Feature Article of Wed, 11 Jan 20178
Dr. Joe Amoako –Tuffour writes: An open letter to new Finance Minister
Dr. Joe Amoako -Tuffour
Dear Honourable Minister:
Your job is revered but unenviable. The task ahead of you is daunting because you have inherited a slow moving, indebted and jobless economy. In October 2013, the UK-based Economist Intelligence Unit (EIU) described Ghana’s fiscal state as a “mess”. Rating agencies agreed and responded with Ghana’s sovereign credit downgrades. It has since become “messier” even under the watch of the IMF.
There is much to do, much is expected, yet with such limited fiscal space or headroom. Soon, you have to come up with some unpleasant initiatives in order to salvage the economy from further downward drift, save the financial sector from Ponzi games, businesses from collapsing and citizens from further descent into poverty. The great art of finding politically acceptable measures, the good science of identifying economic priorities and accurately assessing trade-offs and sequencing strategies are what you need to manage the economy from where we are to where the new government wishes us to be.
Some of the most evident aspects of your difficulties are the threatening inflation, the extraordinarily high interest rates and the sharp weakening of the cedi. Economic management is tied up in knots over the triple budget, current account and energy deficits. The high cost of borrowing and the high cost of energy undermine any prospects of private sector competitiveness, the growth and job creation so badly needed.
The high transaction costs of doing business and of going about ordinary economic activities point to an inefficient economy, over which your government will preside. These are not the kinds of indicators any keen Finance Minister wants to see because they are visible signs of economic management gone wrong. They reflect deeper causes that cannot be stopped without measures bound to be unpleasant.
Next to the high youth unemployment, perhaps most burdensome of the tasks you have inherited is the unnecessary pile up of public debt in peacetime and at a time of unprecedented inflow of oil revenues. The net worth of the common wealth, partly looted, has fallen. The debt ratio nearly reached the 70 percent mark of national output in December 2014 and breached the benchmark of 40 percent for countries at this stage of development.
The cycle of financing maturing debt and the arithmetic of the interest on the debt have made your work unpleasant and you have to make harsh and immediate fiscal policy adjustments. Interest payments to domestic revenue of about 42% in 2014 exceed the recommended threshold for emerging countries of 26%.
I must admit that while Ghana has not yet faced a debt crisis of the likes of the PIGS of recent vintage (Portugal, Italy, Greece and Spain), Ghana has built up all the conditions and vulnerabilities for a crisis to emerge. The remedy lies not in high spirits accounting, “smart borrowing” nor in Ponzi games, but in sound management and policy prudence for a higher public purpose. The ability to borrow should never be mistaken as a sign of good management.
Sound management points in three complementary directions: accelerate economic growth, increase revenue mobilization and spend prudently.
Substantial growth in national output no doubt will reduce the debt burden and provide additional resources through tax revenues; better if that growth creates jobs. The African Center for Economic Transformation during the Ghana Transformation Forum held in 2015 laid out some pathways to transform the economy and the pointers to spur growth with job creating opportunities.
For now, with forecasted economic growth (which according to the IMF, AfDB, WB and EIU) that in all likelihood will not exceed 5-7 percent in the near term, the bulk of the needed adjustments rests on revenue and spending management; not just for the sake of better public sector management, but to provide the enabling environment for private enterprise growth.
On the revenue front, first resist the temptation to rely on money printing to pay the bills. Fiscal induced money printing temper will worsen not mitigate your task. History has taught us much.
Second, few will advocate new taxes in the near term. Indeed, your manifesto leans toward tax cuts. But, except for the obvious – and short of a comprehensive look at what burden of tax individuals, small, medium enterprises and companies should fairly and reasonably bear – hurried tax cuts and exemptions will do little to boost productivity or spur growth.
Policy consistency, sequencing and a fine balance between equity and efficiency matter when it comes to sharing the tax burden to finance public enterprise.
Third, most needed in a hurry is to improve the machinery of tax collection and to close the revenue escape hatches. Next to customs duties, the management of direct taxes (profit and income taxes) is one of the weakest arms of the domestic tax system and it remains a major source of revenue leaks. Despite a promising beginning in the early 2000s, progress in domestic revenue mobilization has been in slow motion, even one step forward, two steps back.
The focus has not shifted from reforming legislation to implementing laws efficiently. Those who must collect the taxes and enforce compliance are not without blame. The corrupt and embezzlers of revenue collected have been winning. Strung out behind them is ineffective accountability and partisan political interventions in the implementation of the tax system. Your commitment to action to tackle institutional habits, leakages and escape hatches offers the best opportunity in the short run to realize more non-inflationary revenues.
