IEA: We’ve failed to raise enough revenue, a reason for high borrowing

The Institute of Economic Affairs has charged government to take bold and innovative measures to mobilise resources and allocate them judiciously to support long-term sustainable growth.

This it believes is capable of delivering sufficiently-high living standards to Ghanaians and moving the country out of poverty within a generation.

In its expectations of the 2022 Budget and Economic Planning, the IEA said “Ghana has a serious challenge with domestic resource mobilization. Year after year, domestic revenue falls short of budget targets. Meanwhile, the revenue targets themselves are also not sufficiently ambitious vis-à-vis the country’s needs.”

“The consequence of failing to raise enough domestic resources is that we have to resort to borrowing, which has caused our debt to continue to mount. Using the 2021 budget as an example, tax revenue and total revenue were projected at ¢56 billion ($9.7 billion) and ¢72 billion ($12.4 billion) respectively. These figures are small when juxtaposed with our huge economic and social needs. Measured as ratios of GDP, which are usually used for international comparisons, tax revenue and total revenue were 12.7% and 16.5% respectively”, it stressed.

Furthermore, it pointed out that ‘we must admit that Covid-19 has adversely affected revenue generation. However, even before Covid-19, our revenue performance was very much similar to that of 2021. When we compare our revenue performance with that of our middle-income peers (MIPs), we see that we significantly fall short. The average tax revenue/Gross Domestic Product and total revenue/GDP ratios for Ghana compare unfavourably with our MIPs’ average of about 25% and 30% respectively.”

It proposed actions needed to be taken to scale up domestic resource mobilisation to support development. They include addressing illicit financial flows, review of tax exemptions, eradication of tax fraud, among others.

Government spending is imprudent

On resource allocation, the IEA said the distribution of expenditure is clearly imprudent, injudicious and inefficient.

“For Ghana, government expenditure is grossly skewed in favour of recurrent expenditure, popularly referred to as ‘consumption expenditure,’ and at the expense of capital expenditure (CAPEX), which is needed for growth. In the 2021 Budget, recurrent expenditure was projected at 20% of GDP, while CAPEX was projected at 4% of GDP. The ratio of CAPEX-to-GDP is unacceptably low. Indeed, as a developing country, we should be allocating 10-15% of our GDP to CAPEX. That is what will allow the economy to grow and move the country quickly up the development ladder”, the economic and policy think tank noted.

In terms of tax revenue, compensation absorbed 58% and interest 56%. This means that, together, compensation and interest constituted 114% of tax revenue. The implication is that tax revenue could not even fund compensation and interest and that government has to borrow to top up in addition to funding all other government expenditure related to transfers, goods and services, and CAPEX.

“Certainly, serious expenditure rationalization and rebalancing is called for”, the IEA prescribed.

Debt service described as a major concern

The issue about public debt service burden is also a major concern expressed by the economic and policy think tank.

This year, it is projected that as much as 56% of tax revenue would be used to pay interest on the country’s debt. This level of debt service, the IEA, said poses risks for fiscal sustainability and the country’s sovereign rating.

It therefore recommend measures such as debt ceiling and fiscal consolidation to deal with the debt risk on a more lasting basis.

For debt engineering, it said the debt could be restructured or refinanced, some of which is being already undertaken, to lengthen the maturity profile and replace more expensive debt. On economic transformation, it called for a strong industrialisation drive to transform the economy away from production of low value-added commodities into high value-added production to accelerate economic growth, growth in living standards and the fight against poverty.

“There is an urgent need to transform the economy into a modern, resilient, self-sufficient and “beyond-aid” economy. While the need for economic transformation has long been recognized by our governments, the issue has largely been paid lip service, without concrete actions being taken to bring it to fruition”, it mentioned.

Natural resource management

It said Ghana possesses natural resource wealth underground that is believed to be worth trillions of dollars, and therefore it is inconceivable, that the country remained poor above ground.

“We should protect the national interest by ensuring that Ghana receives maximum benefits from its natural resources. In particular, government should take the necessary steps for Ghana to take complete ownership of our natural resource wealth. Recent acquisition of commercial interests in Jubilee and TEN blocks by Ghana National Petroleum Corporation—in addition to its existing Carried and Participating Interests—must just be the beginning of a drive to increase Ghana’s beneficial ownership in its oil”, the IEA pointed out.

It continued, saying “government should revisit existing mining contracts and, where possible, renegotiate the overly-generous terms granted to foreign investors. Government should refrain from signing any more contracts on a concession basis. Where contracts are signed on a product-sharing basis, Ghana should retain a maximum share of the product. Eventually, the aim should be to sign “service contracts,” whereby the investor is paid for the cost of extracting the natural resource plus a reasonable profit margin.”

Economic growth has not matched the rate of additions to labour market

For unemployment, it said the acute unemployment problem has several causes, and as such economic growth has not matched the rate of additions to the labour market.

“Further, growth has been largely concentrated in the extractive sectors, which, because they are highly-capital-intensive, do not create many jobs”, it stated.

To give job-creation the needed impetus, the IEA recommend that government focus on policy interventions that create balanced growth in the economy so that they can generate more jobs, government pursues a strong economic transformation and industrialization drive as well as government creates an enabling environment for private enterprises to thrive and create jobs.