- Summary of Presentation on Fiscal Rigidities and their Effects in Ghana (by Dr. Said Boakye, Senior Research Fellow, IFS)
- Governments are unable to create enough fiscal space without resorting to borrowing
- Governments become ineffective in managing fiscal crisis
- The quality of fiscal adjustment reduces
- Incentives to improve efficiency in spending is lowered
- Misallocation of resources may arise
- Government spending becomes pro-cyclical.
- The establishment of new earmarked funds should be avoided, at least until the country is able to significantly reduce the total rigid expenditure ratio below the revenue limit.
- The existing earmarked funds should also be urgently reviewed with the goal to:
- cut, where necessary, parts of the earmarked revenues and return them to the general budget in order to gain some level of flexibility to address the enormous fiscal challenge.
- close down nonessential funds so that the monies involved could be passed through the general budgeting process.
- For those funds that cannot be closed down, greater management efficiency should be pursued, since most of these funds have been managed inefficiently. In this regard,
- Political interference that has the tendency to undermine the usefulness of earmarked funds should be halted.
- The management boards of the earmarked funds should be made to sign performance contracts and the provisions therein should be enforced to the letter. The contracts should aim at cost minimization.
- The current practice whereby the parent MDAs seek to perform some of the same functions delegated to the funds’ managers, as if transfers to the earmarked funds are mere statutory obligations that do not form part of the government’s programs, should be brought to a halt. This creates duplication in the system.
- The rate of growth in wages and salaries of public sector workers should not be allowed to exceed the rate of revenue growth anymore. This should serve as a guiding principle during wage negotiations and when forecasting the ‘wage bill’ for the budget.
- A thorough review of public sector employment should be undertaken in order to right-size the sector by getting rid of redundant workers.
- Public sector recruitment and the payroll system should also be effectively managed. While the efforts being made to remove “ghost” names from the payroll systems is commendable, there should be constant auditing of the payroll to prevent new “ghost” names from entering the system.
- The country is clearly caught in a debt trap. Therefore, budgetary expenditures should not be allowed to follow their current trajectories.
- Discretionary expenditures should be drastically cut while making sure that growth is not badly affected. Importantly, all non-essential discretionary expenditure items should be eliminated.
- A complete moratorium on borrowing may not be feasible in the short term given that total rigid expenditure currently exceeds total revenue and grants. However, borrowing should be significantly reduced by directing it to finance only most essential expenditure items.
The Institute for Fiscal Studies (IFS) and the National Resource Governance Institute (NRGI) jointly hosted a forum on the 2016 budget on November 5 at the Alisa Hotel in Accra. The theme for the forum was: Making the Most of Petroleum Revenues.
Nana Frimpong Anokye, Omanhene of the Agona Traditional Area and a Member of the Governing Council of IFS, chaired the event, which also had in attendance Mr. Alex Ashiagbor, the Governing Council Chairman, and Dr. Kwabena Duffuor, Founder of IFS.
In an opening address to the forum, Mr. Alex Ashiagbor said the main idea for the event was to examine the challenges and risks confronting the 2016 budget, what should be expected in light of the challenges and risks, and how natural resource revenues could be better managed to contribute to the sustainable growth and development of Ghana’s economy.
On the last issue, Mr. Ashiagbor highlighted the following as important preconditions and policy measures which will facilitate the creation of broad-based prosperity from the exploitation of natural resources:
- Government must ensure strong and effective governance, not just at the national but at all levels of governance. An important element of this is the development of strong independent, accountable, and transparent institutions that can help manage the revenues from natural resources.
- Fiscal discipline is an important prerequisite, together with policies to smoothen out swings associated with natural resource revenues, proper exchange rate management, and prudent management of the public debt.
- Using natural resource revenues for short-term purposes such as budgetary support is not advisable; rather, the revenues should be invested in long-term capital accumulation, both human and non-human, to establish a strong basis for sustainable growth.
- It is also important to ensure inclusiveness, ie. active participation of all sectors in the growth process, and to reduce the threat of the so-called Dutch Disease, which refers to the situation where natural resource booms lead to the decline of other important economic sectors.
