Ghana has rebased its economy for the second time in less than a decade. Although the resultant increase in the size of the economy will not affect people’s pockets it will have major consequences for how it is managed.
For the second time since 2010, the Ghana Statistical Service has rebased the country’s economy. This means a change in how the value of the country’s output is computed, based on identified changes in the structure of the production base. The last time the economy was rebased, back in 2010, it resultant change in Gross Domestic Product propelled Ghana from Low Income Country bracket into the Lower Middle Income category. This time around, it has not quite translated into a change in the country’s economic status. Nevertheless, it holds the potential for major changes in economic management.
The rebasing itself has raised GDP significantly to GHc256 billion, up from its value of GHc123.65 billion as at the last rebasing. Based on an estimated population of 28.96 million people this means that per capita GDP has climbed to GHc8,863 per person. However this is purely statistical; in actual fact it does not make any one richer in real terms. But since the very statistics that have been changed by the rebasing are those that are key in measuring macroeconomic performance, the country’s economic managers have been given the impetus to make major changes in their targets and inevitably, how to achieve them.
The latest rebasing, according to the GSS has involved changes in the methodology, coverage and structuring of GDP computations. These changes have resulted putting more emphasis on certain economic activities than before and adding some to the basket altogether.
The new computations show that the services sector is still the biggest in Ghana, now accounting for 41.4% of GDP, followed by industry with 36.9% and agriculture with 21.7%.
They also reflect on Ghana’s growth rate. In nomimal, cedi terms the economy has expanded by 24.6% last year. However in real [dollar denominated] terms, Ghana’s growth for 2017 was 8.1%, down from 8.5% hitherto. On sectoral basis, the strongest growth was recorded by industry at 15.7%, followed by agriculture at 6.1% and services at 3.3%.
But the real implications of the rebasing are with its effects on two key ratios: the debt to GDP ratio and the tax revenue to GDP ratio.
By increasing the size of Ghana’s GDP, the rebasing has lowered the former thus giving the effect of the country being less indebted than hitherto as measured by its public debt against the size of its economy. This ratio has now been lowered from about 67% to 55.5%. Since the globally accepted threshold for untroubled debt sustainability is 60% this means that Ghana now has more room for increasing its public debt, rather than being already over borrowed as the statistics prior to rebasing suggested. Indeed, government’s critics are now claiming that the recent rebasing was conducted primarily in order to make the case for new net borrowing in the face of tax revenue shortfalls which have been forcing government to cut back on its ambitious development projects spending programmes.
Following rebasing , government could engage in net borrowing of a further GHc12 billion and still be within the 60% universally accepted debt sustainability threshold, and could borrow twice that on net terms just to get back to its debt to GDP ratio of 67% at which it was immediately prior to the latest rebasing.
However, it is the other key ratio that has been affected by the latest rebasing that will attract government’s immediate attention. By substantially increasing the size of the GDP, the rebasing has lowered the ratio of tax revenue to GDP from an already inordinately low 15.76% to an even lower 12.6%. Instructively, government had already been looking to raise this ratio to about 20% in line with the average for Ghana’s peers. With the new ratio, government now has the impetus to raise tax revenues by close to 50% above where they stand now.
Indeed expect this impetus to show up in the impending budget proposals for 2019, due to be presented to Parliament in a little over a month from now. Finance Minister Ken Ofori-Atta will present comparative tax revenue to GDP statistics to support his case for the tax increases and/or new taxes that he will propose.
To be sure he will have no pragmatic alternatives top this course of action. Although the statistics following the latest rebasing appears to show more room for borrowing, the more practical ratio of debt servicing costs as a proportion of total revenues will evidence that increased debt – and consequent increased debt servicing costs – cannot be handled, since revenues accruing to government under the rebased economy will not increase commensurately. Indeed rebasing in itself does not increase revenues in any way.
Already debt servicing accounts for some 42% of total state tax revenues and added to wages and salaries, these account for nearly 90% of tax revenues, which indeed is why Ghana’s development budget currently relies almost entirely on net new borrowing. This means that government will pragmatically resist being drawn into accelerated net new borrowing just because the rebased economy’s statistics say there is room based on the debt to GDP ratio.
This quagmire is further worsened by the fact that the latest rebasing makes Ghana’s economy richer in statistical terms and therefore grants and loans on concessionary terms will be all the harder to secure. It is instructive that the 2010 rebasing disqualified Ghana from lots of grants and concessionary loans in the first place simply because it changed the country’s status to that of middle income rather than low income. The latest rebasing will intensify this phenomenon. With government sagely reluctant to increase its borrowing despite a lower debt to GDP ratio, and grants harder to come by, increased taxes will be the only pragmatic way forward.
Which means that although the rebased statistics indicate a richer Ghanaian economy, it is the citizens, through increased contributions to the state that will have to translate a change in statistics to a commensurate change in the reality.
