Righting the wrongs in a public financial crisis

Though in a market economy the private sector is seen as the engine of growth, there is no doubt that the public sector’s performance affects aggregate performance of the private sector. The policies of government and quality of their implementation can stimulate growth or stifle it.

In the management of an economic crisis, the economic agents are expected to cooperate and play their respective roles on a scale of descending order, so that the burden of the crisis can be lessened for the vulnerable in society.

The state and those who wield power rank higher on the scale. This makes the burden lighter and less inconvenient to ordinary residents.

However, where there is lack of openness, transparency, and entrenched postures coupled with a show of insensitivity become the order of the day, suspicion is deepened and the outcome is resistance to cooperation. Nobody gains. The burden weighs more heavily on the poor, including the middle-class, in society than those in power and the rich. Such a situation creates opportunities for the affluent in society at the poor’s expense.

It is important to note that in managing a financial crisis, prioritisation in a ‘Pecking Order’ needs to be considered. Government has to correct its fiscal and monetary policies, first and foremost, before falling on the populace.  In this respect, the pecking order scale ranks fiscal, monetary and debt as the order of preference.

  1. Fiscal Adjustment
  2. Monetary Management
  3. Debt Management

The first aspect of crisis management is to tackle fiscal deficiency, which rests squarely with government. It is a hassle-free approach and imposes no inconvenience or difficulty on government, because all the factors are under its ambit. Next is monetary management. This includes money supply, exchange rate and inflation. These measures complement fiscal adjustment for macroeconomic stability.  The following is the ranking order of the variables for fiscal treatment:

Fiscal Adjustment

  1. Expand tax net
  2. Cancel tax exemption
  • Defer tax holidays
  1. Cut government size
  2. Avoid opulent government lifestyle
  3. Suspend all non-value adding spending (judgement debt, foreign travel etc.).
  • Suspend all non-essential ongoing public projects
  • Cut emolument of all those in the higher group on public payroll
  1. Freeze public sector employment

The first three are for government revenue. The easiest is to expand the tax net by bringing into the net those who were hitherto not paying tax. If the current tax burden is not too much on those who have high income in society, they can be taxed more. By cancelling tax exemptions, more revenue will be made available. When tax holidays are suspended, more revenue is made immediately available to close the deficit. All these actions are geared toward increasing the amount of revenue in order to decrease the deficit.

Immediately after treating for increase in revenue, public sector spending is next to be considered. The first in order of ranking is to cut government size, followed by prudent spending. These two affect the spending on core central government. This might be politically expensive, but in a financial crisis economic interest ranks second to none. These two variables when adopted will reduce government expenditure (austerity).

This will send signal to the populace and underscore policy credibility in the eyes of the international community. It also directly or indirectly motivates the public to cooperate with government, including the donor communities, to bailout the country from its crisis. For government, taking the first concrete steps prepares the minds of stakeholders in advance to accept government’s request to be part of the solution should they be called upon. Problem Sharing!

Following next is to engage in the exclusion of all non-value adding expenses, such as judgement debt, foreign travels etc. Next is to suspend spending on all non-essential projects, otherwise known as luxuries. The next is to cut down on large-sized emoluments.  A freeze on public employment should be last on the scale to touch, because of its importance to national security.

The increase in revenue and fiscal adjustment of expenditure is about the importance of primary and fiscal balances. For a credible sustainable policy assessment, stakeholders will always want to see how the primary balance reacts to policy. By increasing government revenue while at the same time reducing government expenditure, surplus on primary balance soars; and with positive outlook it signals government’s willingness to tackle the problem. Savings made will impact on debt servicing in the fiscal balance. Once a credible fiscal adjustment policy is pursued, there will be no call for inclusion of the debt in the pecking order scale. A credible fiscal adjustment combined with monetary management will correct fiscal deficit, correct BoP deficits and ensure macroeconomic stability. The economy then has no choice other than to bounce back to life.