The media launch of the Institute for Fiscal Studies (IFS) took place at the Holiday Inn hotel in Accra on November 17, 2014. Members of the Governing Council of the Institute, its staff,associates, and other important invited personalities joined Dr. Kwabena Duffuor, IFS Founder/President, and Prof. Newman Kusi, the Executive Director, to unveil the Institute to the media and the public.
In his speech at the event, Dr. Duffuor shed light on the reason for establishing the Institute as well as its mission and vision.
“Throughout our country’s history,” he observed,“instances of apparent economic progress have soon been followed by periods of economic deterioration. These economic ups and downs are far from being part of the normal business cycle that all economies undergo. Simply put, the Ghanaian economy has over the years woefully underperformed, given the resource endowments we have. What have accounted for this phenomenon? While many factors are at play, central to them include the general lack of integrity; frequent and sometimes arbitrary changes in government; clash of economic policies and political interests; corruption; and external influences. In plain language, ladies and gentlemen, our fiscal and macroeconomic management have generally not done well. Our economic management decision-making and choices have more often than not been shaped by political expediencies and not by sound economic policies. It is to help reshape and improve upon our fiscal and macroeconomic management and thus meaningfully transform our national economy that the Institute for Fiscal Studies (IFS) was established.”
Dr. Duffuor underlined that the mission of IFS rests on two basic premises. First, that growth and development occur where there is sustained sound management of the economy, and second, that such management is more likely to happen where there is an active and well-informed group of locally-based professionals in relevant areas to conduct relevant policy research to influence policymaking.
To this end, he said IFS will undertake innovative research into relevant policy issues, analyze public finance developments, assess the implications of government economic policy, provide practical recommendations that put government finances on a sustainable path, and share the information freely with policymakers, parliamentarians, analysts, and the general public.
The Founder called on people with knowledge and experience in the management of Ghana’s economy to step out of their comfort zones and come forward to help tackle the country’s complex economic problems.
Addressing the gathering, Executive Director Prof. Kusi explained IFS’ core activities, which comprise research, academic training, and organisation of workshops and events to disseminate research findings and provide thought leadership. He said IFS conducts an active agenda of research and studies into Ghana’s macro-economy, the fiscal system and its management; advances policy debate and generates ideas for fiscal management improvement; and disseminates its research and findings through events and publications. “It is envisaged that IFS will be an authoritative commentator on Ghana’s public finances, tax and welfare policy, unemployment and labour issues, inequality and poverty, and policies designed to promote growth and development with a reputation for objectivity and impartiality,” Prof. Kusi said.
He further stressed that the Institute’s research will be of international standard and reflect the quality of its staff, management and associates, who will bring to bear on their work a combination of world-class academic excellence and practical real-world policy making experience.
Speaking on current economic issues, Mr. Alex Ashiagbor, Chairman of the Governing Council of the Institute and chair for the launch, said Ghana’s present economic challenges have come about because the country is living beyond its means. “Our lifestyle as a country, which is represented by the budget deficit, is clearly unsustainable. I don’t believe in the much-touted home-grown economic policies. The only policy is to live within your means. If you can’t discipline yourself, then it will be imposed on you from outside,” the Chairman said.
The Institute also received a lavish public endorsement from Dr. K. B. Asante, a distinguished senior citizen, retired diplomat and former government official who served under various political administrations from independence. He said the establishment of IFS is “a bold, public-spirited initiative” that will support Ghana’s economic development. He also stated that “the array of talent at IFS is a measure of its success.”
The senior statesman noted that Ghana has talent in abundance but does not seem to be making use of it.He therefore expressed the belief that IFS will bring together the best economic- management brains in the country to offer durable solutions to the nation’s problems. He also praised the Institute’s ongoing comprehensive study of Ghana’s economic management since independence. This study is expected to lead to a book, “Economic Management in Ghana since Independence”, which will assess all the macroeconomic policies that have been implemented over the decades and highlight their strengths and weaknesses to serve as a guide for future policymaking.
K.B. Asante told the audience that “without knowing the past, we would continue to make many grievous mistakes and, indeed, we would repeat the mistakes of the past.”
Other members of the Governing Council present at the launch were James Avedzi, Chairman of the Parliamentary Finance Committee, and Mrs. Kate Quartey-Papafio, Managing Director of Reroy Cables Limited.