Use earmarked funds as stop-gap financing - Dr Kwabena Duffuor

A former Minister of Finance, Dr Kwabena Duffuor, says the government should consider placing a temporary moratorium on the transfer of deductions to statutory funds and rather use it to support budgetary expenditure.

He said the measure would give the government a free hand to use cheaper funds to prosecute the budget as opposed to borrowing from the domestic and international markets at expensive interest rates to finance budgeted expenditure.

Contributing to discussions at a pre-budget forum organised by a policy think tank, the Institute for Fiscal Studies (IFS), Dr Duffuor, who served as Finance Minister in the Prof. Atta Mills administration, said experience had showed that allocations to statutory funds had been one of the banes of fiscal flexibility to every administration.

That, he said, required that the country took a second look at the earmarked payments, which altogether consumed about 44 per cent of tax revenue.

“Why don’t we begin to think of stopping all the revenue earmarked (for these funds) such that we can transfer a portion but not all. Why should we transfer and then begin to borrow,” he asked.

Currently, deductions into statutory funds together with wages and salaries for public sector workers and debt servicing expenses constitute about 44 per cent of total domestic revenues, thereby making government expenditure rigid.

Dr Duffuor, who founded the IFS, said the country needed to find innovative ways of restructuring its expenditure, while boosting revenues to help avoid the risks that such expenditure rigidities posed to the economy.

Beyond creating fiscal space for the government to operate in, the former Governor of the Bank of Ghana (BoG) said such an initiative would help reduce the country’s appetite for debt, which had been on the rise in recent years.

Pre-Budget forum

Economic and social researchers at the institute made various presentations which touched on a number of challenges facing the country and how the current administration could start overcoming them, using its first budget due next month in Parliament.

The event, which was attended by Members of Parliament, diplomats and some government officials, was chaired by the Board Chairman of IFS, Mr Alex Ashiagbor, also a former Governor.

Negotiating tight corners

Contributing to suggestions on how the country can navigate its way out of the current economic conditions, he explained that a similar initiative was implemented in 2001, when the government temporarily held on to and used a portion of earmarked funds for discretionary expenditures until when economic conditions improved.

“At that time, I was the BoG Governor and some of the earmarked funds were not transferred because they wanted to have some space. Can we look at it again this year,” he quizzed.

Heritage Fund

Touching on the Heritage Fund, which is funded by petroleum revenue, Dr Duffour wondered why the country had chosen to invest its proceeds in short-dated investment instruments in spite of the fund’s long-term nature.

As a vehicle for saving and investing the country’s revenue from petroleum for posterity, the former minister said proceeds of the Heritage Fund needed to have been invested in long-term instruments in the domestic capital market.

While it was understandable for the country to invest short-term funds on short-dated instruments, he said it was not prudent to invest proceeds of the Heritage Fund in such instruments given the low rates they returned to investors.

“We are not going to use the funds right now; are we? So why are we investing them in short-term instruments?

“Well, for the statutory funds, we can invest them in short-term instruments, but with the Heritage Fund, I have a problem seeing them in short-term instruments,” he said.