In 2017, the new government base on campaign promises reduced or abolished 18 taxes that were bringing in revenue. It was dubbed the nuisance Tax. This brought a massive reduction in government revenue.
To make up for the revenue shortfall, government adopted borrowing. This increased Ghana’s bond market activities domestically and externally, and as a result a high debt-to-GDP exposure leading to the current debt unsustainability levels. The financial sector clean-up also cost the country more than anticipated in attaining a robust financial sector before 2022.
The discovery of two more oil fields led to the anticipation of more revenues, therefore government raised more local and external bonds. Government increased expenditures mainly on emoluments, interest payments, social programmes and employment. Revenue generation failed.
An example is the E-levy. Revenue mobilisation was not encouraging. The Auditor General of Ghana reported very high non-compliance activities, leading to the state losing more money than ever.
Amid all these, government set out to digitise economic activities and worked on national ID Cards, digital addressing systems and electronic payment platforms to enhance efficiency and revenue mobilisation.
As government further increased capital expenditure, investors noticed that the economy had become fragile due to the impeding liquidity challenges.
They started to repatriate their money from the economy, as shown by the Bank of Ghana’s report. Government was warned by the rating agencies with their downgrades; academicians and experts advised government to seek the help from the IMF, but government failed to heed the advice in time.
The COVID-19 pandemic set in and government got funding from multilateral agencies. This created a situation for government to inform Ghanaians that all was well, as the balance of payment improved and inflation reduced. However, government failed to sign onto the debt service suspension initiative of the World Bank.
Then came the war between Russia and Ukraine. This war affected global economies and exposed fundamental weaknesses. Within a short period prices in Ghana increased, leading to hype-inflation and currency devaluation – affecting both the macro and micro levels of the economy. The Bank of Ghana did not have the needed dollars to pay for the country’s commitments. The balance of payment had deteriorated, leading Ghana to insolvency.
The government of Ghana has now adopted debt monetarisation to finance operations with help from the bank of Ghana – and this has increased inflation. In order to reach the debt sustainability level so the IMF can lend to Ghana and improve the balance of payments, Ghana has adopted a debt restructuring programme that will lead to investors losing some money (haircut) because of the sovereign risk.
The solution to the current problem is for government to reduce expenditure and increase revenue. Furthermore, ensure efficient and effective allocation of resources backed by accountability.
The writer is an Associate Professor of Finance, Andrews University, Michigan, USA