Overcoming Ghana’s post-election fiscal challenges

Fiscal mismanagement culminating in chronic fiscal deficit is at the heart of the macroeconomic challenges of a country.

Over the past three decades, Ghana has consistently recorded fiscal deficit (excess government spending over revenue), particularly in election years.

Since 1992 when a general election was held to usher in the Fourth Republic in January 1993, Ghana has consistently overrun its budget except for 1994 and 1995 when the country managed to record positive fiscal imbalance.

Generally, fiscal deficit worsens in election years ranging between 3.2 per cent of GDP in 2004 and 12.1 per cent in 2012.

Essentially, the fiscal deficit is not bad in itself but how the deficit comes about, and the strategy adopted to finance it, are the key concerns. The bane of Ghana’s fiscal management is the inability or failure of fiscal managers to spend within the revenue constraint.

Evidently, between 2008 and 2023, the gap between total expenditure and revenue has consistently widened. Of course, persistent revenue shortfall against profligate and unproductive expenditure ultimately results in chronic fiscal deficit.

Flawed implementation of tax measures partly as a result of weak tax administration, high incidence of revenue leakages, abuse of tax exemption measures, imposition of numerous taxes amid several fees, levies and charges, as well as misunderstanding and erroneous measure of the tax base are key identifiable factors explaining revenue challenges in Ghana.

Interestingly, in the face of revenue challenges, the Ghana Revenue Authority has consistently met and in most cases, claimed to have exceeded its revenue targets, causing analysts to question the model that the authority employs in setting its revenue targets. 

At the same time, efforts, if any, to effectively manage expenditure are hampered by procurement irregularities, leakages and corrupt execution of unproductive and unplanned projects most of which tend to be abandoned midstream.

Excessive expenditure gets exacerbated every election year of the four-year cycle when the government in its quest to win favour from the electorate and improve its election fortunes, initiates and executes new projects and speeds up the completion of existing ones.

Public sector workers find it convenient to ask for their pound of flesh in the form of demands for salary increases during election years, which the government finds difficult to contest and resist. In effect, expenditure gets bloated and, coupled with low revenue generation efforts, lands the country into a fiscal deficit with its attendant macroeconomic consequences.

Deficit

Essentially, the fiscal deficit is financed through borrowing from the domestic credit market, external creditors or central bank financing, each of which has implications for the overall economy.

While central bank financing could be inflationary, domestic and external borrowing have a worsening effect on the domestic and external debt position of the country.  

Simply put, it increases the country’s domestic and foreign debts without easing its ability to service them.

Between 1976 and 1980, central bank financing within a fixed exchange rate framework resulted in chronically high inflation reaching 116 per cent in 1977, and an overvalued domestic currency. 

In a liberalised exchange rate regime, which Ghana is currently pursuing, the printing of money to finance monetary financing of fiscal deficit not only causes rising inflation but also exerts pressure on the exchange rate and thus depreciation of the cedi.

In other words, it leads to an increase in the rate at which prices of goods in the domestic market rise, while the value of the local currency falls against the major international currencies such as the US dollar.

On the other hand, resorting to domestic borrowing crowds out or deprives the private sector of loanable funds because private businesses are unable to compete for lending and struggle to pay off what they have borrowed because of the increase in the interest rate.  

This leads to the accumulation of domestic debt while external borrowing, particularly from the international capital market, draws the country into an external debt challenge.

The subsequent debt financing, including amortisation and interest payments, exerts further pressure on the country’s fiscal imbalance …. and the cycle continues. 

The writer is Professor of Economics,

Director and Senior Fellow of the African Centre for Advanced Studies (ACAS).