“You can engage in all the propaganda you want but if the fundamentals are weak, the exchange rate will expose you.” Your famous assertion that earned you many accolades and was seen as economic truth at the time. Lest I forget, you are in charge of the economic management team and none of these difficulties could be your fault; except to say you are producing what you were thought in school and that’s basically the famous John Maynard Keynes theory.
Keynesian economics is a macroeconomic economic theory of total spending in the economy and its effects on output, employment, and inflation.
Keynesian theory basically advocates an increase government expenditure to stimulate demand but what you would have come to realized is the fact that, whiles government expenditure and deficit increased the currency devalues. At this point it is about political constraint and not how well you comprehend economics or figures for that matter.
We need to be told the value of the Ghanaian Cedi in simple language devoid of propaganda. And I trust we are in agreement since, I have heard Professors from our leading University’s in Ghana making some assertions that I found strange; to the effect that inflation is stable and single digit coupled with reduce policy rate, thus there is somewhat improvement in the economy.
What the Ghanaian will want to know is (a) what the current Cedi is worth in 2017 and (b) what the past Cedi is worth in 2021. Assuming the value to be determined is GH¢100, the answer for (a) is GH¢67.85, and (b) is 147.38; using a CPI for January 2017: 190.4 and June 2021: 129.19. What this simply means is, the Ghanaian is worse-off since GHS100 today is worth only GH¢67.85 or would afford goods worth GH¢67.85 in 2017.
One will expect that today’s Ghanaian Cedi appreciates in value, if we claim to have improve our macroeconomics indicators; then, same will be true of our purchasing power. Our Ghanaian Cedi today with nominal value of GHS100 remains same over time but what changes is its purchasing power and as such its real value and not the exchange rate. To ascertain the purchasing power of money, that can be achieved using the prices of several goods (price basket), which is economically expressed in the Consumer Price Index and not a single commodity (exchange rate).
Currency depreciation is in two folds, the first is inflation, which is the loss of value of that currency over a period of time and the second, is the loss of value of a currency against another currency. Therefore, to rely only on the second to claim weak fundamental of an economy is to engage in propaganda.
I will pardon anyone who engages in such propaganda since all the economic books in our universities does not have any topic on Time Preference. This is the ratio of how individuals or a nation value the present gratification compared to future improvement of capital to develop new orientation that will enlarge production.
To further expatiate on the above, a government decides to provide jobs to the youth to cure the unemployment challenges facing the youth, sunk billions of Ghana Cedi for a program that is unsustainable over the long-term; because of its high time preference. And another country choosing to reduce unemployment by reducing tax rate, providing security to its people and managing its monetary inflation better to attract more capital and incentivizing production that in turn will solve the its unemployment challenges; sustainable over the long-term.
We have failed to lower our time preference as a nation and have continuously engage in activities that guarantees immediate gratification rather than those activities that are risky, takes longer time to produce but, it outputs are more and superior. As a nation our decision-making process must always consider time preference and always make a conscious effort to lower our time preference.
A government of a nation that hands over more resources, sound money and superior structures of production to the next government is a civilized nation. I respectfully ask the current administration; would you call us civilized if you should handover the reins of government today?
On the political campaign platform, I know your answer will be YES but let’s exorcise the demon of cheap political-talk by going into the details and only at that point you may say YES or NO. I trust doing this with your own figures which, will be more acceptable to you than to rely on figure you had claimed were produced out of propaganda.
Before we proceed, we must erect some parameters to ensure we are all on the same plane of existence and understanding. Readers must equally grasp what I am about to analyse since most of us like my good-self have not had the opportunity to be thought economics in any classroom.
- Measuring our debt against GDP should not be tolerated rather what should be our focus is our ability to generate enough revenue to pay and service our debt,
- Debt servicing are done not in bullet payments but rather amortised over a period of time
- The figure to be used were all sourced from the Ministry of Finance website under fiscal data and the Bank of Ghana website.
