Ghana has a set of problems not unique among developing countries – it has an infrastructure deficit, high public debt, high inflation, a large public sector wage bill and a fast depreciating currency.
In such an economy, borrowing is expensive and attempts at increasing the money supply through the central bank will be met with higher inflation and a fast depreciating currency as foreign investors pull out their investments. Cutting the public sector is not only politically difficult but it reduces the spending power in the economy and growth is affected as a result. All the while, the lack of infrastructure is holding back growth on the supply side.
Increasing taxes seems to be one way out. And the government has pursued this approach. It increased total revenue and grants from 20.8% of GDP in 2013 to 23.1% of GDP in 2015. I have been generally supportive of this move with the caveat that the government should ensure that multinationals pay their fair share and not just levy indirect taxes on the people at any opportunity. I have also cautioned that the informal sector may largely consist of people who do not even meet the minimum income requirements to pay tax and so we shouldn’t project huge tax revenue from levying direct taxes on them.
So now let’s assume that the government can’t raise enough money from taxes, investors are unwilling to lend to it and FDIs are drying up due to a lack of confidence in the economy. What else remains?
One option is to direct the private savings of the citizens towards infrastructure development through listed companies. Let me explain with an example.
Say the government identifies that $500m is needed over a period of 5 years to build a power plant. The government incorporates a company for the purpose of acquiring, installing and operating the plant. The plant will be funded through an issue of that companies shares.
In order to ensure maximum participation, the government can offer to withhold 5% of the public sector wages in exchange for shares of the company. The government spent GH¢10.55bn ($2.7bn) on salaries of public sector workers last year. 5% of that is $135m. Of course, the workers should be given the choice to opt out of the programme or acquire more shares than are being offered per worker. The shares should also be made publicly available for the general public to acquire and should thereafter be floated on the Ghana Stock Exchange (GSE) or Ghana Alternative Exchange (GAX) so that those who want to dispose of them can do that and those who didn’t initially buy can join in.
The power generated from the plant will be paid for by the general public and its profits will be transferred back to its shareholders as dividends or reinvested in maintenance and expansion. The government can grant tax exemptions to such a company like it grants to the operators of some of the emergency power plants it acquired.
The upsides to such a programme are no debt for government, increased interest in investing for the public, a management which will be under more pressure to deliver results (compared to those of government-owned companies) and increased liquidity on the GSE/GAX. Downsides could be the reduced spending that arises from people investing their money, although I think that is a short-term problem.
Of course I believe the government should borrow for infrastructure projects. But we are in a situation in which deficit spending is discouraged because of our large external debt and our programme with the IMF. This is an alternative project financing method that gets around the restrictions.