John Kwakye speaking to the Audience
Director of Research at the Institute of Economic Affairs (IEA), John Kwakye, has called on the government to amend the Fiscal Responsibility Act, which currently has a 5 per cent deficit ceiling, to 3 per cent in order to promote fiscal discipline and microeconomic stability.
He said this at an IEA Constitutional Review Seminar on ‘Institutionalising Fiscal Discipline and Macroeconomic Stability For Sustained Growth In Ghana: The Constitutional Pathway.’
According to the Director, the reason for the country’s return to the International Monetary Fund (IMF) seventeen times is because of the government’s inability to sustain fiscal discipline, which according to his report, is an important condition not only for macroeconomic stability but also for debt sustainability.
“Ghana has a long history of fiscal indiscipline. This is evident in our fiscal deficits being almost consistently higher than those of our peers. Our deficits tend to escalate in election years when we elevate election-related spending. Then we borrow to finance deficits and cause our public debt to escalate to unsustainable levels. We have been in that situation numerous times,” he shared.
He also added that the prevalence of fiscal indiscipline has caused high fiscal deficits which have resulted in the current increase in inflation and currency instability.
“Our debt reached the first crisis in 2004, when it ballooned to over 100 per cent of GDP. We had to seek relief under the HIPC Initiative which caused the debt-to-GDP ratio to drop to a sustainable level of 26 per cent in 2006. Thereafter, we returned to our culture of fiscal indiscipline which caused the debt to rise again. And today, the debt-to-GDP ratio is back to an unsustainable level of over 100 per cent. We are back to where we were almost twenty years ago,” he stated.
“The 3 per cent ceiling is in line with the convergence criteria for the ECOWAS and West African Monetary Zone (WAMZ), both of which Ghana is a member. Some of our colleagues even suggested a balanced budget to avoid deficit or borrowing however some of us have maintained that we should allow some expenditure in excess of revenue and borrowing to meet excess expenditure, particularly in a developing country such as Ghana,” he explained.
He further added that the government’s borrowing to finance the budget deficit should be restricted to capital expenditure only.
“This is a prudent condition practiced by some countries such as the UK, which ensures that loans are used only for productive, rather than consumption, purposes. Using loans for investments assures that they would yield returns for future repayments,” he said.
By Abigail Atinuke Seyram Adeyemi