Permit me to also quote paragraph three of the IMF’s Seventh and Eight Review Under the Extended Credit Facility Arrangement and Request for Waivers dated March 7, 2019
“Challenges remain though. The elevated debt burden and fiscal risks from the financial sector and energy sector limit policy space. The large loss of foreign exchange reserves in 2018 is a pointed reminder of Ghana’s exposure to shifting investors’ sentiments and external shocks, amplified by the government’s still elevated financial needs. Ghana’s legacy of political budget cycles will test the authorities’ commitments to macroeconomic discipline and reform in 2020 – a challenge the authorities’ intent to face head on.”
The issues raised in the above statement pre-dates Covid-19 and we shall delve into the integrities of the above statement made by the report. It is sad that the national record breaker of backsliding is calling others backsliders.
In 2016, our total revenue stood at GH¢33.68bn; this becomes our benchmark for ascertaining performance of revenue generation in the subsequent years under a different government that promised to do better. In 2017, 2018, 2019 and 2020 total revenue achieve are GH¢41.50bn, GH¢47.64bn, GH¢53.38bn and GH¢55.13bn respectively.
The growth in our total revenue from 2016 to 2020 is 58%, more than half of 2016 revenue have been added to our benchmark revenue in relation to 2020. The revenue in 2020 can service our interest expense 2times; whiles in 2016, our revenue is able to pay 3times our interest expense. Our position in 2016 is better and just like the lazy economic excuse of Covid-19 being the sole reason for government underperformance, lets fall on 2019 which, was without Covid. In 2019, total revenue is 2.7times the interest expense which is still not up 2016. We cannot therefore continue to blame Covid-19 for our indiscipline and under-performance.
In the same trajectory tax revenues ratio to interest expense and capital financing in 2016 was 1.83times compared to 2020 ratio of 1.5times of tax revenue. Again, overall budget deficit in 2016 as a ratio to tax revenue in 2016 is 1.96times whiles in 2020 its 0.99times.
What shall we call such a position when interest payments consume 55.34% of tax revenue? That is where we find ourselves today, knowing how the finance minister described the 2016 debt position in the 2017 Budget. If you have forgotten his description of the 2016 debt position then below were his comments; please help me find a better description to his debt position in 2020.
“Mr. Speaker, it can be recalled that one of the economic situations that our government inherited was a ballooning debt stock which placed an increasing burden on the budget. Indeed, Ghana’s debt-to-GDP ratio had increased from 32 percent at the end of 2008 to 73 percent at the end of 2016 (an increase from GH¢9,746.86 million to GH¢122,263.01 million). This situation resulted in an increasing interest burden, with interest payments alone consuming 45 percent of tax revenue and 6.8 percent of GDP in 2016.” 2017 Budget, page 29 – paragraph 111.
With 242 percent increase in overall budget deficit from 2016 to 2020; a clear case of a government seeking political gratification at the expense of fiscal stability. I would not be surprised if the current administration bequeaths to the next government the worse economy ever in Ghanaian history. This is so because the 2021 budget is a clear indication of government unrepented self-gratification that supersedes its self-restraint in the management of our economy.
What is critical and scary is where this government is further driving this nation to since the above analysis are all historical in nature. We therefore need to do some projections based on the 2021 Budget presented and what has been achieved and what is probable to achieve.
Government missed the target of raising GH¢32.36bn with regards to Q1 and Q2 by 13% resulting in revenue shortfall of GH¢4.06bn but when it comes to expenditure government is only able to manage a 7% reduction from the targeted GH¢53.06bn to settle at GH¢49.61bn. This resulted in a deviation from the program overall budget deficit of 70% of total revenue to achieve a provisional overall budget deficit of 79% of total revenue.
The trend of government indiscipline has not change; if for anything it has been intensified. If I may ask, what is competent about your mismanagement of the economy and what is incompetent about what was bequeathed to you in 2016? Again, to claim that your predecessors had no Covid yet they couldn’t manage the debt levels as you have. Please below is a statement from the 2021 Annual Debt Report, page12 – paragraph 50.
