Ghana must readjust quickly
Recent revelations about the economy points to considerable strain on public finances in Ghana. Many sectors of the economy are at high risk with respect to financing and fiscal sustainability.
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Against this background, there are urgent questions regarding the effects of a high and potentially persistent public debt. This is because economic growth is bound to be affected because of the severe impact of the debt the country owes and future development.
Borrowing money for development is not a bad idea, just like President Dramani Mahama alluded to just a few days ago but care must be taken to ensure that monies borrowed are put to good and justifiable use especially, after a threshold has been reached. Otherwise, high levels of public debt are likely to be a hindrance to growth.
For us in Ghana, government debt has arisen largely because of an expansion in government and its activities over the last couple of decades or so. The situation has been generated because of the need for greater public works.
In Ghana, the urgent need for roads, hospitals, schools and what have you, are some of the projects that have contributed to the piling of public debt.
This is because as the economy and population expands, the requirement for these facilities have also grown in tandem.
But, because the country does not have enough of its own funds to get many of its development projects started, we are left with the option to borrow from international agencies, corporations and countries to help bring about improvement in the lives of the people.
According to a research paper by economists Cecchetti, Mohanty and Zampolli (2011), borrowing allows individuals to smoothen their consumption in the face of variable income.
It allows corporations to smoothen investments and production in the face of variable sales and allows governments to smoothen taxes in the face of variable expenditures and improve on efficiency of capital allocation across possible uses in the economy.
They go on to observe that public debt in particular can help smoothen consumption notably through the lifetime of individuals who are currently alive, but also across generations to the extent that future generations will be richer than the current ones because they will have more human capital and more productive technology.
For all these reasons, financial deepening and rising debt go hand-in-hand with improvements in economic well being. Without debt, economies cannot grow and macroeconomic instability will also be greater than desirable.
However, it needs pointing out that continuous increase in public debt through borrowing can be beneficial to a point beyond which it becomes negative and it is that caution that Dr Mahamudu Bawumia mentioned in his discourse some days ago.
The accumulation of debt involves risk. As debt levels increase, borrower's ability to repay becomes progressively difficult, especially with regards to drops in income and sales as well as increases in interest rates.
In fact, for any given situation, the higher the debt, the higher the probability of defaulting and the higher the probability that the borrower will not be able to make payments and as such, can no longer be regarded as credit worthy.
Hence, instead of a high stable growth with low stable inflation, debts can mean disruptive financial cycles and when these are deep enough, then the financial system collapses taking the real economy with it.
Under the circumstances, it will be important to curtail our borrowing trend and look for other sources of generating more income such as improving export, particularly, in the agricultural sector and also increasing savings as well as consuming largely, made-in-Ghana goods.
The country, likewise, would have to spend wisely on projects that will have positive impacts on the people.
It is important that we act quickly and decisively to address the looming fiscal challenges facing the country. The longer we wait, the bigger the negative impact will be on growth and the harder it will be to adjust.
It is worthy to note also that debt is a two-edged sword. Used wisely and in moderation, it clearly improves welfare but when not managed, the results can be disastrous.