Ghana’s fiscal management has long been hampered by a structural narrow revenue base due to a large informal sector and a reliance on few primary commodities—cocoa, pineapple, gold— which are highly susceptible to changes in the global economic conditions.
In spite of significant reforms in Ghana fiscal management such as Heavily Indebted Poor Country (HIPC), the country’s fiscal management has not stabilized over the years. The inherent structural weakness in Ghana’s fiscal policy regime; poor revenue mobilization capacity, poor public financial management systems and fiscal excesses during election years have always undermined the effectiveness of fiscal reforms the government has implemented. The country’s inability to streamline and synchronize its spending programmes with its revenue mobilization capacities particularly in election years has resulted in persistent fiscal deficit levels at variance with programmed limits. Given that elections are sine qua non in Ghana’s democratic governance, expenditures in elections must be well managed.
The Election-Fiscal deficit cycle
Elections are a mainstay in Ghana’s democratic governance. Every four years Ghanaians go to the poll to exercise their franchise. Election years in the country have barely gone by without fiscal overruns. The country experiences expenditure overruns in election years which have plunged the country into a cyclical deficit situation. Amo-Yartey (2014) argues that fiscal performance in Ghana tends to worsen during election years with concomitant increase in the debt levels. It is often the case that incumbent political parties tend to pursue a politically-motivated fiscal impulse in election years in order to retain power. Primarily, during election years, government consumption increases, leading to higher fiscal deficits. The fiscal indiscipline contributed partly by election years continues to undermine Ghana’s economic growth prospects in both the medium and long term. Figure 1 shows that Ghana has suffered from a large scale of fiscal volatility around election cycles for the past two decades.
Figure 1: Ghana’s Fiscal Performance (1990 – 2018)
Going into the 2020 Elections
Ghana has a track record of high fiscal deficits, partly reflecting procyclical fiscal policies in
good times. Following the discovery of oil in 2007, the ensuing 2008 elections set the procyclicality on a rising trend all the way to 2017. The World Bank projects the Ghanaian economy to experience growth rate above 6% over the period 2019 to 2021. This projection is in a stark contrast to the mere 3.4% real GDP growth in the last election year— 2016. The macro-fiscal economy is largely back on track after years of adjustment, supported by the World Bank and the International Monetary Fund coupled with a financial sector clean up.
The positive economic outlook implies that Ghana will go into the 2020 election from a much stronger position than in 2016. It also implies greater risks of fiscal overruns. The tendency for the government to fulfil campaign promises and roll out populist policies are probable. The likelihood of the government to exercise or interfere in the financial management of Ministries, Departments and Agencies are likely. Given the country’s record of high fiscal deficits in election years, the government’s consumption expenditure must be keenly monitored to ensure the 5% budget deficit set by the country’s Fiscal Responsibility Act is adhered to.
Ghana’s Fiscal Council and the task ahead
As far as Ghana remains a democratic nation, elections are going nowhere. The fiscal overruns that accompany Ghana’s election needs to be curtailed. In an attempt to address the fiscal conundrum, the government in 2018 established a Fiscal Responsibility Advisory Council (Fiscal Council) with the mandate to develop and recommend to the President fiscal responsibility policies for the maintenance of prudent and sustainable levels of public debt.
Country experiences suggest that a number of countries have implemented supporting institutions and reforms to improve the functioning of fiscal rules including the establishment of independent fiscal councils. These fiscal councils can exercise important supporting functions for fiscal policy by assessing the reliability of the macroeconomic and revenue assumptions underpinning the budget, and estimating the fiscal impact of proposed measures.
The Fiscal Council established in Ghana has a huge task to play in ensuring that fiscal expenditures remain within budget. The Council has a tall order to keep the powerful executive arm of government in check. Most important, the independence of the Council is in doubt as its members are directly appointed by the executive body which the Council is expected to advise.
Conclusion and Recommendations
Addressing Ghana’s fiscal challenges requires an ambitious fiscal consolidation strategy. Foremost, the establishment of a Fiscal Council is in the right direction. However, the Council must be devoid of partisanship, it must have less interference from the executive council of government. It is also necessary to give the Council the necessary legal backings to bind the government on fiscal targets that the council proposes or recommends. The current advisory role assigned to the council is not sufficient as it leaves room for the executive to disregard the recommendations and fiscal targets set by the council. The thrust here is that rules entrenched within a stronger legal framework are more difficult to reverse.
Ensuring long-term fiscal sustainability, will require the full implementation and compliance with fiscal anchors such as a Fiscal Responsibility Act with expenditure rules to curtail overruns especially during election cycles. It is argued that monetary and fiscal policies are two sides of the same coin in the management of an economy. It will, therefore, be necessary to ensure proper coordination between fiscal and monetary authorities. Such a coordination will help in eliminating the tendencies of monetary authorities printing money to support excessive expenditures in an election year.
It’s an election year in an African country which not long ago exited an IMF program. Will the usual electoral fiscal overruns occur or the new measures—Fiscal Council, Fiscal Responsibility Act—help put government expenditures in check?
The views expressed in this article are those of the author alone and not the Future Africa Forum.
The views expressed in this article are those of the author and do not necessarily reflect the views of Future Africa Forum. Future Africa Forum is a pan-African policy think-tank and policy advisory consultancy headquartered in Nairobi, Kenya.
