Going into an IMF discussion: what is the guide for Ghana?
Posted on January 20, 2015 at 12:39 PM
Guest blogger Bernard Anaba writes about the IMF from the Ghana perspective.
This article originally appeared in Ghana's Business and Financil Times and is reprinted here with permission from the author.
In the early 2000s Ghana became financially distressed which sent the country into the HIPC initiative. But by 2006, the country seemed to have recovered well by reducing the national debt and sustained growth levels at rates not less than 5% of GDP annually. And by this time too, a kind of complacency kicked-in alongside the national vision to achieve a middle level income status.
Straying into the first EURO bond (about $500m) arena after several years in the doldrums was therefore not an accident. Going for the Eurobond signalled this grand optimism amidst some complacency. Well, that cannot be faulted as we desired to fledge out our wings and prove our success to world, after having suffered some kind of national humiliation with a difficult HIPC decision. It cannot be a misplaced attempt though, especially when this loan was meant for an economic expansionary drive. This nevertheless marked the beginning of Ghana’s desire to fly out of the nest, a kind of leap of faith into a world of its own. And hurray, in 2007, the surprise discovery of oil and an envisaged oil wealth became even more re-enforcing of Ghana’s promise and prospects. The growing renewed hope on the back of these prospects spurred the buoyancy and the expansion of the economy. Then came the re-basing in 2010. The fallouts from this supposedly positive news about our enlarged economy however, became distractive. The ensued political contestation between the two leading “N” parties (NDC and NPP) was about attribution of successes in the economy then. Temporarily, their eyes may have been taken-off the ball of economic management, at least with the new situation of a lower middle income country.
THE LOWER MIDDLE INCOME ILLUSION
As if to say declaring a middle income status comes with a magic wand of economic emancipation, many were those who rubbed their hands gleefully to welcome this status. And with the IMF guys in town, we cannot pretend ignorance, but need to recount some lessons and mis-steps to this day.
For example in 2009, just before the rebasing, tax revenues as a percentage of GDP were hovering in the region of 22%. Quite right for the economy then. However, just after rebasing in 2010, tax revenues as a percentage of GDP plummeted to 13.1% of GDP (too low in the circumstance). Considering that by the dictates of international development, an economy of our kind (lower middle income) should not be raising less than 20% of tax/GDP annually; there was an unexplained problem for Ghana. This short fall in revenues, as it stands, is taking some time to recover. Considering that this figure was 22% prior to 2010, it has however, since adjusted to 15.4% in 2011, 16.3% in 2012 and 17.3% in 2013 but still far less than what we should be recording as tax revenues. Therefore, while tax revenue is taking longer to adjust to the “new lower middle income status” of our economy, cut backs and slower concessionary inflows have become over bearing. Naturally, any economy is going to have problems having to deal with higher cost of external inflows as against lower national tax revenues. Besides, the issues of the incessant power crises affecting outputs, this long lag in adjusting to the pre-2010 tax ratios, tells a story of either an inefficient tax administrative system or a mis-judged impact of the lower middle income status. The two are possible but while the IMF guys are in town, I prefer to stick to the latter.
Whiles we cannot disagree that the prospects of an oil-rich economy actually fast-tracked Ghana into this pre-matured lower middle income status, we need to consider our peculiar context. Well, while Ghana was still growing steadily, the rebased per capita figure was a mere $929.23 in 2006 short of the bar, $1046. And by 2010 we hit it the magic bar, ‘bam’, a lower middle income country. What were the the circumstances then?
When we juxtapose the revenue shortfall issues with the huge petroleum sector investment at the time, it becomes clear that a mere declaration of the middle income status was not enough. According to the Petroleum Commission of Ghana, the petroleum sector alone registered about $11.3 billion inward investment between 2007-2013. This is about twice the incremental GDP growth of Ghc 7.05 billion over the same period in real terms. To collaborate this, the Ghana Statistical Service GDP data series, between 2010 and 2013, attributed growth due to the petroleum sector at Ghc 4.6 billion, more than half the overall recorded incremental national GDP growth of Ghc 7.05 billion in real terms. Looking at these figures, it is clear that the petroleum industry contributed hugely to our new economic status (lower middle income status). However, basic understanding of the nature of our economy tells me that the trickle down of these huge volumes of investments will take some time to arrive; hence Ghana’s economic expansion at the time was more of an enclave expansion in figures than in deed.
