After another review the IMF has approved a third tranche of $114.6m for the country as part of the on-going Extended Credit Facility. The president in the recent press meet also suggested that the country might have done better than the target of 7.3% deficit last year. So I was a bit surprised to see an opinion piece in B&FT suggesting that austerity has failed in Ghana.
Regular readers of ceditalk.com would know that I am no fan of austerity. I have mostly sided with Kwame Ofori Asomaning, the leading anti-austerity economist in Ghana, here and here. But I have always pointed to the absence of our stock of dollar-denominated debt in his analysis and what loosening could mean for exchange rate and interest payments.
Chart: USD/GHS in the last 180 days
In the above chart, one can see the cedi has stabilised against the dollar since October. And was clearly not affected by the increase in the Federal Reserves interest rates in December. Of course, I have said that the hike had already been priced in and we have had quite some eurobond inflows but can one imagine the potential effects that a signal of loosening could have on the exchange rate? Especially with inflation at 17.7%?
Foreign debt as at September 2015 was US$14.4bn. A whopping 40% of GDP! We can hope that the economy grows to reduce this ratio. But how, even after rolling back austerity, can we grow? Especially with the huge political cost attached to borrowing? Oil breached what I thought was a price floor (at least before Iranian oil flows) of $30 yesterday. B&FT is also reporting a surprising fall in cocoa prices. The fundamental problem of reliance on these commodity prices have not been fixed. The power crisis has not been fixed. Surely, they also need to be fixed to have growth back to an appreciable level. Given these, I think we have no choice than to try to reduce the debt through austerity.
As far as austerity goes, ideology tends to come into play between preference for cutting expenditure and increasing taxes. The right would prefer more expenditure cut while the left would prefer more taxes. It appears Ghana has largely stuck to the deficit targets through taxation. And that is probably the reason why austerity is not looking so attractive any more to the right. (To be fair, that is related to why I am doing the surprising thing of supporting an austerity programme.)
But let’s not see an attempt to reform an inadequate tax system only as an austerity requirement. According to the president, Ghana’s tax to GDP ratio is 17%. Which is inadequate for a country which wants to move away from ridiculously expensive borrowing. We need to increase tax revenue but it must be done fairly and not in a way to choke budding businesses or reduce incentive or raise prices on the vulnerable. We need to capture all the economic activities that are unreported under the net. We need to stop granting tax exemptions to foreign companies “by heart”. And the government has to ensure that the funds collected are used productively and are accounted for to justify the tax increases. At least show us that you’re willing to retrieve funds from those who have wrongly gained!
Of course, the thirst for foreign debt is a big reason why we are here. If we are to end the austerity and move to the type of growth economics that will lift the people out of poverty, we have to be more circumspect next time we’re faced with huge revenue and cheap credit. But until such a time comes, we have to do what we can not to completely come off the rails.