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Opinions of Saturday, 15 May 2021

Columnist: Kweku Kitson-Mills

Economic woes due to government policies – Ghana Economic Dialogue

The current economic hardships facing Ghanaians is as a result of government’s policy choices. Though some of the challenges facing the country could be attributed to systemic and structural deficiencies, government’s economic management leaves so much to be desired, especially as most of the policy options offer only short term and palliative solutions.

What is particularly worrying is that instead of concentrating energies on pooling resources and assembling the most competent and able hands to help find lasting solutions to the resorted to trading accusations and blaming predecessor regimes for the woes bedevilling the country.

The first and the most important personality is Dr. Mahamudu Bawumia, Vice-President of the country and Chairman of the Economic Management Team, who is always quick at apportioning blame to his predecessors “for ruining the economy.”

Dr. Bawumia came out recently to outline several reasons for which he thinks “the unbearable economic hardships facing the country are the doing of his predecessors.” This line of argument has become monotonous because it is pointless to continue blaming the economic woes on your predecessors almost five years after assuming the reins of government.

Interestingly, Mr. Ken Ofori Atta, Minister of Finance also while addressing the press on Sunday, May 9, 2021 attributed the country’s troubles to COVID-19. Much as there is no dispute that COVID-19 has negatively affected every economy in the world, competent managers are able to show the way with pragmatic, life changing choices that are able to alleviate the suffering of the people.

In this short piece, we provide a crisp prognosis of what we think is wrong, in terms of the policy choices as well as offer what can be done to turn the tide.

Role of government

A thorough analyses of the Ghanaian economy shows that the hardship in the country is as a result of poor macroeconomic management, policy slippages, poor political policy options at the top echelons of government, among many other factors.

There is abundant evidence on the deployment of ineffective economic tools, confused policies, wanton waste and anti-poor policies, which have ultimately ruined the fortunes of the country. Given the amounts of resources that have accrued to the country within the past four-and-a-half (4.5) years, the results should have been demonstrably better than what Ghanaians are currently witnessing.

The government is solely responsible to fix the country and we expect the government to point out practical measures needed to change the economic fortunes of the country and desist from political equalization and blame games.

Below are some of the unpopular and cataclysmic policies rolled out by the government, which have virtually brought the economy on its knees with the consequent untold hardships on Ghanaians:

High Risk of debt distress

The incessant borrowing by government, driven largely by consumption without setting up the right economic growth drivers has been a major source of worry with the country currently inching towards the potential to default on its debt obligations to external creditors.

The International Monetary Fund (IMF) projects Ghana’s debt to Gross Domestic Product (GDP) – the measure of the total value of goods and services produced in the country – ratio to reach 83.2% of GDP by 2022, 84.8% by 2023 and an alarming 86.8% of GDP by 2024.

As government’s appetite for borrowing is not anticipated to slow down any time soon, how is the government working on the sinking fund to retire the zero-coupon bonds issued in the first quarter of 2021, which are expected to mature and due for one bullet payment in 2025 with the accompanying yields?

It should be a major source of worry to every casual observer that the debt rollover risk could push the country into an imminent debt default mode sooner than later.

Again, there is no doubt that there is a correlation between financial crisis and economic crisis, hence what Ghanaians are experiencing are the symptoms of the financial crisis facing the country, which has translated into the biting economic hardships.

Ghana rendered low-income country

The government has resorted to comparing our debt burden ratio to countries, whose economic fundamentals are completely different from Ghana’s economic situation.

For example, Democratic Republic of Congo’s (DRC’S) debt to GDP in 2019 was 62% to GDP; however, Congo’s gross domestic savings to GDP was 61.4 % of GDP in the same year.

It is worth stating that the importance of gross domestic savings is its correlation to economic growth and the country’s ability to retire maturing debts.

Ghana’s gross national savings for the same period was 24.9% of GDP. This represents our national net savings. If there were to be a debt run on the country (should creditors demand their borrowed funds), how could we pay the liabilities as a country?

It is important for managers of the economy to avoid mixing apples with oranges. Being a developing country with a lower savings to GDP ratio obviously makes Ghana a low-income country with its unpleasant associated risks. There is no question about it and this blame must be placed squarely at the doorstep of government.

Poor monetary policies

It was never prudent for the Bank of Ghana (BoG) to invest GHS21 billion, the equivalent of 4.6% of national GDP in what has become popularly known as the “financial sector clean-up,” especially when funds of depositors were withheld for two (2) years with the negative multiplier effects on depositors and the economy at large.

The banking sector clean-up should have been handled in a better way as the policy has shown that Ghana is about the only country in the world with the same minimum capital requirement for all banks.

We submit that there are development banks, cooperative banks, merchant banks, etc., and the minimum capital requirements should have been tiered so that those banks which could not have met the GHS400 million minimum capital requirement could have been downgraded to second or third tier banks.

Such an approach would have minimized the job losses and the contagion effects the approach deployed by the central bank.

Inflation targeting outdated

It is worthy to note that temporary inflation in the economy is normal as growth drivers could push inflation upwards.

It is however not prudent to use inflation as a determinant of good economic management. If government’s spending could not trigger multiplier effects on the economy through its investment outlets, then there is something seriously wrong with the economic financial transmission mechanism.

We therefore find it hard to believe that the government continues to pat its back for maintaining lower inflation rates, which only ends up exposing the lack of failure of or underinvestment in areas that can spur economic growth.

Poor exchange rate valuation

It is not right for the government to continue priding itself for having maintained a steady exchange rate using indicative rates or the nominal rates by extracting contrasts between its performance and that of the previous government.

Real exchange rate, which is the measure of the Purchasing Power Parity (PPP) of the country should be used to assess the forex performance and not the indicative rate.

Ghana’s currency has depreciated over 70 percent against the major trading currencies in 2020. Apparently, the Ghanaian cedi is valued at 30 percent of the value of the major trading currencies.

We therefore call on the government to be truthful to the citizens about the real performance of the local currency and come out with the best possible solutions for redeeming the steep depreciation of the Cedi.

High taxes

While other countries are pursuing economic recovery using various quantitative easing instruments, the government of Ghana has resorted to contracting the general economy by introducing hostile and nuisance taxes (in their own words) to make the over-burdened citizens even poorer.

If the current incessant tax hikes are not reversed, Ghanaians should not expect an abatement in the biting economic hardships. The sufferings would exacerbate, and Ghanaians should expect more difficult times in the months and years ahead.