Vice President Dr Mahamudu Bawumia
Ghana goes into economic crisis
Ghana runs to IMF for support
Bawumia shifts blame from government
Vice President Dr Mahamudu Bawumia on Thursday, July 14, 2022, delivered the keynote address at a public lecture organized by the Accra Business School.
The
Read full articletheme of the event was: “The role of Information Technology Education in the government’s digitalisation agenda.”
Dr Bawumia as part of his lecture spoke at length about the importance of how the current government is utilizing the digital space to push for Ghana’s development.
Despite the focus of the theme, the vice president seized the opportunity to issue his first reaction to the various responses that have met the government’s decision to seek support from the International Monetary Fund (IMF).
“Before I conclude, I would like to use this opportunity to make some comments on an issue on the minds of many Ghanaians: the decision by the government to opt for an IMF program to stabilize the economy in the midst of global crises (the COVID-19 pandemic and the Russia Ukraine War). A crisis which has visited untold hardships on Ghanaians with rising prices of virtually everything from fuel to bread, tomatoes, building materials and so on. In the midst of this global crisis, Ghana’s fiscal and debt sustainability has worsened,” he stated.
The first issue the vice president tackled about the decision to go to the IMF and the criticism it has brought up was the conversation about Ghana’s expenditure amidst the COVID-19 pandemic.
“Some commentators and analysts have argued that COVID-19 expenditures alone could not be the reason for the large increase in the fiscal deficit and the debt stock. In fact, they are right. COVID-19 expenditures alone were not the reason for the large increase in Ghana’s debt stock by the end of 2021,” he stated.
Referencing a similar lecture he gave about Ghana’s economy in April this year, Dr Bawumia said a Banking Sector Clean-up and some Energy Sector Excess Capacity payments were instrumental in raising Ghana’s fiscal deficit and debt stock.
“The excess capacity payments of GHC 17 billion relate to a legacy of take or pay contracts that saddled our economy with annual excess capacity charges of close to $1 billion. These were basically contracts to supply energy to Ghana way in excess of our requirements, but we were obligated to pay for the power whether we use it or not. The excess 24 capacity payments include GHC 7 billion of payments for gas resulting from the previous government signing an offtake agreement for a fixed quantity of gas with ENI Sankofa on a take or pay basis which was way in excess of what was needed at the time. Not keeping up with the excess capacity payments would have meant throwing the country back into a new bout of dumsor,” he explained.
He added that the Akufo-Addo-led government upon assuming office was confronted with a banking crisis brought about by the mismanagement of the banking sector.
He noted that the COVID-19 expenditure, financial sector clean-up and the payments for excess capacity charges led to a cost of GHC54 billion on the state.
“The data in Table 2 shows that the three items of expenditure cumulatively amounted to GHC 54.0 billion (the equivalent of some $7.0 billion), which was borrowed. The Ministry of Finance estimates that the interest payment on this borrowing for the three items amounts to GHC 8.5 billion annually. This is some 23% of Ghana’s annual interest payments of GHC 37 billion,” he noted.
Comparing the expenditure on the three items to the total expenditure of some of the government’s flagship policies, he noted that the state spent as much as three times what it has spent on such policies in five years on the three items alone.
“To put the expenditure on these three items in perspective, it is important to juxtapose it against the total expenditure (releases) on some of the government’s key flagship projects, including Free SHS, one district one factory, planting for food and jobs, Development Authorities, Ghanacard, Zongo Development Fund, NABCO, and teacher and nursing trainee allowances. The data shows that the expenditure on these key flagship programs over the five-year period between 2017 and 2021 amounted to GHC15.62 billion compared to the GHC 54.0 billion expenditure on the three exceptional items. The expenditure on the three exceptional items amounted to more than three times the expenditure on the flagship programs over five years,”.
He noted that the interest the state is paying annually for the money borrowed to pay for the three items is double the annual cost of the flagship programmes.
He added that taking out the “GHC 54.0 billion debt for the three exceptional items (COVID-19, Financial Sector and Energy), Ghana’s debt to GDP would be within the sustainability threshold of some 68% instead of the 76.6% at the end of 2021.”
Roping in the Russia-Ukraine war, the vice president listed a plethora of effects the four events combined have had on Ghana’s economy.
This he noted includes disruption to the global supply chain, rising inflation, slowed economic growth, inability to meet revenue projections as well as Ghana being downgraded by international credit rating agencies.
“Before COVID-19, Ghana was borrowing $3 billion annually from the international capital market. Following COVID-19, the international capital markets have been largely inaccessible by emerging market countries like Ghana,” he mentioned amongst other things adding “hence decision to seek IMF support.”
Describing the four events (Energy Sector Excess Capacity Payments, Banking Sector Clean-Up, COVID-19, and the Russia- Ukraine war) as a “quadruple whammy” Dr Bawumia said, “if you take out the fiscal impact of this quadruple whammy, Ghana will not be going to the IMF for support because our fiscal, debt and balance of payments outlook would be sustainable.”
“Of the four factors, two (COVID-19 and the Russia Ukraine war) were external and the other two (the banking sector clean up and the excess capacity payments) were the result of policies of the previous government,” he added.
He emphasized that the current economic hardship is not limited to Ghana alone stating that “all over the world, fuel prices are rising in virtually every country, food prices are rising, inflation is at a high for many years, currencies are falling in value, fiscal deficits are increasing, debt levels are increasing, etc. This tells us that what we are dealing with is a global phenomenon.”
Alluding to an analogy, Dr Bawumia went on to clear his government of blame for Ghana’s current economic challenges.
“Let me give you an analogy to make my point. If you ask a carpenter to roof your house and suddenly the roof collapses without any wind or rainfall, will you not blame the carpenter who did the roofing?
“But if a carpenter roofs your house and the roof collapses because of a tornado and a storm which has also blown away the roofs, windows and walls of many houses, will you blame the carpenter?” Dr. Bawumia questioned.
In proffering solutions for Ghana’s current situation, Dr Bawumia, among other things, highlighted the need to restore fiscal and debt sustainability through revenue and expenditure measures and structural reforms.
“Indeed, the reliance on international capital markets to fill the financing gap of about $3 billion annually exposed the vulnerability of the economy once the capital markets shut down to emerging economies. This has heightened the need for Ghana to build foreign exchange reserve buffers to cater for unanticipated shocks like COVID-19 and the Russia-Ukraine war,” he said.
He noted that the government is seeking to build up Ghana’s foreign exchange reserves through a new policy where the Bank of Ghana has the first right of refusal for all gold mined in Ghana. He said this policy will help the government of Ghana to back the cedi and future borrowings with gold once the central bank is able to accumulate enough gold in its safe.
He spoke about industrialisation, energy sector reforms, investment in TVET, expansion of the tax base, increase in agricultural production and digitalisation as some pursuits of the current government which are aimed at resolving the current situation.
He further sought to differentiate Ghana’s ongoing journey to the IMF and the previous 17 expeditions noting some successes achieved by the current administration over the period.
“We are talking now about a different Ghana. A Ghana that is being rapidly transformed. The underlying systems are being dramatically changed through digitalization and other policies that would transform the structure of the economy. With enhanced fiscal discipline and structural reforms to restore debt sustainability and growth, we should emerge stronger than we have with the previous 17 IMF programs,” he stated after listing a myriad of successes chalked by the current government.
Dr Mahamudu Bawumia concluded by emphasizing that digitalization remains integral to the quest of the Nana Addo Dankwa Akufo-Addo-led administration to steer Ghana from the current economic challenges and pursue development.
GA/DO