When both A and B on the scale fail, the country has no other choice than to use C – which is debt. The use of C in financial crisis management is through falling on the resources of individuals who lend to government, as part of the efforts to correct the crisis. This is an issue of debt default, which goes with reputational risk. Government cannot mismanage an economy then turn around and ask lenders to fix it.

Debt Ranking

  1. Domestic – Local currency
  2. Domestic – Foreign currency
  • External – Foreign currency

Domestic debt issued in local currency ranks first to be considered. This is so because such debt-holders are residents in the country who are affected directly by the outcome of government’s economic management; therefore, their assistance must be the first sought in the debt – followed by domestic debt issued in foreign currency, if any, before foreign debt holders. In this group, bonds are the preferred targets because they are of longer-term duration; which presupposes that the holders are not under immediate pressure for their investment fund except the coupon.

The options here are reduction in coupon rate (hair-cut), debt-restructuring and hybrid.  Unlike HIPIC – which was World Bank initiative to lead lenders to provide debt servicing relief to highly indebted poor countries – debt restructuring to address fundamental weaknesses in the economy is a government initiative. To use C, government’s ability to engage in openness and transparency is very important. Anything short of this is a recipe for resistance.

Tackling Ghana’s Financial Crisis

The problem with the economy started around 2019, and it was obvious that all was not well with Ghana. The call by well-meaning Ghanaians on government for fiscal discipline, a brake on borrowing and a bail-out were ignored until things had gone out of control. The financial management act 921 clause 4(1) stipulates that the minister is responsible for strategies related to efficient operation of the public financial management system of the country subject to policy guidance from Cabinet.

Probably a timely intervention earlier than 2022 might have been sufficiently efficient to offer a breathing space to the economy instead of the June 2022 call by government for an IMF bailout.

It was predicted in last-quarter of last year that the country’s debt would hit 104% of GDP by end of the year. However, the report released by BoG about the debt of Ghana as at the end of last year was 93% (GH¢575.7b) of GDP. The debt of a country being 100% or more of GDP is not a problem in principle. Some countries have their debts close to or over 200% of GDP, yet they are not shaken. What’s important is the country’s ability to absorb shocks and ride on. Technically, Ghana does not have the ability to absorb shocks. For debt to be more than 90% of GDP is untenable – if that is what the financial management act meant by “efficient operation”. However, we are at where we find ourselves today.  The best option for government is to consider a pecking order to tackle the crisis, as depicted in the table below:


Ranking Increase in Tax – GH₵b
Increase Tax net 2
Restore Road toll 1
Impose 8% Special tax on bank profits after corporate tax 0.6
Impose 8% Special tax on upstream petroleum after corp. tax 0.8
Cancel Tax exemption 1.7
Defer Tax Holidays 1.8
Impose 8% Special tax in the mining sector after corp. tax 0.7  
Impose Special levy on oil drilling 0.7
Impose Special levy on mineral exploration 1.2
Impose 8% Special tax on income in Telecom sector 1.0
Collect Property Tax 1
Increase Revenue Mobilisation 12.5
Cut Expenditure Savings
Downsize government 1.5
Cut opulent govt spending 0.9
Cut Non-Value Spending 1.1
Suspend all non-essential ongoing public projects 0.6
Cut  all Article 71 officeholders’ emolument by 50% 0.6
Cut 45% off all allowances of Article 71 office holders 0.5
Cut 40%  of fuel coupons in statal & parastatal institutions 0.3
Cancel all bonuses in statal & parastatal institutions 0.1
Reduce official celebrations 0.35
Cancel official enhancement expenses 0.1
Collect misappropriated public funds 13.6
Suspend Free SHS 2.96
Suspend Judgement Debt payment 0.3
Retrieve 50% Commission from debt contractors 0.3  
Total Cut in Expenditure 23.21
Total Savings & Increase in Tax 35.71


The table shows how the pecking order can be applied to achieve a minimum of GH¢35.71billion from increase in tax and savings from cutting expenditure in a year. Assuming this is constant for each year, and all other things being equal, this will take about 16 years to clear the debt to zero – assuming no new debt has been contracted again. Increasing tax and cutting expenditure shows the readiness of government to tackle the crisis. This will create policy credibility.

