The Ghana’s 2017 Budget Statement and Economic Policy of government presented by the Finance Minister on the 2nd March 2017 marked a significant departure from the previous ones in many ways. Among them is the prescription for the financing of the budget deficit of Gh¢13, 175.7 million which is equivalent to 6.5 percent of Gross Domestic Product (GDP). The budget envisions a net domestic financing of Gh¢14,493 million and a foreign net repayment of Gh¢1,317.4 million. The domestic dominant strategy is in sharp contrast to the 2016 deficit financing arrangement which featured prominently the Eurobond. There are risks and costs associated with each of the strategies (domestic or foreign) financing.
Ghana’s debt management strategy has three main objectives which underline the government’s borrowing strategy at each point in time. To supplement the strategy is the Medium-Term Debt Management Strategy (MTDMS) which is an analytical tool and essentially evaluates the costs and benefits of financing option(s) on the scale of risk and cost. It is comprehensive as factors of macroeconomic indicators, monetary variables and real sector developments indices are calibrated to give scenarios which mimic the potential risks and costs of the borrowing option(s).
The vulnerabilities with foreign currency denominated instruments explain the strategy of domestic dominant financing. The vulnerabilities have exacerbated given the rapid depreciation of the cedi and subsequent impact on public debt build up. However, the interest payment composition indicates a domestic debt interest payment challenges. Of the total provisional outturn of Gh¢10,770 million interest payment for 2016, Gh¢8,466 million was for domestic held debt. Clearly, the interest payment pressure is from the domestic instruments due to their short-term nature.
My view is that the policy of doing a domestic dominant financing could have adverse implications for the economy if not managed well. Ghana’s domestic market, when compared with other countries with best practices, does show glaring challenges. The evidence from the domestic market performance has been one of; condensed shorter-dated instruments and high-interest cost even with the introduction of the book-building approach and many other novelties.
The most significant possible implication of the domestic dominated financing strategy is the potential “crowding out” of private investments. Ghana’s private sector faces challenges in all facets of their business. Given that the government instruments are risk-free and with the rates of return on such instruments, it becomes prudent for investors to invest in such instruments rather than investing in private businesses. Investors would always mitigate their risks by investing in risk-free instruments than in private sector businesses where risks are high. Without having a fine balance in rolling out the domestically focused financing strategy, its implication on private struggling business could be dire especially when the government seeks to position the private sector in a pole position for job creation and to propel economic growth.
Another concern with the strategy is that any shortfall in projected government’s revenue mobilisation could potentially put pressure on the domestic market as such shocks are unanticipated. Ghana in recent times has failed to meet domestic revenue mobilisation targets and subsequently increased the financing gap. The challenges to domestic revenue mobilisation have been highlighted and are known. The modernization of the Ghana Revenue Authority (GRA) programme was meant to ameliorate and close the loopholes. Unfortunately, the GRA due in part to inadequate capacity, corruption and inefficiencies have hardly met their yearly targets. It is, therefore, prudent in planning to anticipate such shortfalls and their likely impact on the adopted borrowing strategy. The 2016 financing outturn (provisional) number is a clear case. Revised budget total financing was Gh¢8,408 million, but the provisional outturn puts it at Gh¢10,185 million. The domestic financing (net) provisional outturn is Gh¢10,185 million against the revised budget of Gh¢6,171 million. The increased in total financing was a result of a declined in revised budgeted revenue and also increase in expenditure. The additional financing required which is Gh¢4,737 million had Gh¢4,014 million raised domestically. Certainly, such unanticipated government domestic borrowings does impact on the general health of the economy.
The other issue is that often the market mechanism fails to function properly in determining interest rates when there is substantial government participation in the market. Interest rate could surge to higher levels if government borrowing from domestic market is high and also at high rates. Such situation could lead to slower growth of the general economy as the cost of funds for private investments increases in line with the cost of government instruments. Interest charges on the government bond could also be hit by higher interest charges as the borrowing portfolio increases since increases in government borrowing means increase risks to investors.
Economic growth and development potentially could get weakened as government increases its participation in the market. Resources which hitherto would have gone into private investment would end up in the hands of the government. Unfortunately, the two items of compensation cost and interest payment cost which constitutes the bulk of government expenditure are not direct growth drivers. The financing strategy could potentially impact negatively on the private sector and expected growth and development especially if the “investor base” does not change markedly. In the end, the private sector which is expected to lead the growth agenda of government and subsequently create jobs could get constrained in playing that role.
These identified challenges, however, are amenable through varied strategies which include having a deliberate policy to encourage investors especially state institutions to invest in longer-dated instruments. A significant number of State Agencies including the National Pension Authority – Social Security and National Insurance Trust (SSNIT), Mutual Pension Houses, Insurance Companies and Banks have all invested hugely at the short end of the market thereby increasing rollover and interest cost of government. A policy that will get State Agencies managing long-term portfolios like SSNIT to invest in the longer dated instrument would tame the possible impact of government 2017 domestic borrowing strategy.
Leveraging and maximising gains from economic diplomacy is another area worth considering. Ghana has been the hub of sustained peace in the sub-region and has won the admiration of many advanced and emerged economies. When Ghana transitioned into Low Middle Income Country (LMIC), her Development Partners (DPs) indicated their resolve to continue their support. As a show of commitment, in 2010 Ghana signed a compact with the DPs which affirmed their commitment to Ghana up until 2022. However, Ghana failed to take advantage of this opportunity and rather opted for the most expensive financing options which become available to us upon our transition and almost landed us in the middle-income trap. It has now become a mantra of government that our LMIC status is to explain the dwindling DP support to Ghana. The assertion is canard and falls flatly.
The transition very much increased the funding opportunities which hitherto were inaccessible to Ghana. In fact, the many grant cancellations – Japanese grant support, the Dutch support to the health and education sector, and the Danish support to the private sector were as a result of alleged malpractices in the management of those facilities and government’s failure to address the concerns of DPs. The collapse of Multi-Donor Support Programme (MDBS) for instance could not be due to Ghana’s attainment of middle-income status but rather due to political disinterest in the whole arrangement. The disinterest of the previous government in MBDS which was very cheap and also impact directly the budget is, therefore, baffling and strange. Leveraging on our soft power must not be misconstrued as begging or belittling of our country when such moves have potential to bring in resources in the form of total grants, concessional loans and technical assistance. We must harness those opportunities and maximise their benefits as much as we can.
The diaspora fund as established by the budget is a right way to go, and the government should encourage all including foreigners to donate toward the Ghana project- the project of sustained and shared growth for all.
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Expenditure rationalisation is also a measure worth the attention of government. Of the budgeted expenditure of Gh¢58,137 million, Gh¢16,006 million is for compensation of employees and Gh¢13,941 million for interest payment. There will be the need to sustain the audit of compensation numbers which is ongoing to ensure that budgeted wages and salaries of Gh¢14,047 million for public sector workers are the true figures. The efforts at removing ghost names and the automation of the payroll system must be sustained and deepened to ensure that the wage bill is a true reflection of the number of employees of the government. The interest payment numbers also require looking into as over-payment have occurred in the past before. Such moves would require of government to build robust and solid systems that are not easy to circumvent, and when genuine mistakes occur, the system can identify and rectify quickly. The government must ensure each cedi of tax payers money gets spent on rightful and impactful activities. In so doing, Government would be ensuring that the benefits of the strategy of borrowing more from domestic market will indeed be beneficial to the general economy and at the same time ensure private sector does not get starve of funds.
Author: Kwadwo Kyeremeh