RE: The Economy Is On An Unsustainable Path

Wed, 27 Feb 2013 Source: Yaw III, Nana

....With The Highest Budget Deficit In Ghana’s History.

Intellectual dishonesty and factual misrepresentation that comes from a half-literate politician may be acceptable in modern society. But when it comes from an economist wielding his PhD then one is bound to ask if such a person writes thinking of his stomach, or putting his parochial interests in the forefront of national discussion. Dr. Mahamudu Bawumia’s article on Ghanaweb “The Economy Is On An Unsustainable Path” published on February 19, 2013, coming from a former deputy governor of no less an institution as the Bank of Ghana (BoG), displays a total disregard for the basic rules of objectivity, naivety of the activities of the BoG, and ignorance of the economic forces that went into play during the year whose economic data he chose to use as a basis for his article. The quoted article started thus:

“The data coming in on Ghana’s economic performance in 2012 indicates quite simply that public finances are out of control and the economy is in trouble. At the end of 2012, Ghana’s budget deficit was a whopping GH¢8.7 billion, amounting to 12.1% of GDP using the rebased GDP numbers (or some 20% of GDP in terms of the old GDP series). This is the highest recorded budget deficit in Ghana’s history.”

The source of this data is the BoG Monetary Policy Committee (MPC) press release of February 2013. Dr. Bawumia chose paragraph 18, 21 and 33 (all quoted below) of this release and decided to write on the direction of the economy without bothering to tell readers the full causes of, and/or possible solutions to, the highlighted problem. Below are some excerpts of the MPC release: .............................................. “18. These developments in the fiscal operations resulted in a deficit of GH¢8.7 billion (12.1% of GDP), against a target of GH¢4.7 billion (6.7% of GDP). 19. The higher than budgeted fiscal deficit is explained mainly by: - Shortfall in corporate income taxes – GH¢708.2 million (1.0% of GDP); - Excess payments in respect of the SSSS – GH¢1.9 billion (2.7% of GDP); - Higher interest cost – GH¢245 million (0.3% of GDP); and - Higher utility and fuel subsidies – GH¢339 million (0.5% of GDP). 20. The deficit was financed mainly from domestic sources. Net domestic financing accounted for GH¢7.1 billion (of which BOG financing was 31%) while foreign financing was GH¢1.6 billion. 21. The stock of total public debt stood at GH¢33.5 billion (46.7% of GDP) in 2012, compared with GH¢24.0 billion (42.6% of GDP) in 2011. The stock of domestic debt was GH¢18.5 billion in 2012 compared with GH¢11.8 billion in 2011, while the external debt amounted to US$8.0 billion, compared with US$7.8 billion during the corresponding periods. 30. Total merchandise exports amounted to US$13.5 billion in 2012, recording a growth of 5.7 percent. .. ... ... Total merchandise imports totalled US$17.7 billion in 2012, an increase of 12.1 percent over 2011. .. .. .. These developments resulted in a trade deficit of US$4.2 billion in 2012, compared with US$3.1 billion in 2011. 31. The current account deficit was estimated at US$4.9 billion in 2012 compared to US$3.5 billion in 2011 driven mainly by a deterioration in the trade balance. 33. The overall balance of payments therefore recorded a deficit of US$1.2 billion in 2012 reversing the surplus of US$546.5 million in 2011.” ...............................................................

The Committee “noted that the provisional end year fiscal numbers present the economy with a major challenge going forward. The budget outturn clearly showed that there would be the need for significant fiscal consolidation in 2013. To achieve this, it would be necessary to address the pressures related to wages and salary settlements, utility and fuel subsidies and outstanding payments and commitments.”

I cross-checked data on Ghana’s economic performance over the years, to confirm the assertion by Bawumia that the 2012 budget deficit was the highest in Ghana’s history, and found that the mid-year revision of the 2009 budget by the Mills administration pegged the 2008 budget deficit at 24.2% (after debts of 1.7 billion cedis were included). In 2008, the projected budget deficit by the Kuffuor government (which Bawumia proudly quotes) was 4.7% of GDP. Using this to compute the “misfired” deficit target gives a 516% increase on the planned deficit by the Kuffuor administration. The 2012 deficit was 181% off target whilst the initial 2008 deficit of 11.5 % (which Bawumia conveniently opted for) was 245% off target. Whilst not holding brief for the current deficit, what was Bawumia’s reaction to such dire news in 2008/9, when in part he was a deputy governor of the BoG, and later the running mate of the party which governed.

