Don’t rush to praise all of Africa’s “popular” but fiscally unsustainable programs
- Context is 2019 Mid-Year Review and need to be realistic about the fiscal prospects for the country—based on past views in interviews and articles.
- A general call on those who relate to Africa and its leaders not to ingratiate or praise all “popular policies and initiatives”, even if well-meaning, that eventually lead to waste of fiscal and economic resources—even disaster.
- The call goes for domestic leaders (e.g., chiefs, experts, clergy) and foreigners (e.g., multilateral and bilateral institutions, development partners, CSOs, professionals, etc).
Background
- Even the President now concedes (e.g., Oxford University lectures) that the Free Senior High School (F-SHS) will take a lot of resources, including
- diversion of petroleum revenues from the path of investment to consumption
- including early hints of the use of “Heritage Fund” for F-SHS;
- accumulation of arrears (e.g., pensions, roads, bailouts cost, etc) at May Day Speech;
- higher levels of borrowing than the government had anticipated; and
- despite three (3) (two (2) additional) oil fields with almost 3 times the output since 2017 and recovery of prices that that has tripled revenue from petroleum.
- diversion of petroleum revenues from the path of investment to consumption
- It will involve serious long-term commitment—merit only in leaving a legacy that future leaders will grapple with for decades.
- Note that the Minister for Finance also highlighted the point but was quickly shouted down by hawks within the Cabinet and the Party.
The “unsustainable promise” of F-SHS and other political promises
- F-SHS appeared sustainable because—
- unlike the original promise of a “big bang” during elections (starting with all students), SHS program was “staggered” to start with only Year 1 students:
- Years 2 and 3 students continued to pay fees—while program remained “untargeted”, with even middle-class and affluent parents benefitting;
- additional petroleum (oil and gas) revenues provided initial buffer from 2017—but these one-time inflows are against expanding expenditures (F-SHS and other very expensive electoral promises such as 1D1F);
- averting global and SSA recession and investments in energy sector
- Ghana among few SSA states to avoid recession;
- reverse rate of accumulation of national debt from positive to negative;
- investing directly and supporting private-sector investments in TEN and Sankofa petroleum fields;
- a substantial part of highly-rated fiscal consolidation came through another “illusion”—budget “offsets” rather than a program of paying down arrears;
- bequeath of buffers—previous administration bequeathed buffers
- Sinking Fund: use to pay off outstanding balance of Ghana’s first 2007 Sovereign Bond;
- Ghana Infrastructure Investment Fund (GIIF): balanced used; VAT flow diverted to consumption; and no further allocations made to Fund;
- Energy Sector Levy (ESLA): continuous flow of Ghc3 billion annually for clearing arrears directed at providing relief for domestic banks;
- GDP “rebasing” provided fiscal room and breadth, through
- room for borrowing through GDP growth and “illusionary” lowering of Debt/GDP ratio that is being trumpeted as an achievement by the government; and
- deferred the impact of increasing costs.
- “capping”—has not provided needed fiscal relief, despite diverting vital resources from vulnerable programs (i.e., education {GETFund} and health {NHIL}; rural development {DACF}; and institutions {IGF
Fiscal signs not favourable—going into Mid-Year
- one-time cushions—the “bump” in GDP growth from rebasing and additional crude/gas production is “one-time” and will no longer cushion the worsening indicators like debt and budget deficit;
- arrears owed to contractors and suppliers—large amounts owing to these vital economic players in various sectors, including Presidential initiatives, are becoming apparent and are now acknowledged by the Government—
- pensions—concession at May Day celebrations by HE the President;
- contractors and suppliers—concessions by Roads and Finance ministries and “demonstrations” by contractors;
- salaries—civil servants, nurses, and presidential initiative employees;
- banking sector “bail-out” costs—despite unprecedented funds from ESLA;
- F-SHS—no comprehensive disclosure yet to Parliament and the nation on true costs and inevitable arrears;
- increasing tax burden—retention of temporary (“nuisance”) taxes & introduction of new tax measures
- retention of temporary (“nuisance”) taxes such as ESLA, special import levy (SIL), national fiscal stabilization levy (NFSL)
- increase in ESLA levies: introduced at a period of low crude prices low US$40s pbl so consumers are paying more now at current higher price above US$60pbl;
- Implicit ESLA levy: levy should have lasted 3-to-5 years but increased duration of ESLA Bond to 7-to-10 years;
- new tax measures—increase in top rate of personal income tax (PIT); 2.5 percent increase in VAT rate (from 15% to 17.5%); luxury tax (user fee) on vehicles; blocking VAT input tax credit (ITC);
- discretionary change in basis (valuation and classification) for calculating import duties, VAT, fees/charges; etc;
- fiscal expansion—the worsening fiscal gap may not taper or abate due to
- subtle, not bold, new tax measures (e.g., luxury tax etc.)
