Ghana’s fiscal crisis and domestic debt restructuring: Matters arising


Ghana has just scraped through a Domestic Debt Exchange Programme (DDEP) consequent on a possible programme with the International Monetary Fund. The country has landed itself in an economic crisis which once again required a ‘visit’ to the Fund – the 17th time since independence. This crisis may have been initiated by a fiscal crunch; but it is has spread its tentacles to other sectors of the economy, some of which may linger on for quite a while.  Some of us were witnesses to similar missteps by some governments in the 1970s and 1980s which took decades to heal.

In March 1979, the government of the Supreme Military Council, headed by General Akuffo, decided to mop up excess currency in the system by changing the cedi notes. This exercise was aimed at only those with cash outside the banking system. Cash holders with amounts not exceeding GH¢5,000 received back 70 percent of what they exchanged while those with amounts exceeding GH¢5,000 received back only 50 percent.  In today’s parlance, this is more than a ‘haircut’: more like going to the guillotine! This forced discount adversely impacted the poor the more, despite its progressive nature. Most of the non-poor, unlike the poor, usually kept their monies as bank deposits which were not affected by the ‘exchange’.

A couple of months after that demonetisation exercise, there was first the abortive May 15th Uprising, soon to be followed by the June 4th Revolution. A few years later, after the second coming of JJ Rawlings, the Provisional National Defence Council (PNDC) set up tribunals to vet people with bank accounts exceeding GH¢50,000.  A number of genuine business people were dragged before tribunals to explain the source of their wealth. This exercise impugned the credibility of the banking system and cracked the confidential nature of client transactions, which is a cardinal hallmark in banking.

The afore-mentioned two interventions by two military governments, coupled with the high inflationary environment of the period, seriously affected confidence in the financial system, which took years to restore. A structural adjustment programme (SAP) and a painstaking financial sector restructuring (FINSAP), over tortuous decades, did a lot to restore back confidence. By the second decade of the new millennium, Ghana was back on track and heading for a high degree of financial inclusion on the back of technological features like mobile money and digital cashless transactions.

The current economic crisis is of our own making. That we were pushing toward a precipice has been quite evident for some time now. Unbridled spending in the face of a weak tax base would lead any economy to the doldrums. But what is even worse is the poor handling of the crisis when the country found itself with a fiscal crunch! All the players handled it poorly!

When there is fire, one does not seek to find out what or who caused the fire. The prudent thing to do would be to find ways of dousing the fire! The what, who and how can be answered after the conflagration has been quenched, and its devastating career abated! But no! All stakeholders decided to protect their ‘interests’!

A DDEP, by its nature, can be quite disruptive. In extending a helping hand to Ghana, the IMF should have taken that off the table as a conditionality. Or at worse, it could have been done by swapping short-term instruments for longer-term ones, without a ‘haircut’. As explained earlier, Ghana has gone through tortuous restructuring of its financial sector over the past four decades or so.  The most recent one involved closure and amalgamation of about 9 banks.  The dust has not quite set on that. Its repercussions still run through the system. The IMF could have avoided a DDEP, and instead worked with the government to look for debt forgiveness to create the necessary fiscal space to allow the economy to function.

When it became obvious that a DDEP was the only way to go, it was poorly handled domestically. Government was intransigent and refused to yield in to any suggestions that, if for nothing, could have earned enough goodwill to push through a domestic debt restructuring plan. Strangely, a President who only a year or so ago shepherded the country through a devastating COVID pandemic with success, decided to play mute during an economic crisis! What would have happened if the President decided, for example, to cut the number of ministers and other government functionaries to demonstrate the fact of a crisis which needed ‘belt-tightening’. Is there not enough crisis at home to suspend foreign trips? Would God rain down hailstones on Ghana if the building of a national cathedral is suspended? Except for warning poor investors of a possible ‘haircut’ to secure an IMF support, Government did not really demonstrate how precarious the country’s position is and what a failure to fix the present predicament would imply. No wonder an august body like the Christian Council of Ghana called for a suspension of the Domestic Debt Exchange Programme!