In any case, www.tradingeconomics.com/ghana/government-budget gives a picture of Ghana’s Budget deficit to GDP ratio from 2004 to 2012. The breakdown is as follows: 2004 – 0.4%; 2005 – 2.7%; 2006 – 4.2%; 2007 – 8.1%; 2008 – 24.2%; 2009 – 9.5%; 2010 – 7.5%; 2011 – 5%; 2012 – 12.1%.

Similarly, www.indexmundi.com/g/g.aspx?c=gh&v=143 gives data on Ghana’s public debt to GDP ratio from 2005 to 2011. These are: 2004 – na; 2005 – 75.9%; 2006 – 38.6%; 2007 – 58.5%; 2008 – 62.3%; 2009 – 55.2%; 2010 – 59.9%; 2011 – 36.2%; 2012 – 46.7%*.

*. Provisional figure I supplied from the MPC report.

From the given data, the worst budget deficit situation occurred in 2008, and the worst debt to GDP ratio situation recorded over the period was in 2005. In fact only an economist with a desire to cause mischief or confusion in the minds of readers will resort to the use the absolute (nominal) public debt figures to decry a debt situation in a country when the best tool is to use the debt to GDP ratio to explain the national debt situation.

Now, if Dr. Bawumia knew of the existence of data and reports coming from the BoG this February, I’m sure he should have had no problems in getting further information and data from the same source that talks about the sustainability of the economy in post HIPC/MDRI Ghana. He was quick to make references to the economic situation of Ghana in 2008, but failed to recall that from the same BoG, where he was then working, several research studies and reports were published that discussed the path to debt-sustainability in the economy in post HIPC/MDRI Ghana. Some of these reports are: “Fiscal Sustainability in Ghana in the Post-HIPC (MDRI) Period” published in May 2006: “A Short Note on Public Debt Sustainability in Ghana” also published in the same year; and finally, “Bank of Ghana Annual Report 2008,” which was published to cover activities of the bank when Dr. Bawumia was a deputy Governor of that bank, and member of several committees including the MPC.

In these, the researchers, worried about financing the Ghanaian economy in a post-HIPC/MDRI period, and knowing the inevitability of using borrowing as the major tool of financing budgets and developmental projects in the country, used several borrowing and interest rate scenarios to determine the sustainability of borrowing in the economy. The idea was to determine the ideal debt to GDP ratio that will not create the need for a return to the pre-HIPC Ghana. Concluding, one of these paper states among others, that “The Bank and the Fund [IMF] have analyzed the external debt sustainability matters using the net present value of the country’s external debt at its steady state level relative to GDP. Generally, it is considered that a ratio of the net present value of external debt-to-GDP of approximately 50 per cent is sustainable over the long run.”

According to the MPC report that Bawumia used to write his article “The stock of total public debt stood at GH¢33.5 billion (46.7% of GDP) in 2012, compared with GH¢24.0 billion (42.6% of GDP) in 2011.” Whilst this is not a debt burden to be proud of, the quoted data falls within the limits of debt sustainability determined by his research team in 2008. It is also worthy to note that the government has taken note of the problem and has already reacted by tackling first the prices of petroleum products, to cut expenditure. Other steps include the call of the President for contention in wage demands and a promise to revise the salary system of the nation. What is Bawumia suggestion to cut down costs?

Dr. Bawumia cannot justify the budget deficit of 2008 (11.5% of GDP in the report, before revision by the government) by saying Ghana was not an oil producer in 2008, and that the global economy was then in crisis, a situation he finds different in 2012, and as such expects the economy to be managed better by meeting deficit targets when in the same article he faults the government for having factored-in tax revenues from oil companies. By the way, what was Ghana receiving via the MDRI initiative in 2008 as compared to 2012?

Before proceeding, I recommend Dr. Bawumia to join the real world and update his database on real-time economic outlooks around the globe. For his information, in spite of the great efforts and heavy sums of monies that have been pumped into the world’s advanced economies (e.g. the ‘fiscal cliff” deal in the US early this year), the “crash” that halted global economic advancement, especially in the developed world, remains unrepaired. Outlook in Europe is bleak, despite initial hopes for recovery in the year 2013. I invite him to take a look at Britain, Germany, France, and the US (where he schooled and taught) and tell us what the global economic outlook was in 2012, and is in 2013.