- continuing with expenditure programs (likely borrowing, not reallocation to support the pace of president’s electoral promises;
- fiscal deficit and borrowing—these indicators are deteriorating fast and corrections for offsets in, and lowering of estimates, will make these indicators worse;
- borrowing to support the increasing fiscal deficit;
- borrowing to finance belated infrastructure;
- pledge of resources (e.g., royalties from minerals, bauxite deposits, etc.) to support the budget;
- Sinking Fund—despite three (3) oil fields, not using the SF to reduce debt (as was done from one (1) oil field for the NPPs first 2007 Sovereign Bond;
- Ghana Infrastructure Investment Fund (GIIF)—diverting funds (i.e., VAT and ABFA) for investment in infrastructure to consumption.
Wanted now—cautious voices
- “Measured” approach is fiscally prudent—being “measured” with
- F-SHS [e.g., alternative “progressive” approach] and other programs is consistent with fiscal prudence, as elicited in Public Financial Management Act [PFMA] and Budget Responsibility Act [BRA];
- Benefits of being “realistic”—refreshing to hear the voices of caution emerging
- Domestic experts—professors, experts, think tanks, and chairperson of vital constitutional commission have sounded note of caution;
- Opinion leaders—it is important for other domestic opinion leaders to follow a realistic lead (e.g., clergy and chiefs must reflect condition in religious and community schools);
- IMF/WB MD—sounded note of caution, not ringing endorsement, on government expenditure and debt programs; nonetheless
- roll-back of tax measures (e.g., VAT on non-core financial sector and commercial real estate) in Program;
- failing to acknowledge Ghana’s avoidance of recession; permitting fiscal expansion; and not being critical of “offsets” that underestimated arrears and gave impression of accelerated fiscal expansion;
- Development Partners (DPs)—countries that may be capable of free (education) social programs choose to make them “targeted” (i.e., tuition-free programs, as Ghana had) and adopting alternative options (e.g., concessional student loans);
- Preference for using fiscal support for investments, not consumption, is global
- in advanced countries (e.g., quantitative easing): invest in infrastructure to support private sector and rural/urban development, not place scarce fiscal resources in consumption;
- MIC states—approach adopted by middle-income countries (MICs) such as Emirates and Asian economies;
- Developing countries—Angola and South Africa now showing a preference for infrastructure development through Sovereign Wealth Funds (SWFs) as in Ghana’s PRMA.
- Domestic experts—professors, experts, think tanks, and chairperson of vital constitutional commission have sounded note of caution;
Conclusion
- Current fiscal environment is different from late 2014-16 when many SSA countries were headed into recession, due to global financial crisis, fall in crude oil and other commodity prices, and domestic pressures such as non-supply of gas from Nigeria
- Now, three (1) oilfields, not one (1); rebound in commodity prices, and, therefore, enhanced budget buffers.
- Problem is unbridled expenditure due to electoral promises; non-conventional approach to managing arrears; and borrowing
- Time for realistic review and appraisal as well as domestic and international experts toning down their praise or holding back their reservations on Africa’s politically-motivated “popular” but unsustainable electoral and fiscal promises.
