This quarter, the national budget, and macroeconomic management generally, haven’t been for IMANI the priorities they were in the early half of 2009. Energy policy and the NHIS, and how these are affected by the subsidy regime, have occupied the bulk of our attention.
But now that the budget is approaching, it seems important that we make some input, however limited, in those areas where we believe more than a little laxity on the part of our Finance Tsars could pose serious problems for the economy.
This brief comment is divided into two broad sections: methodological concerns and policy concerns. Our issues with the methodology used in gathering economic data about the state of the economy by the Ministry of Finance and its Agencies, and the framework within which said data is interpreted, touch on the very design of the budget as a guide to policy making. Our policy concerns, on the other hand, are much more narrowly
focused on specific areas of our national life that have systemic importance for economic growth and poverty elimination.
Even a cursory look at the budgets of recent times reveal a strong limitation in the ability of state researchers to collect, analyse, and deploy critical data on Ghana’s external trade in services and its participation in the flows of capital around the world for purposes of investment. There is a preponderant emphasis on the trade in tangible goods.
Yet, this is a country where, increasingly, the trade in intangibles has serious bottom-line effects on the build-up and dissipation of wealth.
Ghanaians are seeking medical care abroad in their numbers, and sponsoring their wards and protégés to schools overseas in droves. Financial Analysts, Real Estate Agents, Legal Advocates, and consultants of every kind are paid overseas for work carried out in this country on behalf of both local and international clients. Ghanaian investment houses and private equity interests are growing ever more active in the sub-region and beyond. The upper-middle class nowadays use returns on savings abroad to finance local investments, while depositing proceeds from capital gains in risk-free instruments elsewhere.
In a major recent policy statement, no mean personage than the Minister of Finance himself blamed the liberalisation of the Capital Account for the weakness in the national currency. The Capital Account refers to the aggregate (net) effect of foreign direct investment and movements in the local portfolio of securities (shares and bonds) due to overseas participation in our capital markets. Every time a Ghanaian asset is sold to private investors or a Ghanaian investor buys into a foreign asset, movements are registered in the capital account.
The comments of the Finance Minister and recent controversies about international mergers and acquisitions touching our shores indicate how important these exchanges of intangibles have become. Yet, in the notes to the budget, one rarely gets the impression that the managers of the economy are paying very significant attention to innovation in the ways data about such movements can be better captured and deployed to policy use.
Much of the stabilisation that has occurred on the current account front owes to the unprecedented decline in the value of oil imports over the past year. At least 60% of the improvement in the balance situation is due to the nearly 70% fall in the value of petroleum and energy imports in the period under review.
While the oil import bill has been rising steadily since this summer, due to increased speculator activity and a pick-up in global trade, the price outlook for the commodity appears stable over the medium term.
The issue is therefore less to do with deteriorating energy trade terms as it is to do with a steady erosion of flexibility in macroeconomic decision making. The fiscal balancing process is now a tightrope act, in which Government of Ghana, going forward, can scarcely rely on the reduction of the import bill and the highly favourable prices being enjoyed by Ghana’s principal export commodities, even as it responds to potential wage overruns in the medium-term on the deficit front. Revenue stabilizers via the taxation route, in an era where hiring freezes and government’s slow response to supplier arrears are eating into the revenue generation stock, are unlikely to contribute much to the cure for budgetary instability. Such an analysis is more credible when performed with “divestiture stagnation” in mind. Simply put, there are few politically palatable “national asset sale” prospects in view.
Indeed, adequate accommodation of inflation tracking promptly raises concerns about revenue performance over the past year. The 2009 supplementary budget, covering developments in the first half of this year, recorded total government receipts for the period under review at a level only 4.3% higher than the outturn for 2008, suggesting negative real growth in revenue on a year-on-year basis.
There is really no compelling reason to believe that revenue performance will improve over the coming horizon, especially in the face of escalating wage demands and the plateauing of primary export earnings. Notwithstanding the recent decline in the domestic financing of the deficit, it is unlikely that the pace of reduction will maintain the recent gradient. Government of Ghana has tended to be optimistic about donor inflows in recent times, and budgetary projections have tended to align with these expectations. Our view is that the growth in external resourcing of the expenditure envelope has already peaked, and, if the shortfall in external loan disbursements in the first half of the year is anything to go by, may actually begin to lag projections at an even more pronounced pace.
All this gives cause to doubt the rosy picture of inflation being painted in some quarters. We will be surprised if the 18% inflation floor is positively breached by year end, though of course the issue is also one of accurate measurement. There is no doubt that the inflation basket is somewhat improperly stocked. Only recently has serious attempts been made to better and fully reflect the most dynamic trends in modern Ghanaian living, in such areas as, for instance, telecommunications and recreation. To cite but one feeble example, the decoupling of the rate of increase in taxi and minibus fares in recent months has occurred in a manner in which the percentage rise in the former has been several multiples of the latter. The effect of that decoupling is the deepening of the importance of greater sensitivity in the measurement of the various components of the broad category of “transport and communications”. Sufficient sensitivity in measurement should provide, in keeping with the preceding analysis, additional evidence to justify an anticipation of higher inflation rates owing to stepped-up demand as the private sector slowly recovers from the impact of the austerity regime through reallocation and new market development.
Among the most serious risks to economic growth and fiscal stability are a number that, collectively, are best described as “quasi-fiscal”. The National Health Insurance Scheme continues to pile up huge and, some would say, reckless arrears. Our wobbly state-owned enterprise sector, particularly the energy utilities, has become a blackhole for precious hard currency. Serious and comprehensive restructuring of these moribund entities could add substantially to the national debt stock, and may even worsen our external debt servicing obligations. Still, such an outcome would be the lesser of two evils. Short-term, ad hoc, and patch and stitch approaches would result in the even more pernicious situation of domestic debt accumulation, a surge in real interest rates, corrosive inflation, a considerable drawdown in gross international reserves, national currency depreciation, and a persistent deterioration in the quality of life of Ghanaians.
Like most independent observers of the current economic situation, we are generally confident of the present economic management team’s capacity to take the bold decisions that will reposition the economy on a path to vigorous growth in order to deliver positive improvements in the standards of living of the general populace. It is precisely because of that confidence that we have decided to focus on potential risks to policy delivery as our contribution to the effort of crushing any sense of complacency on the part of those tasked with the management of our economic affairs.