IEA: We failed to generate enough income, which explains the high borrowing

The Institute of Economic Affairs has instructed the government to take bold and innovative steps to mobilize resources and allocate them wisely to support long-term sustainable growth.

This, according to him, is capable of providing a sufficiently high standard of living for Ghanaians and lifting the country out of poverty within a generation.

In its 2022 Budget and Economic Planning Expectations, the IEA stated that “Ghana has a serious challenge with domestic resource mobilization. Year after year, domestic revenue falls short of budget targets. Meanwhile, the income targets themselves are also not ambitious enough for the country’s needs. “

“The consequence of not mobilizing enough domestic resources is that we have to resort to borrowing, which has resulted in a continuous increase in our debt. Taking the 2021 budget as an example, tax revenue and total revenue have been projected at 56 billion yen ($ 9.7 billion) and 72 billion yen ($ 12.4 billion) respectively. These numbers are low when juxtaposed against our enormous economic and social needs. Measured as ratios of GDP, which are generally used for international comparisons, tax revenue and total revenue were 12.7% and 16.5% respectively, ”he said.

Further, he stressed that “we have to admit that Covid-19 has hurt income generation. However, even before Covid-19, our income performance was very similar to that of 2021. When we compare our income performance with that of our middle-income peers (MIPs), we find that we are significantly below. The average tax revenue to gross domestic product and total revenue to GDP ratios for Ghana compare unfavorably to our average PMIs of around 25% and 30% respectively. “

He proposed that steps be taken to intensify domestic resource mobilization to support development. They include the fight against illicit financial flows, the review of tax exemptions, the eradication of tax evasion, among others.

Public spending is reckless

Regarding the allocation of resources, the IEA said the allocation of expenditure is clearly reckless, misguided and inefficient.

“For Ghana, public spending is heavily skewed in favor of recurrent spending, commonly referred to as ‘consumer spending’, and to the detriment of capital spending (CAPEX), which is necessary for growth. In the 2021 budget, recurrent spending was projected at 20% of GDP, while CAPEX was projected at 4% of GDP. The CAPEX / GDP ratio is unacceptably low. Indeed, as a developing country, we should allocate 10 to 15% of our GDP to CAPEX. This is what will allow the economy to grow and move the country up the development ladder quickly, ”noted the economic and political think tank.

In terms of tax revenue, offsets absorbed 58% and interest 56%. This means that, together, allowances and interest made up 114% of tax revenue. The implication is that tax revenues could not even fund offsets and interest and that the government has to borrow to supplement in addition to funding all other government spending related to transfers, goods and services, and CAPEX.

“Certainly, a rationalization and a serious rebalancing of expenditure are necessary”, prescribed the IEA.

Debt service described as a major concern

The issue of the burden of servicing the public debt is also a major concern expressed by the economic and political think tank.

This year, it is expected that up to 56% of tax revenue would be used to pay interest on the country’s debt. According to the IEA, this level of debt service poses risks to the country’s fiscal sustainability and sovereign rating.

It therefore recommends measures such as debt ceilings and fiscal consolidation to address debt risk in a more sustainable manner.

For debt engineering, he said debt could be restructured or refinanced, some of which is already committed, to lengthen the maturity profile and replace more expensive debt.

On economic transformation, he called for strong industrialization to transform the economy from the production of low-value-added products to high-value-added production in order 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 only been lip service, without concrete actions being taken to make it happen, ”he said.

Natural resource management

He said that Ghana possesses a wealth of natural resources underground that would be worth trillions of dollars, and it is therefore inconceivable that the country has remained surface poor.

“We must protect the national interest by ensuring that Ghana gets the maximum benefit from its natural resources. In particular, the government should take the necessary steps to ensure that Ghana takes full ownership of our natural resource wealth. The recent acquisition of commercial interests in the Jubilee and TEN blocks by the Ghana National Petroleum Corporation, in addition to its existing owned and participating interests, must only be the start of a campaign to increase Ghana’s beneficial ownership. in its oil ”, underlined the IEA.

He went on to say that “the government should review existing mining contracts and, if possible, renegotiate overly generous terms granted to foreign investors. The government should refrain from signing other contracts on a concession basis. When contracts are signed on a commodity sharing basis, Ghana should retain a maximum share of the proceeds. Ultimately, the goal 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 labor market additions

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

“In addition, growth has largely been concentrated in the extractive sectors which, because they are capital intensive, do not create a lot of jobs,” he said.

To give job creation the necessary boost, the IEA recommends that the government focus on policy interventions that create balanced growth in the economy so that they can generate more jobs, the government pursues a strong economic transformation and an industrialization effort together with the government creates a favorable environment for private enterprises to thrive and create jobs.

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