The debt-to-GDP ratio is a measure of a country’s debt in relation to its economic output. A high debt-to-GDP ratio indicates that a country may have difficulty paying back its debt and may be at risk of default. In the case of Ghana, the IMF is projecting that the country’s debt-to-GDP ratio will increase further to 98.7% by the end of 2023, which is a cause for concern.
To address this issue, the Ghanaian government will need to focus on rebuilding fiscal buffers. Fiscal buffers are essentially financial reserves that a government can draw upon in times of economic stress, such the Sinking Fund and Heritage Fund established by the erstwhile NDC government. Unfortunately, most of these funds have been depleted. These buffers provide a cushion that can help the government to maintain essential services and prevent social unrest during times of economic uncertainty as the Ghana faces now.
Developing credible risk-based fiscal frameworks is one way to promote growth and rebuild fiscal buffers. A risk-based fiscal framework involves identifying and mitigating potential risks to a country’s economy. This might involve implementing measures to reduce inflation, improving tax collection, and investing in infrastructure that can support economic growth. But this can only be achieved by cutting inefficiency in government spending and reviewing all if not most government flagship programs. What about the size of government?
By prioritizing the development of credible risk-based fiscal frameworks, the Ghanaian government can help to ensure that the country’s economy remains stable and resilient, even in the face of economic uncertainty. This can help to promote economic growth and development in the long run, while also reducing the risk of default and ensuring that the government can continue to provide essential services to its citizens.
Developing a risk-based fiscal framework for Ghana would involve identifying potential risks to the country’s economy and implementing measures to mitigate those risks. Here are some steps that the Ghanaian government could take to develop a risk-based fiscal framework:
Conduct a risk assessment:
Conducting a comprehensive risk assessment is a critical first step in developing a risk-based fiscal framework for Ghana. This involves a systematic and thorough analysis of the economy to identify potential risks to growth and stability.
Here are some of the factors that the ministry of finance may consider when conducting a risk assessment:
- Inflation: High and volatile inflation can be a major risk to economic growth and stability which currently is 45% from the hight of 54%. The government may analyze trends in inflation and inflation expectations, as well as the factors that are driving inflation in the economy. BoG’s government financing is a major factor in inflation drivers.
- Exchange rates: Fluctuations in exchange rates can impact trade and investment flows, and can also affect the value of the country’s external debt. The government may analyze trends in exchange rates and the factors that are driving those trends, such as changes in global interest rates or shifts in international trade patterns and the depreciation of the Ghanaian local currency, the cedi.
- Commodity prices: Ghana is a major exporter of commodities such as gold, cocoa, and oil. Fluctuations in commodity prices can have a significant impact on the economy. The government may analyze trends in commodity prices and the factors that are driving those trends, such as changes in global demand or supply.
- Political instability: Political instability can create uncertainty and negatively impact economic growth. The government may analyze trends in political stability and the factors that are driving political instability in the country especially after the debt exchange program.
- External shocks: External shocks such as natural disasters, global pandemics, or financial crises can have a significant impact on the economy. The government may analyze the potential impact of different types of external shocks on the economy, and develop contingency plans to mitigate those risks.
Overall, conducting a comprehensive risk assessment will help the NPP government to better understand the potential risks to the economy and develop a more targeted and effective risk-based fiscal framework. By identifying and mitigating potential risks, the government can help to promote economic stability and growth, which will benefit the people of Ghana especially the vulnerable who are the worse hit by the current economic crises.
Prioritize risks
Once the government the MoF has conducted a comprehensive risk assessment, the next step is to prioritize the identified risks. Prioritizing risks involves assessing the likelihood of each risk occurring and estimating the potential impact it could have on the economy.
Prioritizing risks helps the government to focus its resources and attention on the most critical risks, and to develop targeted risk management strategies that are appropriate for each risk.
Here are some factors that the government may consider when prioritizing risks:
- Likelihood of occurrence: The government may assess the likelihood of each risk occurring, taking into account historical trends, current economic conditions, and other relevant factors.
- Potential impact on the economy: The government may estimate the potential impact that each risk could have on the economy, considering factors such as the magnitude of the shock, the duration of the impact, and the potential ripple effects on other sectors of the economy.
- Interconnectedness: The government may consider the interconnectedness of different risks and how they could interact with each other to create greater or lesser risk.
- Strategic importance: The government may consider the strategic importance of different sectors or industries to the economy and prioritize risks that could have a particularly significant impact on these areas.
- Fiscal capacity: The government may consider its fiscal capacity to manage different risks, and prioritize risks that it has the resources and tools to manage effectively.
By prioritizing risks, the government can focus its efforts on developing risk management strategies that are appropriate for each risk. This will help to ensure that the most critical risks are effectively managed, and that the economy remains stable and resilient in the face of uncertainty.
