For sometime now, the government of Ghana and the National Union of Ghanaian Students (NUGS) have been locked in a statistical tug-of-war over how much the government actually owes as arrears to the Ghana Education Trust Fund (GETFund). The students put the amount in the region of 400 billion cedis; the government is sticking to something in the region of 200 billion cedis.
Problem is, they are both wrong. The correct amount, measured in 2003 prices to preserve its purchasing power, is just over one trillion cedis. Publicly available statistics make this abundantly clear.
The first Quarterly Bulletin of the Bank of Ghana in 2001 (p.19) reported the following contributions to the GETFund in 2000: C200 million in the second quarter; C1.0 billion in the third quarter; and C30.9 billion in the fourth quarter for a total contribution of C32.1 billion in 2000. The total VAT collections for those three quarters of 2000 were C1,096.9 billion. The C32.1 billion contribution to the GETFund, therefore, represented 2.9 percent of actual VAT collections for the three quarters of 2000 (there was no contribution reported for the first quarter of 2000).
The Bulletin’s statistics clearly contradict statements by various government officials that the first contributions to the GETFund could not have been made prior to June 2000, when the new VAT law supposedly came into force.
Although it has been widely reported (erroneously, it must be said) that 2.5 percent of VAT collections is what should be lodged in the GETFund, the actual amount, as the Ministry of Education recently acknowledged, should be 20 (twenty) percent. (As an aside, it should be noted that the original increase in the VAT rate from 10.0 percent to 12.5 percent represented a 25.0 (twenty-five) percent increase, and not 2.5 percent. A 2.5 percent increase would have given us a new VAT rate of 10.25 percent, which is clearly not the case).
In 2000, the GETFund should have received C219.4 billion from VAT collections, representing 20 percent of total collections. Government, however, proposed to put in C200 billion (or 18.2 percent of total VAT intake). The actual amount lodged in the fund, as noted above, turned out to be C32.1 billion, or 2.9 percent of total collections for those three quarters, leaving arrears of C187.3 billion in 2000.
In 2001 government projected annual VAT collections of C1,739.7 billion, but actually collected C1,964.1 billion, an overshoot of about 13.0 percent. Based on the forecasted collections, the GETFund’s 20 percent share should have been C347.9 billion. The government, however, proposed C358.3 billion, representing 20.6 percent of projected VAT collections. The actual contribution to the Fund in 2001, however, was C140 billion (7.1 percent of total actual collections, not the forecast), resulting in arrears of C207.9 billion).
The 2002 budget statement projected annual VAT collections of C2,207.7, but actual collections came in at C2,308.8 billion, an overshoot of about 4.6 percent. Based on the forecasted VAT intake, the GETFund’s 20.0 percent share should have been C441.5 billion, but the government proposed C329.2 billion (or 14.9 percent of total VAT intake). Actual contributions to the GETFund in 2002, however, were C164.6 billion (7.1 percent of total actual collections, not the forecast), creating arrears of C276.9 billion.
For 2003, the government has projected total VAT collections of C3,062.1 billion, C612.4 billion of which must go into the GETFund. The 2003 budget, however, proposed to lodge C489.7 billion (16.0 percent of projected collections) into the Fund, creating arrears of C122.7 billion.
Based on the foregoing, the cumulative arrears to the GETFund between 2000 and 2003 should be C794.9 billion. But that is before we have accounted for the effects of inflation; after all, one billion cedis in 2001, for instance, is considerably less in 2003 than it was two year ago in terms of the amount of goods and services it can purchase.
Measured in 2003 prices, therefore, the arrears for each of the four preceding years become the following: The arrears of C187.3 billion in year 2000 become C348.5 billion; the C207.9 billion for year 2001 become C291.1 billion; the C276.9 billion for year 2002 become C334.5 billion; while the C122.7 billion for year 2003 remains the same.
The cumulative inflation-adjusted arrears in 2003, therefore, becomes C1,096.9 billion (about C1.1 trillion). This means that if the government were to settle all of the arrears in 2003, for example, that is how much it would have to pay to ensure that a cedi in 2003 buys the same goods and services it would have bought in each of the preceding three years.
With the government having offered to settle the arrears over a five-year period, it would be financially prudent to make such adjustments in order to restore the purchasing power of those arrears. Assuming that the 5-year payment period is accepted by all parties involved, then in 2003, the government, in addition to paying 20 percent of all VAT collections into the GETFund, will have to pay C219.3 billion as the first installment. The size of subsequent installments will depend on the inflation rate in subsequent years. As long as the inflation rate is greater than zero (and there is no reason to believe it wouldn’t be), those future payments will also be bigger than C219.3, to account for the effects of inflation.
Such computations may seem to put the government at a financial disadvantage, but there are two reasons why that should not be so. Ethically and financially, it is the proper thing to do. There is no point in short-changing the fund now only for someone to come along five years later and point up the flawed computations, at which time the inflation-adjusted arrears would be even higher than it is now.
Secondly, the government too can insist that its debtors settle their obligations to it in inflation-adjusted terms. Indeed, that was precisely what the Transitional Team on the Economy recommended in 2001. A great deal of the government’s financial distress can be traced to the collection of its debts in nominal (non-inflation-adjusted) terms, a typical example being the Business Assistance Fund, which collapsed partly because most repayments had lost their purchasing power by the time they were made.