The next item in the pecking order is B – monetary management. This is a mandatory responsibility for the Bank of Ghana (BoG). Selective rationing of foreign reserves coupled with a mixed exchange regime should be pursued. For instance, a pegged official transaction rate (US$1= GH¢6) as window-1; and use window-2 for a flexible exchange rate for private transactions. The fixed rate will stabilise the currency for official dealings while the floating rate will allow the forex market to adjust and drive private transactions.

This will substantially reduce the foreign debt component in cedis. This can be combined with supply side management. With the BoG buying 20% of gold volume produced in Ghana with the cedi, the same can also be extended to the oil sector. BoG can also buy about 40% of the share of partners in Ghana’s oil volume with the cedi and trade volume for refined oil products. Given an annual oil import bill of about US$1,920m, Ghana’s share and 40% of the partners’ share will be more than US$2,000m a year.

This will significantly reduce the foreign currency demand for oil imports, and relatively stabilise the forex market and the cedi. Other monetary measures moving into the future should include a ban on imports of goods by government departments and agencies except capital goods. These measures will be monitored and reviewed as the monetary environment improves.

When the fiscal adjustments and monetary management fail to solve the crisis, then lenders are called for assistance through restructuring of debt. What about the debt contractors? Tackling debt should begin with debt contactors.  50% of the commission earned by them should be refunded to the state. For instance, 10% commission of GH¢575.7b is GH¢5.757b – and 50% of that is about GH¢2.9b. If debtholders should become victims for lending to government, then the debt contractors who work for issuance of the debt must also forfeit part of their commission; so that all agents involved in transaction of the debt are seen to be part of the solution.

Government has missed the boat to redeem its sinking image, in light of current economic circumstances, by rather ranking debt first. Its approach to fiscal discipline is suspicious, especially with no clear sign of fiscal adjustment anytime soon.

While some commenters believe that lack of education was the problem for resistance and rejection of the debt exchange programme, the major problems were rather trust and priorities. Contradictory statements and counter-statements attributed to government officials since the early part of last year about IMF bailout and others did not help matters.

Ghana is a proud country. It cannot go for bailouts. Where is our pride now in the eyes of the whole world? Any reputation? By this contradictory attitude, government has created mistrust of itself in the public eye. Further to this, prioritising debt restructuring over fiscal adjustment not only creates mistrust but questions government’s sensitivity to the populace’s economic plight. The acting minister of trade was reported to have reiterated government’s position of granting tax holidays to startup companies.

Between companies enjoying tax holidays over their profits and government tampering with resources of lenders, which of the two should government deal with first in a financial crisis? What is the guarantee that a company will remain in the country to do business after end of the tax holiday, and therefore pay tax? Experience has shown that such companies are folded-up or intentionally collapsed immediately the tax holidays are over.

Thus, huge sums of tax revenue under the guise of tax holidays are made away with. Who gains or misses out? Is it better to delay the tax holiday and allow them to pay the relevant tax and retrieve them after the tax holiday when the company makes profit?  The pecking order requires government to tax businesses first before eventually falling on lenders for assistance. It is important that in such matters collective economic interest overrides any other interest.

Are there any reasons for pegging debt sustainability of poor countries to GDP? Should it be GDP or cash? Is GDP used to service and pay back debt? GDP is not cash or cash equivalent; therefore, it cannot be used to settle debt. To peg a country’s ability to borrow to its GDP is like doing one thing and expecting an outcome from another.

Ghana, like other developing and lower middle-income countries, by virtue of their economies’ nature lack the necessary structures to absorb shocks.  Therefore, it is more prudent to limit their borrowing to the country’s cash flows rather than their GDP.  A limit at about 70% of total cash generated by such countries in the previous year is a better yardstick than their GDP – if these countries want to avoid debt traps and stop frustrating their lenders.