Ghana is not bankrupt

As I was driving to work last week I saw a gentleman selling magazine by the wayside with a big title; “Ghana is Bankrupt” says Nana Addo Dankwa Akufo-Addo and the headline got me into thinking to write this piece. Ghana as a sovereign country with our fiat currency system cannot go bankrupt.

After 1971, most governments abandoned the gold standard and issued their own fiat currencies; fiat currencies are not backed by gold, not convertible or redeemable into anything of value, and are floated and traded freely in foreign currency markets.

Under the current fiat monetary system, we should understand that Ghana is a sovereign country with its own currency called the Cedi. The popular practice adopted by most countries all over the world as far as monetary units are concerned is the concept of one nation one currency with the exception of the monetary unions (CFA Zone and EU) and other countries which adopt dual, peg or even dollarise the currency such as Liberia. In a fiat monetary system, Ghana government creates its currency unit called the Cedi and has the sole right to impose taxes on the people of Ghana and also has the powers to enforce the collection of those taxes.

Again, Ghana government promises to accept the cedis in payment for taxes which create demand and value for everyone who has to pay taxes. Everyone in Ghana then needs to obtain the cedis in order to pay their taxes, meaning everyone is “unemployed” until they obtain the cedis.

The government, through Bank of Ghana, spends by issuing the cedis into the economy for the most part via computer entries crediting commercial banks accounts (by way of transfers and cheques), to the non-government sector (i.e., private sector) who accepts them as payment for goods and services, etc., since the private sector need the cedis. Over time, the government replaces most other forms of money (prints cedis when worn-out) since everyone uses the cedis for accounting, pricing, wages, taxes, and exchange of goods & services. The cedis then enter the economy, first from the government and later return to it, while for some obvious reasons, the private sector will try to save some of the cedis, requiring the government to issue more than it taxes away just to keep up with demand for the cedis. It is not possible and wise to tax all the cedis government has spent, just to balance government accounting books, the private sector needs to save and must be allowed. The cedi doesn’t first originate from the private sector to be later taken by the government via taxation. We should all note and understand the sequence because it has profound implication.

We must also understand and know that government is the Monopoly Issuer of the cedi and if any entity other than the government tries to issue cedis (unless permitted to do so by government) it would be prosecuted as a counterfeiter, with severe penalties. The government of Ghana is the only body that can issue the cedi and therefore is the Sole Issuer of the Cedi.

As a monopoly issuer, the government can never run out of the cedi and therefore cannot be revenue-constrained unless it has self-imposed restrictions. This means that the government can spend whenever it wants and does not depend on its own saving, taxing or borrowing to facilitate the spending. The crucial point, however, is that the sovereign Ghana government can always fund its liabilities as long as the liabilities are denominated in its own cedis, that it issues under monopoly conditions. This also means that Ghana government can never be Broke or go Bankrupt.

The government can never be bankrupt within its own national boundaries if it is spending Cedis. It can pay for anything in cedis whenever it comes due. Once government borrows abroad in foreign currency or has debts to be settled in foreign currency and cannot pay, “bankruptcy” can be forced on it, (i.e., HIPC) but currently, Ghana has not gotten there.

We must also understand the differences between government as a Cedi Issuer and Private sector (Household, Businesses) as Cedi User, and the options available for them (government and private sector) under fiat monetary system is different. The private sector by way of generalisation includes all the non-government entity, uses the cedi and has to fund every cedi they spend either by earning income, running down saving, and/or borrowing. It is clear that the private sector cannot spend more than its revenue for a long time because it would mean being in debt constantly. It is not possible for the private sector to sustain living in debt permanently.

Therefore, the budget choices facing a private sector are limited unlike the government. The analogy that government should run its finances like the private sector (Household, Business) is wrong because government is the Sole Issuer of Cedi and cannot run out of money. The non-government sector is the user of the cedi and can therefore go bankrupt if it does not earn enough cedis to fund its spending. I am sure Nana Akufo-Addo’s statement comes from this analogy.

Understand that government spends by crediting private bank accounts, using keystrokes on computers (much like changing accounting entries in a spreadsheet). Government spending is handled by the Bank of Ghana. The procedures are similar to those of the regular commercial banks.

From research, the Ghana government spends “out of an account” called the Treasury Main Account at the central bank. The central bank transfers funds from the government “account” to the recipients’ accounts in private banks. Ideally, as the issuer of the cedi, when government spends, it does NOT use up the cedis that would otherwise have existed in the economy. In fact, it should be issuing or injecting newly created money that we collectively save.

As a sovereign government, Ghana government is never financially constrained period! Yes, the government may have self-imposed voluntary constraints– for example:

The government might want to have a matching sum of tax revenue in “treasury main account” at the central bank before it can spend that sum.

The government might say it has to borrow a matching sum from the treasury bills and bondmarkets and put it in some bank account at the central bank before it can spend that money.