For sometime now, the government of Ghana and the National Union of Ghanaian Students (NUGS) have been locked in a statistical tug-of-war over how much the government actually owes as arrears to the Ghana Education Trust Fund (GETFund). The students put the amount in the region of 400 billion cedis; the government is sticking to something in the region of 200 billion cedis.
Problem is, they are both wrong. The correct amount, measured in 2003 prices to preserve its purchasing power, is just over one trillion cedis. Publicly available statistics make this abundantly clear.
The first Quarterly Bulletin of the Bank of Ghana in 2001 (p.19) reported the following contributions to the GETFund in 2000: C200 million in the second quarter; C1.0 billion in the third quarter; and C30.9 billion in the fourth quarter for a total contribution of C32.1 billion in 2000. The total VAT collections for those three quarters of 2000 were C1,096.9 billion. The C32.1 billion contribution to the GETFund, therefore, represented 2.9 percent of actual VAT collections for the three quarters of 2000 (there was no contribution reported for the first quarter of 2000).
The Bulletin’s statistics clearly contradict statements by various government officials that the first contributions to the GETFund could not have been made prior to June 2000, when the new VAT law supposedly came into force.
Although it has been widely reported (erroneously, it must be said) that 2.5 percent of VAT collections is what should be lodged in the GETFund, the actual amount, as the Ministry of Education recently acknowledged, should be 20 (twenty) percent. (As an aside, it should be noted that the original increase in the VAT rate from 10.0 percent to 12.5 percent represented a 25.0 (twenty-five) percent increase, and not 2.5 percent. A 2.5 percent increase would have given us a new VAT rate of 10.25 percent, which is clearly not the case).
In 2000, the GETFund should have received C219.4 billion from VAT collections, representing 20 percent of total collections. Government, however, proposed to put in C200 billion (or 18.2 percent of total VAT intake). The actual amount lodged in the fund, as noted above, turned out to be C32.1 billion, or 2.9 percent of total collections for those three quarters, leaving arrears of C187.3 billion in 2000.
In 2001 government projected annual VAT collections of C1,739.7 billion, but actually collected C1,964.1 billion, an overshoot of about 13.0 percent. Based on the forecasted collections, the GETFund’s 20 percent share should have been C347.9 billion. The government, however, proposed C358.3 billion, representing 20.6 percent of projected VAT collections. The actual contribution to the Fund in 2001, however, was C140 billion (7.1 percent of total actual collections, not the forecast), resulting in arrears of C207.9 billion).
The 2002 budget statement projected annual VAT collections of C2,207.7, but actual collections came in at C2,308.8 billion, an overshoot of about 4.6 percent. Based on the forecasted VAT intake, the GETFund’s 20.0 percent share should have been C441.5 billion, but the government proposed C329.2 billion (or 14.9 percent of total VAT intake). Actual contributions to the GETFund in 2002, however, were C164.6 billion (7.1 percent of total actual collections, not the forecast), creating arrears of C276.9 billion.
For 2003, the government has projected total VAT collections of C3,062.1 billion, C612.4 billion of which must go into the GETFund. The 2003 budget, however, proposed to lodge C489.7 billion (16.0 percent of projected collections) into the Fund, creating arrears of C122.7 billion.
Based on the foregoing, the cumulative arrears to the GETFund between 2000 and 2003 should be C794.9 billion. But that is before we have accounted for the effects of inflation; after all, one billion cedis in 2001, for instance, is considerably less in 2003 than it was two year ago in terms of the amount of goods and services it can purchase.
Measured in 2003 prices, therefore, the arrears for each of the four preceding years become the following: The arrears of C187.3 billion in year 2000 become C348.5 billion; the C207.9 billion for year 2001 become C291.1 billion; the C276.9 billion for year 2002 become C334.5 billion; while the C122.7 billion for year 2003 remains the same.
The cumulative inflation-adjusted arrears in 2003, therefore, becomes C1,096.9 billion (about C1.1 trillion). This means that if the government were to settle all of the arrears in 2003, for example, that is how much it would have to pay to ensure that a cedi in 2003 buys the same goods and services it would have bought in each of the preceding three years.
With the government having offered to settle the arrears over a five-year period, it would be financially prudent to make such adjustments in order to restore the purchasing power of those arrears. Assuming that the 5-year payment period is accepted by all parties involved, then in 2003, the government, in addition to paying 20 percent of all VAT collections into the GETFund, will have to pay C219.3 billion as the first installment. The size of subsequent installments will depend on the inflation rate in subsequent years. As long as the inflation rate is greater than zero (and there is no reason to believe it wouldn’t be), those future payments will also be bigger than C219.3, to account for the effects of inflation.
Such computations may seem to put the government at a financial disadvantage, but there are two reasons why that should not be so. Ethically and financially, it is the proper thing to do. There is no point in short-changing the fund now only for someone to come along five years later and point up the flawed computations, at which time the inflation-adjusted arrears would be even higher than it is now.
Secondly, the government too can insist that its debtors settle their obligations to it in inflation-adjusted terms. Indeed, that was precisely what the Transitional Team on the Economy recommended in 2001. A great deal of the government’s financial distress can be traced to the collection of its debts in nominal (non-inflation-adjusted) terms, a typical example being the Business Assistance Fund, which collapsed partly because most repayments had lost their purchasing power by the time they were made.
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