Which economic lesson in 2016?
Eight days from today, we shall be witnessing the end of another year. As it is the case every year, 2016 has been an eventful year and l am sure you will have some interesting memories to share also.
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Events, good or bad, always offer some useful lessons. Bad events warn us to be alert, and sometimes prompting us to take seriously our risk management responsibilities. Yes, there are risks in every given situation and life itself, day in and day out, is about risk management.
Driving on the road, buying phone or jogging down the park to trim that waistline all come with risk. And since we cannot wish away all the risks that we face, we must always ensure that we have the risk mitigating strategies, hence the need to be aware of them. Bad events, at least, remind us of the uncertainties in life.
The good event gives us the lasting impression of hope that carries us on in life. Achieving a little success in the performance of a task that appeared herculean at the beginning builds up momentum that further motivates us to achieve even more. Such is life.
Now, let us look at some of the events of 2016 that perhaps, should give us hope for 2017- and the lessons.
From where I sit, I would say the considerable gains made at the macroeconomic level should give us hope for the future. And here, l am looking specifically at the way the currency stabilised, compared to the same period last year, the way market interest rates too, aided by a monetary policy stance that ended the year with a 50 basis points policy rate reduction (the first reduction in several months) also maintained some decency and the general inflation level not experiencing serious upswing.
In fact, inflation has returned to a level that makes the economic managers bullish, with the monetary policy handlers certain that the target band of eight per cent, plus or minus 2 per cent, is achievable by the third quarter of next year.
Of course, it isn’t that all the pointers conclude with utmost satisfaction to all. Not at all. For instance, the inflation rate is still deemed high by many, and also the general market interest rate has not gained many admirers.
At an average of 35 per cent, that is when borrowing from the commercial banks, many businesses have found the cost of doing business high. But what is clear also is that with inflation highly controlled, even though the cost of borrowing may be high, some input costs of production have remained relatively in check.
Nevertheless, it is also the wish of the economic handlers to see both interest rate and inflation down, to have the feed through effect of stabilising and strengthening the domestic currency.
So, by and large, the economic performance of 2016, in real terms, was far better than what was experienced in 2015- my first lesson. Take the case of the country’s debt to GDP ratio. Whereas in 2015 that ratio had moved, at some point to almost 70 per cent, today, that ratio is firmly calculated to be below 70 per cent.
Yes, the more it comes down, the more space it could provide for the economic managers to source for more external funding to undertake further development in the country, literally - the second lesson.
In the third lesson, I noted that the fiscal deficit performance has not been bad either. With low revenue base, especially from taxes and a fall in commodity prices generally, countries that are confronted with these issues most often experience problems fulfilling financial obligations. In lay terms, using your own finances as an example, when you earn less than what you need to fulfil your financial commitments, you will need to find other sources of funds to make good those commitments. You may resort to borrowing and that is when you have the means to do so.
The bigger picture is what happens to governments. Tasked with the responsibility of providing certain essential social services, the government will have to find the means to do so. It mostly does so by using the money that good citizens pay as income tax and the others collected from corporate bodies.
In addition, export receipts and royalty payments of some companies are also captured as part of the pool. And yes, we also do get help from some “development partners” in the form of donor funds and also the government borrowing from both the domestic and international financial markets by way of issuing bonds.
In the end, all these funds are brought to book and “consolidated” to ensure not only proper accountability, but also transparency. In the end, if the government is not able to close the gap between what it has collected and what it has to pay, that is when a deficit is created.
The deficit, primarily, is when the expenditure is more than the revenue and a surplus arises when the income exceeds the expenditure.
So what happens next? Well, to deal with the situation of fiscal deficit, the government has to adopt some prudential controls that would ensure that either the revenue side of the equation is increased or the expenditure side is trimmed.
In dealing with the revenue side, one of the ways of doing that is for the fiscal managers to find ways of increasing taxes or broadening the tax base, which is, finding a way to get more people into the tax bracket. But a government cannot go about taxing people anyhow. There is a limit to this as over taxing could also be counter-productive.
Controlling expenditure brings with it its own challenges too. The option of reducing waste in the system seems the most feasible and easier to implement. Another option, which can go hand in hand with the payroll trimming, is by instituting an effective public financial management controls that would address issues bordering on fraud in the management of public finances and not just payroll.
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These apart, other austerity measures, involving the cutting back on expenditure can be adopted. The painful part of austerity measures is that in its worst form, even social services are cut! You may find that the introduction of austerity measures to control the public purse could even affect the provision of health and sanitation services.
As the Ghanaian economy experienced various forms of what has been enumerated above, there were lots of economic lessons in 2016 and I hope you had a good lesson too.
botabil@gmail.com