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What does fiscal consolidation mean?

A couple of weeks ago, an International Monetary Fund (IMF) mission initiated discussions with Ghanaian officials on a possible programme of economic reforms that could be supported by the much dreaded Bretton Woods institution.

After the meeting, it was concluded that Ghana continues to face significant domestic and external vulnerabilities on the back of a large fiscal deficit, a slowdown in economic growth and rising inflation. 

According to the mission, among other things, these vulnerabilities are putting Ghana’s medium-term prospects at risk. It further estimated growth to decelerate to 4 ½ per cent in 2014, from 7.1 per cent in 2013, and inflation to reach an average of around 15 per cent for the year. 

The fiscal deficit is expected to remain elevated at around 9 ¾ per cent of GDP, driven by weak revenue performance, a large wage bill and substantially rising cost of debt service. 

Consequently, it said a more ambitious and front-loaded fiscal consolidation was needed to help place public debt on a sustainable path, and to allow monetary policy to be more effective in bringing down inflation, including by strictly limiting budget deficit financing by the Bank of Ghana. 

 

History of the Ghana/IMF

According to economic historians, Ghana’s interaction with the IMF and the World Bank dates back to the late 1960s when the National Liberation Council (NLC) toppled Dr Kwame Nkrumah. The NLC became pro-IMF and revised Dr Nkrumah’s state-oriented policies. In the 1970s, intense resistance from domestic social forces compelled successive leaders to rescind their decisions to implement rigorous neo-liberal economic reforms. 

Between 1983 and1992, however, the military government of the PNDC turned around and accepted the Structural Adjustment Programme (SAP). SAP involves both economic and political dimensions. They both contain specific sets of prescriptions linked to the conditional loans of the IMF and the World Bank. The economic dimension involves such market-oriented policies as trade liberalisation, privatisation, and fiscal discipline.

Ever since, government after government have resorted to the IMF for bailout after the economy has been mismanaged. Every recovery made to lead the country on the path of growth has been derailed on grounds of political expediency.

 

IMF on fiscal consolidation

The IMF asked for a more ambitious and front-loaded fiscal consolidation to help place public debt on a sustainable path. 

According to the OECD, fiscal consolidation is a policy aimed at reducing government deficits and debt accumulation.

Fiscal consolidation is important to any type of government fiscal policy that focuses on the elimination of debt. In order for the policy to function properly, it must consider the total cost of essential expenses and identify ways to generate as much benefit from those purchases as possible. This often means creating procedures that help to eliminate waste, effectively increasing the efficiency of the consumption of the goods and services purchased. 

Unfortunately, in the case of Ghana, this has never happened since the 1990s because successive government have run huge deficits (See graph 1), a situation which makes people wonder whether the managers of the economy really understand what the term ‘fiscal consolidation’ is really about. 

According to the Ministry of Finance website, the overall objective of the government debt management policy is to meet the central government’s financing requirement at minimal borrowing costs with a prudent degree of risk. It also aims at facilitating the government’s access to the financial market, as well as supporting development of a well-functioning domestic financial market.

 

Yearly debt stock 

According to information on the Ministry of Finance Website, Ghana’s total public debt stock which stood at US$9,303.7 million increased steadily to US$22,737 million as of the end of August, 2013. Out of this, total external debt amounted to USD10,167 million, (i.e. 44.72 per cent) and domestic debt was USD12,569.83 million, representing 55.28 per cent of the debt stock.

As a percentage of GDP, total debt stood at 36.9 per cent as of the end of December 2009, up from 32.3 per cent on December 31, 2008. 

This increased to 49.25 per cent of GDP by the end of December 2012. However, in January 2013, there was a slight reduction in this ratio to 42.3 per cent. Thereafter, there has been a slight increase to 49.44 per cent in August 2013.

According to the Monetary Policy Report for September 2014, the stock of public sector debt as of the end of June was 55.4 per cent of GDP, marginally lower than the 55.5 per cent observed at the end of December 2013. Of the total debt stock, domestic debt constituted 43.9 per cent while external debt was 56.1 per cent. 

 

Debt sustainability

Many economists including the country’s donor partners have consistently raised issues about the level of the country’s public debt stock, warning that it is likely to throw the economy out of gear and derail the gains made in the past.

At a gathering in Accra under the auspices of Standard Chartered Bank, Ghana last week for instance, Dr Charles Mensah of the Institute of Economy Affairs (IEA) wondered why since 1990, the country has constantly been in debt while the macroeconomic conditions continue to worsen. To him, there was the need for the government, irrespective of which political party is in power, to take pragmatic steps to reverse the trend.

The general public have also waded into the debate, wondering the whereabouts of  the large amount of monies borrowed by the government both internally and externally.

Although the government continues to explain where the monies are going, it is not yet evident to the masses what the realities are and that is an issue that requires urgent and much more serious attention.

 

Conclusion

There is a saying in Ghanaian parlance that “You cut your coat according to the size of your cloth”. This saying is so common that the government needs to take seriously to reserve the continues rise in the public debt.

In the previous issue of the GRAPHIC BUSINESS, it was reported that GH¢26 billion has been borrowed by the government internally alone through Treasury Bills in the first nine months of the year.

Much as the managers of the economy will say that the rationale was to mop up excess liquidity and settle maturing debts, it is important for them to know the impact of that on industry and the growth of SMEs.

Today it is obvious that the banks are making more money because almost all of them tend to invest heavily in T-Bills instead of extending loans to grow businesses in the country.

Considering the implications of the excessive borrowing of the government on the economy and the image of the country, there is the need for the managers of the economy to go back to the rudiments of economics to better understand what the meaning of fiscal consolidation is. This will help them avoid the temptation of borrowing limitlessly to bring untold hardships to the people.GB

 

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