Mr. President, debt and deficits Matter

As Ghana continues its momentum along the growth ladder, the question asked by the business community, academia and citizens who know a thing or two about prudent management of modern economies is this: ‘Should we be concerned about the dizzying rate of growth of the nation's debt and the ballooning budget deficits?’

Having witnessed this country's historical battles with debt management and its resulting deleterious effect on our economic, social and political development, my answer is an emphatic yes. We must not fool ourselves, yet again, into thinking that unrestrained borrowing and excessive budget deficits are without consequences. Unless we have a desire to saddle the nation with unsustainable debt, we must acknowledge two simple premises - debt and deficits matter.

First, we are not going to put this country on a sustainable development path, neither will the citizens of Ghana experience improved standards of living if government debt becomes a liability on economic performance. Government revenue generation must focus on broadening the tax net and collecting all that is due, not necessarily by increasing taxes. We must close tax loopholes by instituting robust measures to curb evasion in the formal sector, and develop effective plans to control the informal sector.

We must also aim to attract quality foreign direct investments, equip our workforce with technical knowledge and create a favourable climate for local businesses to thrive. It should encourage local industries to produce goods and services of good quality to meet the needs of Ghanaians consumer and neighbours who want to import or patronize our products and services.

Second, the government has to cut its coat according to its size. We must deviate from the tendency to pile up irresponsible budget deficits. Our goal should not be to burden future generations with tax increases or bankruptcy as a result of our inability to keep our fiscal house in order today. We have been burdened with high indebtedness before and if we are not careful, we will do it again. If we do, we can no longer count on Western largesse to bail us out. There will be no HIPC 2.0.

We cannot continue to be a nation that spends seventy percent of its revenue on a bloated public sector whose returns leave much to be desired. We have to demand accountability and efficiency from our public officials. More importantly, we must focus on creating the enabling environment where the private sector is the engine of job growth so that the government can channel public spending to infrastructural development.

As a nation, we have not seriously been pursuing a long-term economic agenda that seeks to achieve these goals. The evidence can be seen through the fiscal mismanagement of the economy. Like individuals, governments must pay their bills, including interest payments on the accumulated debt.

When a government continuously pile up debt, interest payments can be substantial. And as the government pays large sums in interests, it must raise more revenue from taxes or borrow more to close the gap. A government that borrows to pay interest on its outstanding debt dig itself deeper into more debt and this process can push the state into a situation where lenders begin to question its ability to repay.

Therefore, it came as no surprise when on October 17th 2013, Fitch downgraded Ghana's credit rating warning lenders that Ghana's "policy credibility has been significantly weakened" because of the size of our deficit and the rising cost of servicing the government's domestic debt.

The budget deficit grew from 4% in 2011 to 11.8% at the end of 2012, almost twice what was aimed at. Plans to reduce the deficit to 6% by 2015 with a goal of bringing it down to 9% in 2013 has thus failed beyond measure. Meanwhile, Ghana's debt currently stands at about 50% of GDP. Rising inflation is rearing its ugly head and the Ghana Cedi has been struggling against the major currencies. Projected GDP growth has been scaled down to 7% in 2014.

We desperately need a development strategy based on fiscal prudence and improvements in productivity; otherwise we risk falling into a growth trap like other countries that were once growing very fast but stopped growing or suffered a reversal of fortunes when their fiscal evils eventually caught up to them. A word to the wise is enough.