated currency debts. These measures aim at identifying the capacity of the country to either generate foreign currency or the levels of foreign currency buffers to ensure adequate forex liquidity.
The relationship between Ghana’s public debt and its export earnings gives an indication of the foreign currency earning potential for the accumulation of forex buffers.
Unfortunately the outcome of the last two joint IMF and World Bank Debt sustainability analysis of Ghana shows that Ghana has breached the threshold of this measure for debt sustainability, signifying heightened external vulnerability.
Another measure of external vulnerability is the adequacy of net reserves of foreign currency with the BOG to cover for short-term non-resident capital holding in the country. As a rule of thumb, a country must have at least $2 for every dollar of short-term capital holding of non-resident investors.
Over the last couple of years, declining net international reserves of Ghana has resulted in breaches of this prudential foreign currency reserve requirement. By the end of 2019, Ghana’s net international reserves could hardly cover for 50 cents of every $3 short-term capital holding of non-resident investors.
You will recall that in 2019, significant reversal of portfolios of domestic bonds held by non-residents in Ghana and mounting uncovered-auctions led to excessive depreciation of the cedi as our buffers were inadequate to stem the huge liquidity demands in the market.
High debt service even if it were covered by good tax revenue generation will still require high levels of foreign currency reserve buffers to be able to pay the foreign currency obligations imposed by the high component of foreign currency debt service.
This is the reason Ghana’s external vulnerability has been heightened by the high foreign component of public debt, low levels of net reserve buffers and high demand for increased export earnings. This has resulted in a cycle of more foreign currency denominated bonds to provide artificial buffers, further worsening debt service obligation and providing more poison to the economy.
Nasty Capture of Financial Sector
In the colonial days when our forefathers shed their blood to free our country from the claws of servitude, they did that in the spirit of togetherness to help create a fair, equitable and prosperous society where the basic rights and freedoms of every citizen would respected and jealously guarded.
Our legendary fathers gave the fight their all, knowing very well that it was only through independence that individual talents, hard work and commitment to achieving something for themselves and their nation could be rewarded in their own land.
Our own party, the NDC and our father, Flt. Lt. Jerry John Rawlings of blessed memory, have fought tooth and nail to create equal opportunities for all Ghanaians to realise their dreams, share in the national cake proportionately and be empowered to create sustainable futures for their children.
Unfortunately, these ideals are now being thrown to the dogs and a new culture of clan-preneurship – prosperity through clan and family ties to people in power – is now nurtured and distastefully promoted. It is a master strategy by the NPP, has the tacit approval of Nana Akufo-Addo and is being executed by his family members who he placed in strategic positions to weave their identities into critical sectors of the economy.
We can all recall the circumstances that led to the near sale of the assets of the Electricity Company of Ghana (ECG) to cronies and family relations of Akufo-Addo and persons in government and the aborted and distasteful re-emergence of an ill attempt to redistribute portions of the country’s gold wealth into individual pockets.
In the financial sector, which is my focus for the benefit of today’s engagement, this plot has thickened and produced results for the perpetrators. Established brands that were earning government jobs on merits now struggle to get business while companies owned by government appointees, their relations and cronies with some established a fortnight ago have all of a sudden become the go to firms for government businesses.
In the fixed income market, three companies – Databank Financial Services, Black Star Brokerage and IC Securities Limited – all owned by members of a nuclear family who control the affairs of the country’s finances and by that have state authority and oversight over the award of contracts, have taken over the sector since the coming into office of this government.
I have secured incontrovertible evidence that proof that Ken Ofori-Atta, the white-wearing finance minister, owns 11% of Databank while his former Deputy and now Minister of State at the Ministry of Finance owns 95% of the company that wholly owns Black Star Brokerage Limited.
Black Star Holdings Limited, the shell company set up by Charles Adu Boahen to hold his deals owns 100% of Black Star Brokerage Limited, a company that started trading in the fixed income market in 2019 but is now number one in terms of volumes of sales and number three in terms of volumes of purchases.
Interestingly, the 5% in Black Star Holdings is owned by the blood brother of Charles Adu Boahen called Christopher Adu Boahen. Thus, in effect, when Ken Ofori-Atta and Charles Adu Boahen appoint and sign off Databank and Black Star Brokerage to trade in securities on behalf of the country, they asking themselves to go and borrow for Ghana in return for payment of fees.
Does it now become clearer to you why Ken Ofori-Atta claims not to take salary for his role as Finance Minister and why the government prefers borrowing than growing domestic revenues?
It is because Ken has various channels to make larger sums of money off the country, one of which is the use of his firm, Databank, and that of his right-hand man, Charles Adu Boahen to borrow for the government.
This nasty capture of the financial sector by Ken and his cohorts has undermined its competitiveness, robbed seasoned entrepreneurs of their toils and created deep scars that will take years to heal and unwind. It has also confirmed to all and sundry that ours is now a government where while the President, Nana Akufo-Addo is busy slicing the country for his family relatives and undermining the entrepreneurial ingenuity of the rest of us, the Vice President is busy parroting lies in his attempt to replace his boss.