The pragmatic reality of the continued stagnation in the economies of the developed world is that imports from the third world (including Ghana) have reduced drastically, leading to a drop in exports for us in Ghana – with the exception of minerals (gold and crude oil). People in the advanced nations have cut down consumption of exotic products (such as processed African foods, traditional art and craft, etc., which are consumed mostly by our kinsmen in the diasporas – most of whom are jobless to-day – and nationals who may acquire these items as exotic or ornamental souvenirs. I guess it is needless to say here that a reduction of export has a direct effect on internal revenue generation. Furthermore economic stagnation in the advanced world has led to a drastic reduction in remittances by our folks in the Diasporas, a situation which directly affects Ghana’s foreign exchange reserves, balance of payments, and other revenues and taxes that work to influence the direction of a budget.

Dr. Bawumia went on to accuse government of having to use subsidy removal on petroleum products to correct the mismanagement of the economy. This is unfortunate, because in 2008 the same bank for which he worked as a deputy governor, practically advised government in the same direction. The problem with this economist-turned-politician is that he has spent his time studying economic principles, theories, and models of the West and spared no time to look at the peculiar situation of Ghana and for that matter sub-Saharan Africa in order to adapt whatever he had learnt and taught in the West to our situation. What we need in this country are rural and village economists who will lead our rural folk out of poverty, subsistence, ignorance and disease, to self-sufficiency. Its only when we achieve this that macro-economists will make some sense in this country.

As usual with many Ghanaian high-end professionals Dr. Bawumia failed to provide or suggest any solutions to the unsustainable economic path being taken by the current government, and failed to provide any credible alternatives to financing Ghana’s developmental agenda. He wrote to sound a ‘warning’ and behaved as if he were still on a campaign bandwagon, where condemnations and attacks of the adversary without presentation of credible alternatives were the requisites for winning a handful of votes.

I will like him to reconcile his assertion of no corporate tax revenues from oil companies in 2012 with his party’s claim of financing the Free SHS in Ghana with proceeds from oil. In doing this he should not forget the fact that the GH¢ 78 million projected as the cost for the first year of Free SHS implementation was a lie, and ploy, to hoodwink Ghanaians into thinking the Free SHS dream was an easy to handle affair. As a matter of fact, the initial cost of the programme would not have been less than GH¢ 1.4 billion. How an economist gulped and preached this misinformation for months to Ghanaians is a thing I cannot understand. But then this is Ghana, and such are some of our expert economists!

We can move forward and cut costs. Part of what needs to be tackled by all and sundry is our thirst for imported products. It surprises me to see so many truckloads of imported rice being carted from the Tema port on daily basis. They come from the United States and Asia. We patronise them in lieu of the better quality rice grown around Afife in the Volta Region, and Northern Ghana. For some inexplicable reason we have developed an insatiable taste for foreign imported rice which has no single NUTRITIONAL advantage over the home-grown one. We spend hard-earned foreign exchange to import rice, destroying our trade balance and driving our rice farmers into bankruptcy and poverty. Our economists, politicians and policy makers look on shamelessly, and come out to tell us stories of macro-economic crap that will never lead our country anywhere.

Common sense should move us into putting restrictions to the importation of rice because imported rice is a negative input in Ghana’s economic development. Similar issues could be raised on the influx of other products such as apples (most of which are not worth marketing in their countries of origin), potatoes, simple plastic toys that can be produced here, etc. These imports are useless and a complete waste of resources that ought to have worked to give Ghana better balance of payments! In fact we have great, quality and organically grown rice, bananas, mangoes, avocado pears, pineapples, and countless numbers of fruits in this country, yet we go out to import useless foodstuffs such as “perfumed-rice” to show off our class in society. Then at the end of the fiscal year, we turn round to blame “government” for mismanaging the economy. We live in a country where maize can be cultivated all year round, and yet we use hard-earned foreign currency to import maize to ‘supplement’ the shortfall in production. What are we up to?

I will be back soon. In the mean time, Long Live Ghana!

Nana Yaw III (nanayawiiigh@gmail.com).

Columnist: Yaw III, Nana