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 middle-income level status.
Straying into the first EURO bond (about UYS$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 defined as a misplaced attempt, though, especially when the loan was meant for an economic expansionary drive.
This nevertheless marked the beginning of Ghana’s desire to fly the nest; a kind of leap of faith into a world of its own…and hurray! In 2007, the surprise discovery of oil and envisaged oil wealth became even more reinforcing of Ghana’s promise and prospects.
The growing renewed hope on the back of these prospects spurred the buoyancy and 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 ensuing political contestation between the two leading “N” parties was about attribution of successes in economy, then. Temporarily, their eyes may have been taken off the ball of economic management, at least with the new situation.
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 missteps leading 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 alright 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 shortfall in revenues, as it stands, is taking some time to recover. Considering that this figure was 22% prior to 2010, it was however since adjusted to 15.4% in 2011, 16.3% in 2012 and 17.3% in 2013 – but that’s 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 inhibiting.
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 issue of incessant power crises affecting output, this long lag in adjusting to the pre-2010 tax ratios tells a story of either an inefficient tax administrative system or misjudged impact from the lower-middle income status. The two are possible but while the IMF guys are in town, I prefer to stick to the latter.
While we cannot disagree that the prospects of an oil-rich economy actually fast-tracked Ghana into this pre-mature 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 US$929.23 in 2006 — short of the bar at US$1046. And by 2010 we hit it, ‘bam’, a lower-middle income country. What were 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 US$11.3billion inward investment between 2007 and 2013. This is about twice the incremental GDP growth of GH₵7.05billion 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 GH₵4.6billion, more than half the overall recorded incremental national GDP growth of GH₵7.05billion 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 toward 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 into the future.
The point is therefore that 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 temporary, if not misjudged.
For example, after 2006 the majority of Government expenditure — except the Single Spine Salary Scheme — was 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 not less than 2 years if not more, upon completion. This will also depend of the transmission mechanism of the national economy; which will in turn depend on the availability of a critical mass of 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 mistake that we are still paying for — by bringing the IMF guys into town. First we had to accept with the drying-up of concessionary loans, and secondly we had to adjust to “promise 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 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 ramp-up our tax collection, but these things require certain structural preparation. Therefore, the presumptive demands on Ghana’s economy by these Bretton-Woods institutions, especially the IMF, seem harsh under the category of a newly-acquired “lower-middle income level status”. This is akin to a toddler just beginning to stand on two feet but being dragged to double his/her steps.
We may have a cause to be suspicious of the historical neo-liberal agenda of the Bretton-Woods folk, but we cannot absolve ourselves from these problems entirely. Year after year and decade after decade, the cycle is repeated.
One does not doubt the well-intended policy-decisions of the two leading “N” parties who together have run this country 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 overindulgence to suck-out the productive drive of Ghanaians.
Particularly on the issue of overindulgence, 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 that we know.
When Ghana finally managed to shake-off the less-fancied label as a HIPC country 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 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.
Did it have to take the Senchi Consensus — all these years since the HIPC days — to come to the realisation of these basics? While the economic and development issues are clear and belong 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 crisis and a loss of moral verve on the part of government to attract market forces alongside for positive outcomes.
Now, we are going into a discussion with the IMF — and what we need most going into this discussion is a deeper understanding of our peculiar problems and not just what the IMF thinks.
A precise knowledge of the economy is required. We must be active participants armed with true local knowledge and not the kind of passive participation that we have shown in the past. This also means a good understanding of not only the hard economics of our country but also the debilitating political-economy that over the years has been on over-drive to the detriment of all Ghanaians.
By Bernard ANABA
The writer is a Policy Analyst (Economic Justice Team), ISODEC