Fourth, the accountability of public institutions and agencies, especially hospitals, tertiary institutions and the sports ministry in their collection and use of, and accounting for non-tax revenues, fees and charges, deserves your immediate and closest attention. These are public resources and must be submitted to public accountability.
Finally, the assessment, collection, use of and accounting for oil and gas revenues have been contrary to the spirit of the Petroleum Revenue Management Act. There has been a near pandemic character to the misappropriation of the oil revenues, and so much manoeuvring to change the law to justify it. It is remarkably obvious that changes in the petroleum revenue management law have been spurred more by obscurity than by transparency, accountability and sound management.
The need to realize unmet revenue expectations had your predecessor grappling for ways out of the fiscal quandary and raiding the petroleum funds in the name of “smart borrowing” and debt management.
On spending, every Ghanaian Finance Minister faces two primary challenges: the inflexibilities in public spending and the ever rising cost of government. All earmarked funds – assigning revenues from designated sources to finance designated spending – must be revisited so as to assess how well they are working. There are questions about their accountability, the control of priorities for spending, administrative outlays and continuing necessity. On the cost of government, here is a list for your consideration.
First, the rising fixed cost of government is largely the making of politicians. For instance, the creation of an additional 46 district assemblies and 45 new parliamentary seats in 2012, ratcheted up the fixed cost of government without much thought given to what those actions mean for public finances. The cost of government was brushed aside by a premature exuberance about the coming oil revenues. The 1992 Constitution lacks the mechanism to ensure a fine balance between political expediency and fiscal sustainability.
Second, ghost names payroll fraud is prevalent in the education and health sectors, and even in the judicial system. This is not the work of some lowly placed civil servants. Rather, it is the work of a web of highly placed civil servants and banks that are in a position to determine that the risk of detection, arrest and punishment is low. The solution is not more technological innovations and sophisticated payroll management.
Yes, these may help, but are hardly the answer. Because after nearly 20 years of massive investments and innovations in public financial management, from public sector payroll management to the Public Financial Reforms and Management Programme, Budget and Public Expenditure Management Systems, repeated revelations in the AuditorGeneral’s reports suggest that payroll fraud has been nearly an unstoppable syndicated crime. Strengthening control of the wage bill hinges greatly on this.
Third, expenditure overruns are the result of the collusive behaviour of both politicians and civil servants. Let the revelations of misappropriation, waste and embezzlement uncovered in the Auditor-General’s reports be a good starting point in identifying areas of unaccountable public spending and the disregard of the provisions of public financial management.
Fourth, extravagant purchases of vehicles by ministries, departments, agencies public hospital boards are unjustifiable and must be stopped. There is no reason for a single public office holder to have a saloon car, a V8 or 4 by 4 Cruiser and a pick-up van at his or her disposal.
The political process condones civil service spending cycles as civil servants, eager to serve the new politicians, splurge public funds on buying new vehicles. Even when politicians insist on change, the thinking much more often than not is that senior public officials may give the appearance of change, but on closer inspection they ensure that the status quo prevails in the misuse of public resources.
What Ghana needs are circuit breakers in its convoluted and ineffective public financial management system. A strong, independent Auditor-General, insulated from politicians, and a strong Public Finance Committee of Parliament are steps in the right direction. The effectiveness of Ghana’s public financial management lies perhaps less in technological innovation and more in transparency, accountability and freedom of access to information.
Your predecessor’s budgets attracted cynicism for their rosy revenue forecasts, undisclosed arrears, understated deficits, fervent addiction to borrowing and lack of public purpose. Thankfully, your Vice President was on top of our fiscal and macroeconomic quandary and did well to educate citizens. Your team must have been aware that the IMF programme went off-track in the six months leading to the election. At the root of it was the inability to control spending.
Between utopianism and realism, Ghanaians require a more realistic assessment of our current fiscal health. Citizens, businesses and money markets need reliable information of our state of public finances. Giving us a realistic fiscal plan, beginning to clean up the nation’s balance sheet and building confidence in sound management will be worthy and credible message s for a budget you have so little time to put together. Let your first budget signal realism, budget honesty and your aspiration for a higher public purpose .
Your unpleasant work can be made a bit easier if there is a fair measure of the public’s understanding behind you. That will depend on your ability to communicate the extent of the fiscal mess, lay out the options for remedies, and signal the prospects for the future.
Article 24 of the 1992 Constitution provides, with good intent, for the economic rights of citizens in terms of the right to work, to safe and adequate work conditions and to equal pay, as well as the right to join a union. What the Constitution fails to provide explicitly is the obligation for prudent management of the common wealth and the right of citizens to live in a well -managed economy. This, Minister, is at the heart of the problem you must address.
Dr. Joe Amoako -Tuffour is Professor of Economics and Director of Research at the African Center for Economic Transformation (ACET) .firstname.lastname@example.org.