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Opinions of Friday, 27 July 2018

Columnist: Dr Nii Moi Thompson

The Bible, The Budget & Bob Marley: The high cost of economic vindictiveness in Ghana

I. THE BIBLE

Proverbs 26:27:

"Whoso diggeth a pit shall fall therein: and he that rolleth a stone, it will return upon him."

II. THE BUDGET

After recklessly slashing taxes in 2017 and putting its revenue generation and national development agenda at risk, the government decided to crank up consumption expenditures and drastically reduce infrastructure spending - the very opposite of what needed to be done.

Hence, in 2017, it exceeded its compensation budget by GH¢1.0 billion but cut the goods and services budget by GH¢1.3 billion and the domestic component of infrastructure spending by GH¢1.7 billion (or 63.0% of budget).  

This artificially created consumer spending, unsupported by public sector productivity and local economic production, created an estimated “unproductive” demand of between GH¢8 billion and GH¢10 billion, putting pressure on prices and ultimately the cedi.

Not surprisingly, non-oil real GDP growth in 2017 was lower than it was in 2016, and domestic revenue fell substantially short of the target.   

Why one is tempted to ask, would government engage in such blatantly contradictory and unproductive spending to its own ultimate detriment?

The answer may be partly gleaned from a statement attributed to former GFA boss Kwesi Nyantakyi in the Anas corruption video, in which he suggests that government slashed infrastructure spending to spite "NDC contractors". "As for NDC contractors,” he boasted, “their monies will rot!"

The following is what eventually happened:

· Contractors (whether NDC or not) who had taken loans to execute various public sector projects suddenly found themselves in financial distress as interest on the loans piled up and banks came a-calling for repayment.

· The stock of non-performing loans for many of these banks skyrocketed, threatening a banking system that was already under considerable though stabilised stress.

· Worried about impending systemic defaults, some banks capped the growing interest liabilities of their contractor clients.



· This meant lower interest income for the banks, and hence lower taxes from them to government in the future.

· In order to survive, some banks curtailed credit to the private sector.  This partly explains the following statement from the Bank of Ghana's MPC report in May 2018: "Private sector credit growth slowed to 5.6 percent from 16.1 percent in April 2017.... In real terms, private sector credit contracted by 3.6 percent in April 2018 against 2.6 percent growth in the same period of 2017."

· The overall effect of these depressive policies by government on the economy was the lower non-oil GDP growth in 2017, compared to 2016, which meant lower revenue intake for government. 

In this distorted economic environment of artificially inflated consumption and steep cuts in critically needed infrastructure spending, the cedi could only survive by virtue of proceeds from Eurobonds, as suggested in the MPC’s May 2018 report: "So far, the recently issued Eurobond raised the levels of international reserves to US$8.1 billion (4.4 months of import cover) as at 17th May 2018, providing enough cushion against any potential external vulnerability."

· Once the Eurobond proceeds started dwindling, the cedi came under pressure, losing ground rapidly against the US dollar by mid-2018.  

· On 13th June 2018, former President John Mahama shared a video of the current vice president, then in opposition, declaring the following:

· “You can engage in all the propaganda you want, but if the fundamentals are weak, the exchange rate will expose you.” 

· The vice president, who is also chairman of the Economic Management Team, took offense at that reminder and fired off a written response to the former president that was as remarkable for its insulting tone as it was for its many computational errors and double talk.

· It turned out that the formula the vice president used to compute the exchange rate depreciation while he was in opposition was markedly different from what he used now that he is in office, overstating his record of economic management while underplaying that of his predecessor and Mr. Mahama. 

· In the end, he interchanged the appreciation of the US dollar with the depreciation of the cedi, a clear case of statistical mischief and managerial incompetence.

· By the middle of 2018, government finances were under pressure and the finance ministry was forced to raise taxes, some openly, others surreptitiously, making nonsense of the government's campaign promise of moving from "taxation to production."

· What the government gave with one hand in 2017, it took back with two hands in 2018.   

· From basic economic theory and some empirical observations, we can deduce that had the GH¢1.7 billion, which included withheld payments to “NDC contractors”, been ploughed into the economy, it could have generated at least GH¢10.7 billion in productive income for Ghanaians – enough to stimulate economic growth and contribute revenue to the government’s coffers.  Raising taxes in 2018 may have been unnecessary, and the government would have retained the goodwill of the public while accelerating the pace of economic growth – broad-based economic growth.

· But that did not happen.  Instead, everybody – contractors, government, and Ghanaians in general – ended up in the pit of economic vindictiveness that the government mistakenly thought it was digging for “NDC contractors” only.    

· We are all the worse for it now.

· Such is the timelessness of Proverbs 26:27.

III. BOB MARLEY

How does Bob Marley fit into all this?  Well, 45 years ago, the reggae legend and sage wrote his classic song, “Small Axe”, based on Proverbs 26:27, but with a lyrical flavour and an even more expansive lesson for anyone who may think they are “doing” somebody, when in fact they are doing themselves. 

Enjoy.  

* “Small Axe” "Why boasteth thyself Oh, evil men Playing smart And not being clever? Oh no I said, you're working iniquity To achieve vanity, yeah (if a-so a-so) But the goodness of Jah, Jah I-dureth forever

* So if you are the big tree We are the small axe Sharpened to cut you down (well sharp) Ready to cut you down

* These are the words Of my master, keep on tellin' me No weak heart Shall prosper, oh no they can't! And whosoever diggeth a pit, Lord Shall fall in it, shall fall in it Whosoever diggeth a pit Shall bury in it, shall bury in it

* If you are the big tree We are the small axe Sharpened to cut you down Ready to cut you down

* And whosoever diggeth a pit Shall fall in it, fall in it And whosoever diggeth a pit Shall bury in it, shall bury in it

* If you are the big, big tree We have a small axe Ready to cut you down (well sharp) Sharpened to cut you down If you are the big tree, let me tell you this We are the small axe Ready to cut you down (well sharp) Sharpened to cut you down

* If you are the big tree We are the small axe"

** The version by the reggae group, Culture, called “Iron Sharpen Iron”, is equally good.  Do check it out.