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20% expenditure cut insufficient to stabilise economy - Economist

Dr George Domfeh, Economist1 Finance lecturer at the University of Ghana, Dr George Domfe

Wed, 26 Jan 2022 Source: thebftonline.com

Given the deficit at hand, a 20 per cent cut in expenditure from the 2022 budget won’t contribute significantly to stabilising the economy but will rather affect infrastructural development – thereby negatively impacting growth, economist and finance lecturer at the University of Ghana, Dr George Domfe, has said.

His comments come on the back of an announcement made by the finance minister last week that government has suspended 20 per cent of its expenditure in the 2022 budget for the first quarter of the year.

In an exclusive interview with the B&FT, Dr Domfe said the government should channel its focus on deepening implementation of existing policies if it wants to generate internal revenue, explaining that this is the best way to obtain stabilised economic growth.

“20 per cent is not too good, because the moment you cut expenditure it does not affect salaries and interest payment but rather affects infrastructural development; and these infrastructure [projects] are backbones to the economy, and this is not good news. The government is planning to spend a certain amount of money against a particular revenue handle.

“Now, the government has seen that the revenue intended to be generated internally is not forthcoming and they don’t have any other alternative than to reduce the intended expenditure. However, you don’t always have to incur a higher fiscal deficit; but today we are in a situation where we are incurring deficits of over 10 per cent, and that is not good enough for the economy,” he said.

“Another bad thing is that today, our credit rating has gone down to B- with negative outlook; which means that we are not creditworthy on the international market, and if the government has to borrow it is going to do so at an exorbitant rate – and that is dangerous."

“Government has decided not to go and borrow so that our debt situation will be better. But if it is not going to borrow and what it is generating internally is also not forthcoming, then the only option is to cut the expenditure – even though this is very bad. But I wouldn’t advise them not to continue with this expenditure cut, especially when our debt to GDP ratio has ballooned to 77.5 per cent – putting us into an unsustainable debt level,” he noted.

Dr Domfe reiterated that government is capable of raking in a greater amount of internally generated revenue, particularly through its tax system; hence the need to ensure efficiency in tax collection.

“What I’m suggesting is that government has to deepen already existing laws and promote efficiency, particularly in the area of tax collection. They’ve announced that the suspension will only be in the first quarter; but what will happen is that if the E-levy doesn’t go through, then that is going to affect not only the first quarter but also the second, third and fourth quarters of 2022 – and that means development will be stagnant."

“I have always maintained that people in the country don’t pay taxes because our current tax to GDP ratio is below 14 percent and that means a lot of people in the country are not paying taxes,” he said.

Fitch’s credit rating of Ghana’s economy

International rating agency Fitch has downgraded Ghana’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-' from ‘B’ – indicating a negative economic outlook for Ghana.

Fitch, in its latest report, explained that the downgrade of Ghana’s IDRs and Negative Outlook reflects the country’s loss of access to international capital markets in the second half of 2021, following a pandemic-related [COVID-19] surge in government debt.

The agency said Ghana’s effective loss of market access to international bond markets also increases risks of its ability to meet medium-term financing needs.

Additionally, Fitch said it assumes Ghana will not be able to issue further bonds on the international capital markets in 2022, while any prospects for issuing bonds in 2023 also remain uncertain.

Source: thebftonline.com