Conclusion and recommendations
At this point, I am sure the data presented provides enough evidence for us all to make informed conclusions. I am also glad that the key thematic question is answered as to whether or not the current messy state of our economy is as a result of COVID-19 or pre-existing conditions has been satisfactorily answered.
I can confidently conclude that the current economic predicaments we facing as a country are due to conditions that pre-existed even before the outbreak of COVID-19.
Like doctors and researchers will tell you about COVID-19 itself, it is not the virus itself that kills; it is its ability to act on the defects of pre-existing conditions that kills its patients. Ghana’s economy was already in a precarious situation, thanks to the reckless decisions and actions of a group of people fight for their families and their future and COVID-19 only intensified those ills.
As stated by the IMF in its recent Article IV review report on Ghana, Covid-19 exacerbated Pre-Existing challenges of the economy.
SUMMARY OF PERFORMANCE OF MACROECONOMIC INDICATORS FROM 2016
| INDICATOR | 2016 | 2019 | 2021 | 2024 |
| Capex/GDP | 3.6% | 1.8% | 2.9% | 2% |
| Total Rev/GDP | 17,9% | 15.2% | 16.8% | |
| Dom Tax/GDP | 17% | 14.8 | 16.6% | |
| Tax Rev/GDP | 13.8% | 12% | 13.2% | |
| Non-Oil Tax/GDP | 12.7% | 11.3% | 12.6% | |
| Y/Y Rev Growth | 14.5% | 13.3% | 13.3% | 11.9% |
| Debt Service/Tax Rev | 66.4% | 72.5% | 91.6% | 77.6% |
| Fiscal Deficit | 6.9% | 7.3% | 12.6% | 9.1% |
| Debt/GDP | 56% | 62.4% | 70% | 86% |
Ghana’s economic challenges pre-date the Covid-19 Pandemic. By the end of 2019, Ghana’s economy had become an economy with weak absorbers to withstand headwinds.
Weak revenue generation coupled with rising public debt and associated unsustainable levels of debt service from tax revenue left the country without buffers and susceptible to the slightest shock.
Debt to GDP crossed the dreaded 70% level and exposed the economy with serious challenges.
Rising levels of fiscal deficits, low revenue generation and high levels of debt service resulted in rising primary balance deficits, implying the country has been borrowing to pay interest costs.
Ghana default rate outlook for foreign currency debts has now been degraded by Fitch to negative and affirmed at B.
The only reason Ghana is still affirmed B is because we are yet to face a major market access for credit but the time is ticketing for Ghana.
Fitch in downgrading Ghana makes a profound basis for still affirming as at ‘B’ because we borrowed $3 billion this year and the Government has approval to borrow a further $1 billion enough to cover $3.3 billion in principal and interest payment due this year external creditors.
This means that because we have been able to add more poison to the economy without defaulting, we can still hang in there for another day and wait for what awaits us next year when our debt services would have consumed all our tax revenue, needing as to borrow to finance the entire budget.
Clearly, Ghana’s biggest challenge in the medium term is how to avert a looming market access complications on the international capital markets as investors begin to protect their monies from potential default.
Ghana’s net international reserve position is under threat as volatility from excessive foreign debts, high non-resident holding of domestic bonds and possible portfolio reversals threaten to collapse the cedi as Ghana face an imminent forex liquidity crisis.
Unfortunately, the medium-term trajectory in terms of the fiscal path in terms of revenue mobilisation, expenditure containment, debt-service and debt to GDP show a deterioration in fiscal space, elevated levels of risks of debt distress and excessive external volatility.
Ghana must act fast and prudently to save the situation.
RECOMMENDATIONS
Beginning with the 2021 mid-year budget estimate, Government must reign in expenditure by rationalising expenditure and resisting the temptation to request supplementary appropriation for additional expenditure.
Aggressively pursue progressive revenue mobilisation by looking to spread the burden revenue generation proportionate. Efforts should be made to tighten the tax exemption regime and check the rising leakages of customs revenue at the ports.
Government must fast-track fiscal consolidation and significantly reduce the appetite to borrow and reign in debt levels and debt service burden. Government must prioritise freeing up fiscal space encumbered by excessive debt service to free the economy from the shackles of debt to a path of sustainable growth. The market expect to see a genuine resolve to bring back confidence and provide comfort to investors.
To deal with these recommendations may recall very tough decisions and immediate but drastic policy shifts that may be politically difficult. To achieve this, I call on Government to seek help from Ghanaians and begin to under transparent financial and natural resource Governance to engender trust.
A national dialogue and consensus around the critical national issues and solutions have to be held immediately for the critical stakeholder buy-in.
Ghana is not in normal times and we need to muster the political will to pursue the most difficult policy shifts to safe our country.
By Hon Isaac Adongo, MP for Bolgatanga Central