It was also no wonder that some affected individuals and institutions opposed the whole exercise. Clearly, not much education and clarity were factored into the exercise. Meanwhile, a huge misinformation campaign on social media muffled any common sense out there! In one typical media report, a poor woman who placed her savings with an investment bank went on air bemoaning: “daylight robbery”. Apparently, on a quick redemption, she received even less than the amount she had placed. The media which reported this incident should have used the opportunity to educate the woman on the nature of investments. Instead, it was drummed up that the said investment bank was going broke! This caused a near ‘run’ on that institution and its associated contagion!

Economists distinguish between saving and investment. The two are not the same, except on the aggregate in equilibrium. Saving is generally that part of income not consumed. One can decide to hoard his saving or place it in a time account with a bank to earn interest. Investment, on the other hand, is money used in buying assets such as property, stocks or shares in a mutual fund. Generally, one expects his/her investment to increase in value. However, unlike saving, investment plays by the market. When the market is bullish (optimistic), returns on investments are positive and promising; on the other hand, when the market is bearish, investment returns are poor and disappointing. Thus, if the lady with the complaint cited earlier had had her money in a mutual fund with the investment bank, the value of her investment would certainly have fallen in a bearish market, such as the prevailing one.

Now that the 80 percent minimum threshold of the scheduled DDEP has been secured, the chances are that Ghana is in line for an IMF supported programme which would bring in about US$3billion of fresh aid. It should be emphasised that it is not so much this paltry US$3billion that drove the government to hang itself to dry on the back of an unpopular debt restructuring. The economy would have imploded on itself if there is no fund programme to shore up the credit rating for Ghana.

For much of our existence as an independent nation, we have been living on borrowed money. There is always more to do than the revenues collected by government can support. We have, therefore, been running deficits on our fiscal. This in itself is not unusual; most governments run on deficits. There are three ways in which to finance the deficit: (a) draw down on reserves, (b) borrow from external sources and (c) borrow from domestic sources. There is a fourth method of financing the deficit – borrowing from the central bank; but the consequences of that can be dire! The most common methods adopted by most governments are (b) and (c). Government borrows by issuing bills and bonds to the investing public. Such borrowing creates a debt position from the country. Often, much of what government borrows is used to service its maturing debt obligations – mostly, interest on the debt. This keeps the pipeline active and allows the economy to run. In that scenario, anything which happens to disrupt the flow of new funds can lead to major problems for the country.

In 2020, the world faced a COVID pandemic, which impacted economic activities in all countries around the globe. Governments around the globe spent a lot to provide social safety net to cushion the impact of the pandemic. Workers were laid off and yet, had to be paid. In Ghana, subsidies were provided for some social services for some months, in addition to free vaccinations. Thankfully, Ghana received generous donations from bilateral and multilateral sources to support its fight against the pandemic.  By 2021, most governments in the world – both developed and developing countries – found themselves faced with huge fiscal deficits. Unfortunately, government did not curtail spending, and thus, widened the deficit. As fate would have it, other countries like the United States, Britain and the European Union countries also needed funds from the same markets as Ghana to support their fiscal regime. With a low credit rating, Ghana could not compete on the international market. Thus, the country stood to default on its debt obligations with all its attendant consequences, hence, the need for a fund programme!

Going forward, there is a need for a serious rationalisation of Ghana’s fiscal regime. There is a need to open up the country’s expenditure basket, take out what is not urgent, and prioritise what remains. This advice is not new and has been repeated the umpteenth time. Some have argued that government should “cut its coat according to the size of the cloth”! My retort to that is: “You don’t know the size of the cloth”! The cloth (total revenue) is so small it will get the country nowhere. The introduction of more efficient methods in taxation, particularly of property tax, revenue can be enhanced. Another area that needs attention is the number of exemptions granted in tax collection, particularly in the extractive industry. Ghana must stop the granting of several years of tax holiday to companies in the extractive industry. With the attendant environmental damage involved in the extraction of minerals, investing companies must factor payment of special taxes in their cost of production rather than be exempted.

A country does not need to balance its budget in order to progress. Running deficits is not evil; borrowing is also not a crime.  I also believe that credit spurs development faster than reliance on saving. It all depends on what the credit is used for. If the borrowed funds were used to generate a positive output, it goes to pay-off the debt!

Let’s get ourselves out of this mess and vow never again!

The writer is an economist

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