Whoever wins the ongoing Presidential and parliamentary elections there are immediate macro-economic challenges they will have to confront.
On the upside both of the two leading political parties – the incumbent New Patriotic Party and the opposition National Democratic Congress – know exactly what those challenges are and what needs to be done to resolve them. The downside however is that the state’s purse lacks adequate fiscal space; neither party has the needed fiscal discipline; and all too often political exigencies are considered over economic realities.
Indeed it is instructive that neither party has been able to quite achieve the macro-economic performance they so confidently promise during the election campaign cycles every four years.
To be sure, Ghana’s economic growth and development over the next four years will be determined largely by the policies drawn up in the productive sectors and how well they are implemented. However for growth and development to be sustained over the long run macroeconomic stability is requisite. This means low inflation – preferably in single digits – which could allow for low interest rates.
Achieving such low inflation in turn requires exchange rate stability and achieving both of them also requires a low fiscal deficit. None of these things can wait, even as the next government is put together (even if the incumbent is re-elected for a second term he can be expected to make several changes among his ministers and chief executives of government agencies).
The most immediate task will be starting to bring down the fiscal deficit to sustainable levels. The outbreak of COVID 19 forced a suspension of the five percent of Gross Domestic Product ceiling on the fiscal deficit imposed by the Fiscal Responsibility Act as government’s revenues fell well below target even as its expenditure rose significantly. This being an election year, government has used this as an excuse to step up its politically motivated spending too, with spending to woo voters being passed off as social interventions to ameliorate the economic effects of the viral outbreak.
The result is a more than doubling of the fiscal deficit from the original target of 4.7percent to a revised one of 11.8 percent and government will be hard put to even keep within it, going by the deficit data as at September.
The incumbent government now plans to bring it back to within 5.0 percent over the three years up to 2023, beginning with an 8.6 percent deficit for 2021. The opposition has not provided any quantitative targets for macro-economic targets if it takes over government but its tax policy proposals imply unsustainable deficits onto the coming years.
But though those promises cannot be fulfilled and even the electorate realizes it; whoever wins the election will have to restart fiscal consolidation all over again.
Actually, this year’s deficit, under normal circumstances would have generated huge inflationary pressures and cedi depreciation. This has not happened because the economic slowdown resulting from COVID 19 has left the economy operating at well below capacity and indeed the deficit spending has helped to push it back towards its normal capacity. But as it gets closer and closer its full capacity, inordinate deficit spending will stoke up the fires of inflation and cedi depreciation.
On the other hand though, fiscal consolidation will have to be measured against the need to support a resumption of strong economic growth. This year Ghana should count itself lucky to get away with 2.0 percent growth and the incumbent government is optimistically projecting a recovery to over 5 percent growth next year. Again the opposition makes no quantitative growth forecasts if elected.
Apart from the practical difficulties in reining in the deficit quickly, the economy still needs higher than usual deficit spending in 2021 to boost the economy back to annual growth rates of over 6 percent.
Another immediate concern is inflation which now looks likely to end the year around the upper end of the Bank of Ghana’s target band of between 6 percent and 10 percent. The central bank expects inflation to fall to the meridian level of that target band – which is 8 percent – by the second quarter of 2021, but is loath to use the most obvious tool to ensure this – an interest rate hike – because that could slow the economic recovery.
This means the next government has to adopt a non-inflationary fiscal policy, even as it reins in the deficit.
In turn this will require policies that keep the cedi stable too since cedi depreciation is invariably inflationary. Here, the incumbent government has adopted the prudent strategy of building gross international reserves to instill confidence among foreign exchange traders and users, in Ghana’s ability to meet demand for hard currencies. This will need to be continued without pause right from the start of the next government’s term in office so as to send the right signals to the forex market. The BoG would do well to increase the volumes of forex offered at its forward auctions, or increase the frequency of those auctions, since they keep currency speculators quiet.
There is a usual tendency by a newly elected (or re-elected) administration to start the four year term in office by engaging in populist initiatives that necessitate considerable public spending with a view to rewarding the electorate for voting for it and assuring them they have made the right electoral decision. This is good strategy in that it tends to generate support and goodwill for the newly elected (or re-elected) government which is needed for public buy-in to the rest of the initiatives and policies to be rolled out over the rest of its tenure in office.
However, the peculiar circumstances facing whoever wins the 2020 general elections call for a different strategy which requires that the government gets the requisite tough economic decisions behind it as early as possible in its tenor and works towards their paying off well before the next elections so as to appease voters in time to win them over again.
All this means that no matter who wins the election, macro-economic realities will have to take precedence over the political exigencies that tend to dictate the contents of both leading parties election manifestos.