Tuesday, 23 November 2021

The State of Ghana’s Economy and What the 2022 Budget Offers

Author: Neenyi Ayirebi-Acquah, Economic Policy Analyst, Ghana Growth and Development Platform (GGDP) The Ghanaian economy has been reeling from the devastating effects of COVID since it hit in March 2020. Admittedly, prior to this, the economy had vulnerabilities, but COVID certainly tipped things over. Government had to resort to aggressive fiscal spending against the backdrop of the collapse of its export revenues and a hit to our growth projections which has adversely impacted domestic revenue mobilization. To compensate for the shock, government had to rely on fiscal support from the IMF, World Bank, AfDB, drawdowns on our Petroleum funds and BoG financing. Despite this, the economy recorded a fiscal deficit of 15.2% at the end of 2020. Even though the economy has began recovering from 2020, the challenges remain, which is principally driven by the lack of fiscal space due to the high interest obligations and the public wage bill which absorbs all our domestic tax revenue making borrowing a necessity to forestall an economic collapse. Despite the best efforts of economic managers, the economy is yet to recover, in any significant way, to give any respite. The harsh reality is that Ghana’s economy finds itself in a debt trap, a reality we are yet to publicly admit. A consequence of this is that we do not have enough resources to invest in our economy in the way we need to drive the levels of growth we need to get out of this debt trap, in the medium term, and to invest in our own development. In the 2022 budget which was read yesterday on the 17th of November the Minister states that government’s goals are to rebuild investor confidence in the economy (an admission that investors have lost confidence in our economic management and our ability to service our debts) and to facilitate growth through entrepreneurship. However, the reality is that the 2022 budget is geared more at regaining access to the Eurobond markets on favourable terms down the line since the economy cannot operate without borrowing. The goal to get growth through youth entrepreneurship, welcome as it is, remains to be seen as there has not been any demonstrated impact on growth from previous similarly structured interventions or programs. For me, the key questions are: (1)Are the measures in the 2022 budget enough to assure the Eurobond market that we have a clear path out of our quagmire? And even if we succeed in this, our ability to borrow is severely constrained given elevated default risks increasing premiums on our debt and constrained growth post COVID. (2)What does (1) mean for our own economic development in terms of job creation for our citizens, especially the youth, infrastructure, and social spending? If a significant amount of our domestic revenue is servicing debts with principal payments kicking in in 2023, there isn’t enough left for critical capital spending needed to expand the economy and drive growth. Where does this leave the millions of unemployed youths and middle-aged persons who need a regular income? This is even more dire because Ghana has a very high dependency ratio putting a lot of pressure on the few who are working. Given that we spend all our domestic revenue on only interest payments with the remainder taken up by our public wage bill, and that we need to borrow to finance the rest of our expenditure, Ghana can be said to have found itself in a debt trap. A debt trap is defined as “a situation in which a debt is difficult or impossible to repay, typically because high interest payments prevent repayment of the principal.” And given our already high interest payments, going forward, we are constrained in our ability to borrow so where does that leave us? This is the question that I was hoping the 2022 budget would answer credibly but didn’t. All that it offered was to increase taxes and socio-economic hardship in the process to be able to regain access to the Eurobond market and a flawed growth strategy of youth entrepreneurship whose contribution to GDP in past iterations remain to be seen. The additional increase in GDP over the next three years is projected to be GHS 60bn. This makes government’s projection of catalyzing GHS 20bn in funding towards youth entrepreneurship in this same period for growth very ambitious. So, what is the wany forward then? In my view, the starting point on the way out of this rut we find ourselves in is for economic managers to admit the stark reality that we are in a debt trap and have a major re-think of economic policy going forward. Tinkering with youth employment under the guise of promoting entrepreneurship won’t cut it. Most businesses take about five years to achieve steady state and to survive to that point requires more capital than what is being bandied about. Our dire situation requires a major rethink of economic policy principally aimed at growing out of our debt situation. To achieve this, we must identify and invest strategically in the key sectors of the economy of Agriculture and Manufacturing that will deliver growth, jobs and attract the capital we need to grow out of our debt. What the Honorable Minister for Finance offered fell short of that in a big way.

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