Institute of Economic Affairs (IEA) is alarmed at the current rate of government borrowing and has warned, Ghana is retrogressing to 1985 – a painful period of near economic collapse.
In a statement chronicling a short history of poor fiscal discipline that IEA said
“Should we continue on this path, our national debt will grow to about 70% of GDP by 2016 and close to 100% by 2020, returning our nation to where it was some thirty years ago, at the brink of financial collapse”.
With Ghana set to agree a deal with the IMF, the policy institute has recollected the number of times Ghana has need the IMF in order to set the economy right.
The current IMF intervention will be the fourth in 30 years. Ghana’s debt to GDP ratio is 65%. The IEA predicts that it could hit 70% of GDP by 2016 and close to 100% by 2020.
Former President Rawlings presided over a painful period of IMF intervention during which many lost their jobs.
The IEA is recommending the passage of a new law to force government to make sound financial decisions.
Read the full statement below:
The IEA is pleased to send you the attached documents. It is our hope that our proposals will help lay the foundation for a prosperous society.
By 1983, Ghana's economy was at the brink of collapse due to its huge national debt and high fiscal deficits. The national debt had reached a catastrophic level of 107.5% of GDP; inflation was 142%, and commercial banks had stopped lending to commercial enterprises. The economy was teetering on the precipice of complete collapse.
We had mismanaged ourselves and were at the brink of total failure. We needed help to save ourselves. The leaders of the country had no option than to run to the IMF and the World Bank to seek help to revive Ghana's sick economy.
The IMF responded with a battery of conditionalities which put the people of Ghana through a nerve wrenching exercise in order to bring back the economy from the brink of disaster. They imposed heavy conditions on the government and citizens, particularly the poor.
As a result, several national assets including state owned enterprises were sold, and several employees were laid off without any explanation, except that the leadership had mismanaged the finances of the country. We were all told to tighten our belts.
Between 1990 and 1991, the painful medicine administered by the IMF and World Bank began to show results. Our national debt was reduced to 31.9% of GDP (from 120%); inflation was brought down from 142% to about 10% and interest rates were down to 15% from a high of 50%. In the process, many casualties were created; however, that was the price to pay for the mismanagement of the economy. That was the period of Structural Adjustment.
With the economy now stabilised and the mission accomplished, the IMF passed the baton to our political leaders to carry on with the race. We had been given a new lease of life and it was our responsibility to manage our fiscal affairs prudently and with the utmost care.
Not long after the departure of the IMF, our political leadership squandered the opportunity created for economic growth and went back to their old culture. They borrowed huge sums of money under the guise of development between 1992 and 1995. As a result, our national debt ballooned to 91% of GDP from 33% in 1992. The picture remained gloomy until 1996.
Thankfully, from 1996 to 1998, there was a glimmer of hope and we experienced a slight decrease in the national debt from 78% to about 70%. Regrettably, this was short lived and by 1999/2000, the painful sacrifices of our citizens had come to nothing.
Our leaders had become addicted to borrowing without limits to the extent that, once again, our national debt exploded from 70% in 1998 to 123% of GDP in 2000. Extreme hardship on the citizenry reared its ugly head again. Inflation rose to more than 25% and interest rates on loans shot up to between 40% and 50%. Once again, the country was assaulted with excessive borrowing and spending, to a point where we teetered on the brink of bankruptcy. How could we have allowed this to happen again, just within 10years!
It was no wonder, therefore, that in 2001, without any shame, our leaders wobbled back to the IMF and the World Bank to beg for Debt forgiveness. Lo and behold the IMF and the World Bank forgave us our trespasses (debts) under a new program called Heavily Indebted Poor Countries (HIPC) program.
This pardon didn't come without the usual "bitter" measures, called conditionalities and by 2006 our debt was brought down from 123% to 26% of GDP drastically as a result of the HIPC Initiative. Inflation also declined to about 11% and commercial bank interest rates reduced to between 15% and 18%. Just as in 1991 and 1992, the country was ready for a good takeoff again! However, in 2007 and 2008 our debt went up again from 26% in 2006 to 34% of GDP by 2008.
As has been the story of Ghana, between 2009 and 2014, not long after the IMF's exit, the national debt almost doubled and jumped to 65%. Commercial Bank interest rates also rose to an alarming rate of between 30% and 40%. The international rating agencies of the world lowered our credit rating to "B", equivalent to Junk Bond status.
Should we continue on this path, our national debt will grow to about 70% of GDP by 2016 and close to 100% by 2020, returning our nation to where it was some thirty years ago, at the brink of financial collapse.
Under the circumstances, the question that faces us as citizens is: how do we inculcate the culture of financial discipline among our elected leaders knowing very well that their inability to manage the country's fiscal affairs has been the bane of our problems and the cause of our poverty and underdevelopment?
The IEA proposes that Ghanaians should require the adoption of fiscal policy rules with ceilings on annual fiscal deficits.
To be effective, this rule should be incorporated in a legislation to govern the entire public sector financial management system with well defined sanctions for violating the law.
By so doing, our decision makers/or political leaders will be guided by a clearly defined legal framework. This is not new; several countries including Chile, Brazil, the United States of America and countries of the European Union have adopted such frameworks to protect their economy and citizens from short-term polices for political expediency.