The issue is, while all these inflows constitutes the national capital stock and are counted towards the growing size of our economy and helping to bloat Ghana’s national accounts, they are mostly investment capital whose returns for the economy are projected into several years in the future. The point therefore is, we are perhaps unduly harsh on the economy expecting immediate results while the expected return cycle, in terms of revenues, including taxes need time to arrive. However, provided we do the right things now. Instructively, if we reconcile the sources of the rapid economic growth over the last 5 years (being the petroleum sector and expansionary policies) and the non-commensurate increases in national revenues, one cannot help but side with the Finance Minister, Hon. Seth Terkper, that Ghana’s economy is in a transitional mode and the current crises are but temporal, if not mis-judged.
For example, after 2006, majority of Government expenditure, except a Single Spine Salary Scheme which, is currently consuming close to 70% of tax revenues, were huge capital investments. The gestation period for many of such infrastructural investments to yield any meaningful results by way of national tax revenue increases may take longer than expected, if not ever. This will also depend of the transmission mechanism of the national economy which in turn depends on the availability of a critical mass of the needed infrastructure as well as other national productivity adjustments.
It is natural to expect commensurate higher national revenues with our current lower middle income status. But this has not been the case for Ghana. It has become a sword that we are still answering to, by bringing the IMF guys into town. First we had to put up with the drying up of concessionary loans and secondly we had to adjust to “promised and fail” annual budget supports. This is where the whole international development prescription from the likes of the IMF and the World Bank may have got it wrong putting us to the sword. From the scenario of the long lag in the adjustment of Tax-GDP ratio figures shown above, it does seem Ghana needed more time to adjust to these changes in the national accounts. Today, we are being told to rump-up our tax collections but these things require a certain structural preparation. Therefore the presumptive demands on Ghana’s economy by these Bretton-Woods, especially the IMF seems harsh under the guise of the new acquired “lower middle level income status”. This is akin to a toddler just beginning to stand on the two feet but being dragged to double his/her steps.
THE OVER INDULGENCE
We may have a cause to be suspicious of the historical neo-liberal agenda of the Bretton Woods, but we cannot absolve ourselves from these problems entirely. Year after year and decades after decades, the cycle is repeated. One does not doubt the well intended policy decisions of the two leading “N” parties who together have run Ghana for more than two decades between them. But because intentions alone are not enough, I dare say they have allowed the blight of corruption and over indulgence to suck-up the productive drive of Ghanaians. Particularly on the issue of over indulgence, it is clear that the promise of oil wealth greatly influenced and led to some poor decisions such as in unplanned expenditure over-runs and the public profligacy.
When Ghana finally managed to shake-off the less fancied label as a High Indebted Poor Country (HIPC) in the mid to late 2000s, managers of the national economy somehow managed to take their eyes off the ball. At the time, Ghana was in a good stead, the B+ rating enabled the country to leverage by hitting the EU-bond market in 2007, so the prospects looked good. But as with first principles, one would have expected managers of the national economy to strive to properly understand the new dynamics of the economy mostly in the sense of a more business-like management regime, productivity and the political economy issues that will ever be threats to any growing economy. Rather, political priorities and corruption took the centre stage; dissipating and distracting national energies into a nosedive. This kind of ‘plan to fail performance’ is not befitting of a nation with so many accomplished economists and many other experts. It had to take a national economic forum dubbed the SENCHI CONSENSUS (also local grown policies) after all the years since the HIPC days, to come to a realisation of these basics. While the economic and development issues are clear and belonging to a different debate, they have become over stated and usually mixed-up with the corruption and other mismanagement issues which have all created the credibility crises and a loss of the moral verve on the part of Government to woo market forces along-side for positive outcomes.
Now, Ghanaian authorities are going into discussion with the IMF but touting their position as promoting home grown policies. One wonders if these home grown policies will be anything other than ramping up more hardship on the people of Ghana. The Government has already withdrawn many subsidies including market adjusted prices for some important utilities such as electricity and fuel. The living situation is worsened by a speculative attack on the Ghana’s currency the ‘Cedi’ which has depreciated at more than 35% by the third quarter of this year. With a largely import dependent economy, Ghanaians are battling with daily increases in prices as most prices are clandestinely pegged to the US Dollar. With the IMF in town, one wanders if this hardship on the people will abate anytime soon. The looming fears of people are well founded. More unemployment is suspected as a signature tune of the IMF is not lost on Ghanaians.
And what do Ghanaians need most going into and IMF discussion? A deeper understanding of our peculiar problems and how mere labelling as a middle lower income country is still way-off the neo liberal prescription of automatic adjustment in gains. A precisional knowledge of the economy is required. We must be active participants armed with the true local knowledge and not the kind of passive participation that we have known to exhibit in the past. This also means a good understanding, not just about the hard economics of our country but also the debilitating political-economy that over the years have been on an over-drive to the detriment of all Ghanaians.
Bernard Anaba is Policy Analyst in Ghana's ISODEC.