Develop a risk management plan
After identification and prioritization of the risks to the economy, the next step is to develop a risk management plan. A risk management plan is a set of specific measures that are designed to mitigate the identified risks and minimize their potential impact on the economy.
At this juncture, some steps that the government may take when developing a risk management plan:
- Develop specific measures for each risk: The government should develop specific measures for each identified risk that are appropriate for the nature of the risk. For example, if inflation is identified as a risk, the government might implement measures such as tightening monetary policy or reducing government spending to curb inflationary pressures and implementation of zero financing of government deficit.
- Define roles and responsibilities: The government should define the roles and responsibilities of different stakeholders involved in the risk management plan, such as the central bank, finance ministry, and other relevant agencies like the financial stability council.
- Establish targets and indicators: The government should establish specific targets and indicators that will be used to monitor and evaluate the effectiveness of the risk management plan.
- Determine resource requirements: The government should determine the resources that will be required to implement the risk management plan, such as funding, personnel, and equipment.
- Establish a monitoring and evaluation framework: The government should establish a monitoring and evaluation framework to track the implementation of the risk management plan and assess its effectiveness over time.
By developing a risk management plan, the government can take proactive steps to mitigate the identified risks and promote economic stability and growth. The risk management plan should be regularly reviewed and updated as new risks emerge or as the economic landscape changes.
Monitor and evaluate Risk Management Plan
Regularly monitoring and evaluating the effectiveness of the risk management plan is a critical step in ensuring that the plan remains relevant and effective over time. This involves measuring progress against established targets and indicators, and making adjustments to the plan as needed based on feedback and performance data.
Here are some key activities that the government should undertake to monitor and evaluate the effectiveness of the risk management plan:
- Regular reporting: The government should establish a regular reporting schedule to track progress against established targets and indicators, and provide updates on the implementation of specific risk management measures.
- Data collection and analysis: The government should collect and analyze relevant data on key economic indicators such as inflation, exchange rates, and commodity prices, as well as on specific risk management measures that have been implemented.
- Performance reviews: The government should conduct periodic reviews of the performance of the risk management plan, assessing its effectiveness in mitigating identified risks and promoting economic stability and growth.
- Stakeholder engagement: The government should engage with stakeholders, including the private sector, civil society, and international partners, to gather feedback on the effectiveness of the risk management plan and identify areas for improvement.
- Continuous improvement: The government should use the feedback and data gathered through monitoring and evaluation activities to continuously improve the risk management plan over time.
By regularly monitoring and evaluating the effectiveness of the risk management plan, the government can ensure that the plan remains relevant and effective in mitigating identified risks and promoting economic stability and growth. This will enable the government to make timely adjustments to the plan as needed, and to continuously improve its performance over time.
Communicate with stakeholders
Communicating with stakeholders is an important step in building confidence in the economy and promoting investment. The Ghanaian government should communicate the risk-based fiscal framework and the measures being taken to mitigate identified risks to key stakeholders, including investors and international organizations like the IMF and world bank.
Here are some key activities that the government should undertake to communicate with stakeholders:
- Develop a communication strategy: The government should develop a comprehensive communication strategy that outlines key messages and target audiences, as well as the channels and tools to be used to communicate with stakeholders.
- Engage with investors: The government should engage with investors, including domestic and international investors, to communicate the risk-based fiscal framework and the measures being taken to mitigate identified risks. This might involve holding investor briefings, publishing regular economic updates, and engaging with the financial media.
- Communicate with international organizations: The government should also communicate with international organizations such as the IMF to provide updates on the implementation of the risk-based fiscal framework and seek feedback on its effectiveness.
- Engage with civil society: The government should engage with civil society organizations and other stakeholders to communicate the importance of the risk-based fiscal framework and the measures being taken to mitigate identified risks.
- Provide regular updates: The government should provide regular updates on the implementation of the risk-based fiscal framework, including progress against established targets and indicators.
By communicating with stakeholders, the government can build confidence in the economy and promote investment. This will help to ensure the sustainability of the country’s debt and support long-term economic growth and development.
Conclusion
In conclusion, the IMF projection of Ghana’s Debt to GDP Ratio increasing to 98.7% by the end of 2023 underscores the urgent need for the Ghanaian government to prioritize rebuilding fiscal buffers. Developing a credible risk-based fiscal framework that promotes growth is critical to achieving this goal.
The government should conduct a comprehensive risk assessment of the economy, prioritize identified risks, develop a risk management plan, and regularly monitor and evaluate its effectiveness. The government should also communicate the risk-based fiscal framework and the measures being taken to mitigate identified risks to key stakeholders, such as investors and international organizations like the IMF, to build confidence in the economy and promote investment. By implementing a comprehensive risk-based fiscal framework and prioritizing the rebuilding of fiscal buffers, the Ghanaian government can mitigate identified risks, promote economic stability and growth, and ensure the sustainability of the country’s debt in the long term.
The writer is an Economic Policy & Financial Analyst
