Economy in fiscal 'mess' - IFS urges govt to stop populism

The Institute of Fiscal Studies (IFS) has warned that the country’s economy is in what it described as a fiscal mess which will require urgent measures to restructure.

It has, therefore, cautioned the government to be careful with its fiscal policy measures in the face of the outbreak of the COVID-19 pandemic in order not to worsen the situation.

Addressing the media on the fiscal position of the country, the Director at IFS, Dr Said Boakye, said the country’s fiscal position was already in a very precarious state in 2019 even before COVID 19 struck.

He said there were clear signs that showed a country that was poised to struggle fiscally if even no disaster occurred.

“Simply put, by the end of 2019, the government’s financial position was such that the ability of the government to enhance economic growth and development through infrastructural development or even maintain the existing ones was enormously curtailed.”     

“This is because in 2019, the government was able to collect GH¢53.38 billion in total revenue and grants, representing only 15.3 per cent of GDP and thus 1.8 percentage points below the initial budget forecast of 17.1 per cent of GDP.”

“On the other hand, the government spent as much as GH¢31.01 billion to service its debt alone (GH¢19.77 billion in interest payment and GH¢11.24 billion in principal repayment -- amortisation).

“The government also spent GH¢22.22 billion as employee compensation in 2019. Therefore, the sum of these two expenditure items alone stood as high as GH¢53.23 billion, representing 99.7 per cent of total revenue and grants, which is virtually the entire total revenue and grants,” he explained.

Debt trap

Dr Boakye noted that the country had already fallen into a debt trap by the end of 2019, since borrowing was no more a choice but an imposition by the fiscal state of the country.

He said the cycle could only be reversed if revenue was able to grow at an unusually high rate, growth in employee compensation drastically reduces, and if there is debt forgiveness as happened in the 2000s.

He said none of these had, however, been able to be achieved even before the pandemic stuck.

Fiscal policy measures

Since the pandemic hit the country, the government has taken certain fiscal policy actions which include the announcement of a 15 per cent salary increase for civil servants in March 2020, provision of free water and electricity, and the reduction of the Communication Service Tax from nine per cent to five per cent, effective September 2020.

Dr Boakye described these policy actions as head scratching decisions.

“What is actually driving these head-scratching fiscal decisions and choices in the face of COVID -19, whose end is still not yet known?

“Is the government not aware that the country’s fiscal position was already in a precarious state before the pandemic hit?

Is the government again not aware that it was too much borrowing that landed the country in the state in which it found itself in the 1970s and 1990s, which caused the country to call on the IMF and the World Bank for an economic bailout in the 1980s and debt forgiveness in the 2000s?” he asked.

He said the 2020 revised budget clearly demonstrated that the country’s fiscal position had dramatically worsened.

“While it is true that the pandemic is what has mostly caused the bad fiscal position at the end of 2019 to dramatically deteriorate in 2020, the head-scratching choices of the government listed above have added some fuel to the fire,” he stated.

Fiscal populism

On how the country could get out of this poor fiscal position, Dr Boakye advised the government to refrain from what he described as fiscal populism despite the looming 2020 elections,

“Indeed, a critical analysis of the economic history of Ghana reveals that fiscal populism has been one of the main causes of the country’s recurring fiscal and economic distress since independence,” he noted.

He also advised the government to immediately seek debt reliefs, including debt forgiveness, from its major creditors so as to minimise the enormous size of the country’s debt service expenditure, which is consuming the biggest chunk of the country’s revenues (projected to be 71.6 per cent of total revenue and grants in 2020).

Dr Boakye also urged the government to take steps to reduce the rate of growth in employee compensation in order to minimise its relative size over time.