On the eve of 1957, when the Union Jack, a symbol of colonialism, was lowered and the Ghana Flag was mounted amidst cheers and jubilation from the citizenry, the mood of the 6.5 million Ghanaians at the time was one of hope and positivism.
The expectation was that with their people now at the helm of affairs, the pride of nationhood would be restored and economic decisions inspired by a desire to improve the livelihood of the Ghanaian, not the British, would be fundamental.
At the heart of those aspirations was the state of the economy. Despite enduring years of pre-independence agitations, which expectantly strained macroeconomic indices, Ghana’s economy was still in a healthy state.
Inflation was under one per cent, unemployment at five per cent; the budget balance was in surplus and foreign exchange pressures absent because of the fixed nature of the Pound Sterling in the British West African Colonies (BWANA) at the time.
Gross international reserves were reported at US$273 million, equivalent to about US$2.4 billion in present day Ghana, and per capita income at around US$450.
Thus, when Dr Kwamme Nkrumah declared on Independence Day in 1957 that “Ghana, your beloved country, is free forever,” the hope around the country at the time was that Ghana would become an economic giant.
Unfortunately, however, that was never to be, as years of fiscal indiscipline, political expediency and coup d’etats later conspired with global challenges to rob the people of their dreams.
Apart from 1957, when Britain handed over power to Dr Nkrumah, where the economy was arguably in a healthy state, no government in the nation’s history has inherited an economy with strong macroeconomic indices.
History of fiscal indiscipline
After assuming office, Dr Nkrumah rolled out his Vision 2020, which had industrialisation at the top.
As a result, a sizeable amount of the country’s resources was used to set up factories and businesses, all of which were state-owned.
On the social side, huge investments were made in education, roads and electricity, among others, to complement the government’s industrial drive.
This took a toll on the country’s resources, forcing the government to turn to commercial loans around 1960 to meet expenditure pressures.
By 1965, economic indices had taken a nosedive, with the budget balance deteriorating from a surplus of 15.5 per cent of GDP in 1954 to a deficit of 6.4 per cent of GDP around 1965.
Government spending, which was 9.5 per cent in 1957, almost tripled to 25.8 per cent in 1965.
The position of the country’s foreign exchange reserves also deteriorated from a surplus of US$269 million in 1957 to negative US$39 million by 1965, fueling anxiety over Ghana’s ability to pay for its imports.
Economic history between 1966 and 1992
In 1967 the economy witnessed a causing balance of trade to move from a deficit to surplus and inflation declining from 18 per cent around 1966 to 6.5 per cent around 1969.
By 1971, however, these gains had started deteriorating on the back of fiscal indiscipline and a global decline in cocoa prices. This aggravated the economic situation, which inspired the 1972 coup.
Between 1972 and 1983, things took a dramatic turnaround. Total revenue had declined from 21 per cent of GDP in 1970 to five per cent of a smaller GDP around 1982, forcing the government to borrow more from the international market.
The increased borrowing soon fuelled inflationary pressures, causing it to rise from 6.5 per cent in 1969 to 116.5 per cent by 1977 and 122 per cent by 1983.
The response was import controls, not fiscal discipline, which only worsened the situation.
This caused the government to seek financial help from the International Monetary Fund (IMF) under the Structural Adjustment Programme (SAP), an initiative that would help provide a breather for the economy.
However, by 1992, government revenues plummeted to record lows amidst rising expenditures. This led to a rise in the budget deficit from 1.3 per cent of GDP in 1991 to 9.4 per cent of GDP in 1992, mainly as a result of election-year pressures.
HIPC and the rhetoric
Although global factors did not favour the economy between 1992 and 2000, fiscal indiscipline again became the order of the day, forcing economic indices to deteriorate.
After assuming office, the usual rhetoric of a ‘broke economy’ played out and J. A. Kufuor turned to the IMF’s Highly Indebted Poor Countries (HIPC) initiative for relief from the debt stress the economy was undergoing.
The result was a cancellation of the country’s external debts, giving it the opportunity to start on a clean sheet.
Eight years down the line, however, things went from good to bad.
This situation brings to the fore the need for a legal framework to anchor fiscal discipline. There have been suggestions to the effect that the country needs a Fiscal Responsibility Act. The opponents of the Act have argued that there are existing laws such as the Financial Administration Act, but these are obviously not effective because they have been unable to prevent the fiscal excesses over years.
The immediate passage and enforcement of a Fiscal Responsibility Act that has bite will be important in this regard if it is supported by political will. A Fiscal Responsibility law will require governments to declare and commit to a fiscal policy that can be monitored. It will include fiscal rules (including rules governing election year spending), provisions for transparency and sanctions (including sanctions on the Executive).
By: dailyviewgh@gmail.com