But none of these “constraints” are financial in nature; in fact, this design actually came from the abandoned Gold Standard Era where if government has to spend it must either tax or borrow. The only economic constraint that a sovereign Ghana government will face is what we termed as the “real constraint” which is the availability of real goods and services to buy. Government spends by buying goods and services from the private sector, if there is no room for spending due to full employment or full capacity, then government cannot spend because it will result to inflation.

The very reason we invented the cedis is to be able to afford things. We can recruit and pay soldiers, teachers, doctors to provide essential services, invest in big infrastructure projects, pay for government employees like judges and air traffic control workers, build schools and universities, fund costly science research, and whatever else the people determine is in their interest. Currently, there is excess capacity, huge unemployment, infrastructure needs which must be funded. The only limitations on government spending are political.

In Ghana, taxes and borrowing fund government’s activities which should not be the case. This means government is first collecting/removing/draining cedis through taxes from the people before it can spend. In fact, government’s expenditure must necessarily come before collecting taxes, rather than the other way around. To put it differently in economics language, tax payments can onlybe settled with base money (i.e., bank reserves or physical currency; coins and notes).

The right sequence requires that base money previously has been issued and spent into the economy (privatesector) by the government. The base money must be issued and added (government spending) before they can be removed or drained again (taxation). If people don’t receive the money/cedis, it can’t befirst taken from them by the government – the cedi is created and flows into the economy when the government pays for things. If government doesn’t spend by injecting cedis into the economy, it cannot tax what it has not spent.

The ultimate purpose of taxation and borrowing is not to raise revenue for spending. Instead, taxation is to reduce aggregate demand, i.e., total spending power, in the economy, to “leave room” for the government to spend. This is necessary to maintain the value of the currency, i.e., to avoid inducing inflation. Taxation thereby drives the value of the currency because it creates adequate demand for the cedis. Without taxation no one would accept the government “fiat” money in payment for anything. Furthermore, taxation can be an important tool to direct resources for the good of the people or the environment that are otherwise being poorly distributed by the forces of capitalism.

So if the economy is in a downturn and there is insufficient spending to maintain growth, investment, and employment, then the correct “function” is some combination of lowering taxes and increasing spending. On the other hand, if demand is robust, investment is becoming speculative, and inflation is rising, then the appropriate “function” is a combination of increasing taxes (reducing spending power) and reducing government spending. Interest rate adjustments can still be somewhat useful for influencing investment but fiscal policy is the key.

The government does not need to save to spend – in fact, the notion of making savings on the cedis before spending by the government as a monopoly cedi issuer under fiat system does not make any sense. It has the flexibility of issuing new money without any constraints. Operationally, it should work as follows in a closed economy; If Government spends say GHC100 and taxes GHC100, called balanced budget, there is no private sector savings. Again if government spends GHC100, taxes GHC80 (we call it deficit because it has not yet collected GHC20) and should sell T’bills/bonds equal to GHC20. The government should then issue a saving scheme or instrument for private sector to save GHC20 so that the private sector do not hold a lot of money in their checking account. The T’bills/Bonds is not meant to fund government activities as we think. So, what we should understand is an attempt to coordinate the government’s spending with taxes and bond sales. Government Treasury Bills, Bonds are nothing more than a savings account at the central bank. We give up Cedis today and we receive Cedis plus interest at a future date say 91days/182days.

So if the government sells T’ bills and bonds today, funds get moved from checking accounts. People who have money buy these bills and bonds. Funds move from the checking account into what’s effectively a savings account. It’s an interest earning asset, IOU of the government. When the bills / bonds mature in 91days/182 days, the government credits our account, principal plus all of the remaining interest, and the funds are converted back into checking accounts; they move from saving back into checking accounts. Government of Ghana does not need to borrow cedis to spend. That is to say the Government of Ghana should not borrow its own cedis from itself or lend its own money-cedis to itself at ridiculously 25.7% whereas private sector commercial banks offer savings rate of maximum 9%. (I will expand this statement next time). The government can sustain deficits for long without having serious problems in the economy. In fact, government deficit spending creates surplus for the private sector since government is the sole source of net financial assets (created by deficit spending) for the non-government sector.

It is only through transactions between the government and the non-government sector which creates (destroys) net financial assets in the non-government sector. So when the government runs a surplus say Government spends Ghc100 and Taxes 120, the non-government sector has to be in deficit of Ghc20. To put it differently, the government deficit occurs when the government deposits more new money into bank accounts than they tax back out of existence. Such spending creates new money deposits for the private sector. Taxes remove or drain some of that money out of the economy.

The“domestic national debt” is the total accumulation over time of all money spent into existence by the government that has not been taxed out of existence. It represents the total net money savings of the private sector. To say that the government sector should be in surplus is to also aspire for the non- government sector to be in deficit which can bring about financial crisis.