In Part 1, I overused the term fiscal balance/imbalance on purpose. It is an extremely critical matter in the economic management of nations like Ghana. Yes, nations like Ghana. The United States is the greatest nation on earth in terms of GDP and military power. It’s not even close, as President Obama would say. However, they have exceeded debt levels of more than $ 31 trillion, excluding liabilities such as pension, social security, and military benefits crossing $ 240 trillion. You heard that. Somehow, it is still the greatest economy on the planet, whether artificially held together or not. Would you not want to look at Ghana separately from these examples?
What is Fiscal Imbalance?
In Frederick Mishkin’s analysis of the economy of Iceland, he points out that there are three things that cause financial instability in an economy; a) Liberal Market without strong prudential regulation b) Fiscal Imbalance and c) Imprudent Monetary Policy.
Two of these were mentioned in Part 1, but in this part, our main focus will be on Causative Agent 2.
The term Fiscal Imbalance means that there is a big gap in the country’s budget that has to be filled(financed). Ghana is in that spot. When fiscal balance is in the negatives, it means the government does not have the ability to meet its financing needs. When this happens, governments are forced to issue debt instruments. This is more or less the beginning of a Ponzi-esque scheme. If the government is not in a position to meet its financing needs, how can it be in a position to pay back the debt? The banks know this but they are forced to purchase these government debts anyway. However, like every Ponzi, it is just a matter of time before people lose confidence. Investors begin to pull out of the bonds, causing the price curve to invert. This generates a complex problem of weak balance sheets in the financial statements of the banks, and they are left with one option of selling at a big loss. It is a virus. It has no cure. It develops into an even worst stage, the worst nightmare of every economy- Currency Crisis. When there is a currency crisis, the end is nigh. This is where Ghana is and has ever been for the years under perspective. Truth is, no economic theory whatsoever works when debt significantly exceeds productivity. There is only one secret in finance and it is obvious to everybody- that the Return on Investment must always exceed the Weighted Average Cost of Capital. Therefore, one of the most important to-dos of an economic management team is to see to it that this is true at any given time.
Ghana’s peers, Singapore and Malaysia, although not always above zero in terms of fiscal balance as a percentage of GDP, have been very stable many times comfortably above that trough (i.e. positive fiscal balance). This is a crucial aspect of economic management that Ghana must strive to emulate.
Historical Examples
Let’s dive deeper and draw parallels to other countries that have faced similar challenges.
To understand the potential consequences of fiscal imbalance, we can look at the case of Mexico. In the 1980s, Mexico experienced a severe fiscal crisis. By 1982, the Mexican government owed more than 550 banks. Similar to Ghana’s situation, Mexico had been heavily relying on external borrowing to finance its budget deficits. As a result, its debt levels soared to unsustainable levels.
When the global financial environment became less favorable, Mexico found itself unable to service its debt obligations. Confidence in the country’s economy waned, leading to a sharp depreciation of the Mexican peso and a subsequent currency crisis. The government was forced to implement stringent austerity measures, including significant cuts to public spending, which resulted in social and economic hardships for the population.
The Mexican Debt Crisis serves as a cautionary tale for countries like Ghana that face fiscal imbalances. It demonstrates how a reliance on debt financing, coupled with a lack of sustainable fiscal policies, can have severe repercussions on the economy and the well-being of the citizens.
By learning from the experiences of countries like Mexico and understanding the perils of fiscal imbalance, Ghana can navigate its economic challenges more effectively. It is crucial for the government, policymakers, and stakeholders to prioritize fiscal discipline, responsible financial management, and sustainable economic growth to ensure a prosperous future for the nation.
Way Forward
To address Ghana’s fiscal imbalance there’s a need for a comprehensive approach that encompasses both revenue generation and expenditure management.
On the revenue side, Ghana can explore avenues that can sufficiently finance our budget. Often times when we mention revenue mobilization, the first thing that comes to mind is tax collection. I am not one of those who subscribe to this. I do not say that the country must not collect taxes, but I think the idea that the increase in taxes automatically enhances development is not exactly true. Going down in history from the 1400s, we do not see a single economy that developed on increased taxes. Rather, we see the opposite. We will go deeper into such matters in later parts of this series where I write expansively on specific things Ghana must do to improve our situation, philosophy, leadership, and the science of development.
Exploring other avenues to add value to Ghana’s abundant natural resources can indeed generate significant revenue. Ghana is blessed with rich reserves of natural resources, including gold, cocoa, and lithium. While these resources have been traditionally exported in their raw form, there is a tremendous opportunity to add value through processing and refining, which can lead to higher revenue generation and economic growth.
One prime example is the gold industry. Ghana is currently the largest producer of gold in Africa, and traditionally, we have exported gold in its raw form. However, by investing in local refining and processing facilities, Ghana can capture a larger share of the value chain. This means refining the gold locally, producing gold bars, jewellery, or other gold products, and exporting the finished goods. By doing so, Ghana can benefit from higher export revenues, create more jobs in the processing industry, and build a stronger domestic gold sector.
Similarly, cocoa, another vital resource for Ghana, presents an opportunity for value addition. Ghana is one of the world’s largest cocoa producers, and by processing cocoa beans into products like cocoa powder, chocolate bars, or cocoa butter, the country can earn higher revenues compared to exporting raw cocoa beans. Value-added cocoa products have a higher market value and can command premium prices, leading to increased export earnings and job creation in the cocoa processing industry.
Furthermore, Ghana’s recent discovery of lithium deposits opens up new possibilities for revenue generation. Lithium is a key component in the production of batteries for electric vehicles and renewable energy storage. By establishing lithium extraction and processing facilities, Ghana can tap into the growing demand for lithium globally and become a supplier of refined lithium products. This would not only generate substantial revenue but also position Ghana as a key player in the emerging green technology sector.
In addition to these examples, there are numerous other opportunities to add value to Ghana’s resources. It requires strategic planning, investment in infrastructure, technology transfer, and fostering partnerships between the government, private sector, and international investors. By leveraging these resources effectively and adding value through processing and refining, Ghana can unlock significant economic potential and reduce its dependence on raw resource exports.
It is important to note that while adding value to natural resources presents opportunities, it also requires careful consideration of environmental sustainability, social impacts, and equitable distribution of benefits. Proper regulations and responsible practices should be in place to ensure that value addition is carried out in a sustainable and inclusive manner, benefiting both the economy and the people of Ghana.
By exploring these avenues and promoting value addition, Ghana can maximize its revenue potential, create employment opportunities, foster technological advancements, and ultimately achieve a more sustainable and prosperous future.
It is essential to note that addressing fiscal imbalance requires a long-term commitment and a comprehensive strategy. Ghana’s economic management team must work collaboratively to develop and implement sustainable fiscal policies, including prudent debt management, effective fiscal oversight, and robust financial governance.
Join me in Part 3 of the series, where I address an important issue of how to create transparency in the financial governance of the country and reverse monies that would have otherwise landed in the pockets of corrupt citizens.
[End of Part 2]
Hubert Baidoo
Co-founder of Afria.io
Email:Hb672@exeter.ac.uk