“The increase in the external debt stock by GH¢29,049.1 million (US$4,366.4 million) from the 2019 stock of GH¢112,747.7 million was primarily due to additional disbursements of loans, the US$3,000.0 million Eurobond issuance in February 2020, as well as exchange rate fluctuations during the year under review. The much higher rise of GH¢44,352.7 million (US$7,078.8 million) in the domestic debt stock in 2020 was mainly due to net issuances of domestic instruments to pay down the cost incurred from the crystallization of contingent liabilities in the energy sector and the financial sector bailout.”
We should have it in mind that government high debt position will require higher taxes and a call on the central bank to borrow money for spending which, will lead to a situation where the Central Bank will have to increase its money supply; further devaluing the Ghanaian Cedi. This leads to the next area of focus which, most people will not naturally look into.
An increase in the money supply means low interest rate, disincentivizing or discouraging savings and investment whiles encouraging debt acquisition. When debt grows, savings will diminish and the possibility of capital accumulation to take on sophisticated production methods that will enlarge our production base and improve the standard of living of our youth is taking-way from us by our own deeds.
The role and performance of the Central Bank must be interrogated to ascertain whether or not their actions or inaction have also contributed immensely to the mess we find ourselves in today. The main function of the Central Bank is to formulate and implement monetary policy; promote by monetary measure the stabilization of the currency within and outside Ghana, and to institute measures which are likely to have favourable effect on the balance of payments, the state of public finances and general development of the national economy. These are but few of the Central Bank responsibility.
Managing the currency and its supply has many repercussions and far-reaching consequences, if not done right. Government money has been forced down our throat, however inferior (unsound money) since its price or value is determine by the politician and not free-market; coupled with the fact that its production is again in the hands of that same politician. When the stock-to-flow ratio of money is considerably increase to finance government spending its effect is devaluation of money and to check the problem caused by government, policymakers will attempt to maintain the value of money by reducing policy-rate to encourage borrowing thereby disincentivizing savings.
In Ghana, savings are discouraged with interest on savings being significantly low and the value of the currency depreciates faster over time. And no matter how prudent you are, you will witness huge savings loss in value, pay more in taxes to finance government debt and, political indiscipline which, promote spending rather than saving and capital accumulation needed to create new orientations that will enlarge production.
Therefore, the assertions made by Dr. Bawumia about the effect of debt mismanagement affecting exchange rate, growth rate, inflation and interest rate could be properly understood if he had further told us how those variable will react if well manage; but like a bad economic teacher, he failed to do that in front of his students.
To cure this lazy mischief born-out of premature economic ejaculation anytime he looked at his own failures, we must be prepared to look at the outputs and not the inputs. And I will do that by providing a cure in the next analysis with figures coming out of our Central Bank.
At the close of 2014 Monetary Policy Rate (MPR) was 21% and by the close of 2016 MPR was trending upward to 25.5%; whereas, in 2018 the MPR stood at 20% and has since trend downwards to 14.5% at the close of 2021. This is what is been referred to as your competence which, was not achieved by the previous government incompetence; but for a moment, these rates are decided by the Central Bank Monetary Policy Committee and not by free-market. These are monetary policy input; what were the output?
From the period 2014 to 2016 Broad Money (M2+) saw an increase of 54% from GH¢36.84bn to GH¢56.69bn. Savings and time deposit contribution to Broad money stood at 31% in 2014 climbing up from 28% in 2014. Whiles at the same periods Demand deposit of 28% of Broad money in 2016 had been maintained at the same 28% in 2016. Ghanaians had developed a low time preference in the periods 2014 to 2016 and where prepared to put their money in savings rather than spending which, does not encourage capital accumulation.
Now, same period under the present administration from 2018 to 2020 will give us an indication that Ghanaians have adopted a high time preference and beliefs it is proper not to save, but spend, to avoid the erosion of their savings due to quicker depreciation of the currency and high tax rate. In 2016 Broad money was increased by 58% from GH¢76.38bn to GH¢120.52%. Savings and time deposit was 33% of Broad money in 2018 trending down to 28% in 2020 – an indication of Ghanaians having high times preference and were not interested in savings and investment.
The figures do not support your assertions, let us be serious with our pronouncement if we are to find lasting solutions to our challenges. If you continue to do propaganda with your inputs, with time your outputs, will expose you.
By Michael Nii Yarboi Annan]]>