The First Deputy Governor of the Bank of Ghana (BoG) is calling for a policy on expenditure rationalization and value for money projects, among others, to enable the country to deliver projects more efficiently and enhance the fiscal economy.
Dr. Maxwell Opoku-Afari said no matter the efforts made towards enhancing domestic revenue mobilisation, failure to rationalise public expenditure will trigger continuous chronic fiscal deficit and growing debt levels.
Speaking at a public lecture organised by the University of Ghana Business School with support from Joy Business on the topic “Rethinking Development Finance: Macroeconomic Management When The Love is Gone”, he said the high levels of government spending calls for fiscal consolidation that is targeted at reducing overall financing gap to sustainable levels.
“No matter the efforts we make towards enhancing domestic revenue mobilisation, we will continue to experience chronic fiscal deficits and a growing debt burden, if we do not take steps to rationalize our expenditure levels. The high levels of government spending is required to close the huge infrastructure deficit and debt which are limiting fiscal room for maneuver”.
“This therefore calls for the kind of fiscal consolidation that involves both revenue-raising measures and expenditure-rationalisation policies, with the aim of reducing the overall fiscal deficit to sustainable levels and achieving structural fiscal balance over the medium term. This is achievable when governments are efficient and serve as a catalyst for private-sector-led growth and development”, he explained.
He continued saying “we therefore need to identify areas where spending is either wasteful, inefficient or does not deliver value for money, with the view to curtailing or eliminating them completely. Negotiation of government projects and contracts must be effectively handled and scrutinised to ensure that losses are minimized, and facilitate value for money considerations. I think we need a change in mindset when it comes to negotiating such state projects”.
“We must ask ourselves these key questions: to what extent does the State benefit from such projects? and what are the feasibility studies and cost-benefit considerations that go into these? Technical, operational, financial and economic feasibility must be paramount in such decisions”, he pointed out.
Another reason for efficiency in public spending, Dr. Opoku-Afari, said is the fact that the level of tax compliance depends on citizen’s perception of the utilisation of such taxes.
In that regard, he said their acceptance and compliance are tied to the effective use of these resources, adding “when citizens perceive that the tax system does not inure to their benefits, they are likely to want to evade or not comply with such tax obligations. But where revenues are used to finance productive spending programmes, they are more likely to accept their tax obligations”.
He however urged all Ghanaians to support the government in the expenditure rationalisation reforms.
He also noted that though the challenge may be tough, it is possible to always put the fiscal economy in better shape.
“We can all achieve this if we collectively put our minds and efforts together to raise domestic resources to
sustainably finance and close the huge infrastructure deficit”.
Tax policies must be upgraded to boost revenue mobilisation
Ghana’s tax revenue to Gross Domestic Product (GDP) ratio is lower than Africa’s average, which is also lower compared to other regions of the world.
The tax to GDP ratio for Ghana has averaged 12% over the past two decades, and is lower than Africa’s average of about 17% in 2017. This also falls short of the 25% of GDP needed to give fiscal comfort and to finance development projects under the Sustainable Development Goals.
The First Deputy Governor intimated that this highlights the inadequacy in the country’s tax effort, calling for new measures, in particular, targeting broadening the tax base, upgrading tax policies, and revenue administration systems to mobilize more domestic revenue.
To broaden the tax base, Dr. Opoku-Afari said there is the need to get more people to honor their tax obligations and minimisation of tax exemptions.
He also called for business support incentives for tax compliance to be introduced to instill the discipline in all tax payers to honor their tax obligations.
He expressed worry that there are only 2.4 million individual tax payers in a country of over 30 million, and with over 16 million active Mobile Money users.
Ghana card to aid revenue mobilisation from informal sector
Dr. Opoku-Afari said the introduction of the Tax Identification Number (TIN) and its subsequent replacement with the Ghana Card is expected to attract a wider base of Ghanaians into the tax bracket and help widen the tax net.
The replacement of TIN numbers with the Ghana Card has increased the registered TIN numbers from some five million Ghanaians to over 13 15 million.
This he said should help bring in a lot more people into the tax bracket, going forward, and facilitate the raising of revenue from the large informal sector.
He commended the Vice President, Dr. Mahamumdu Bawumia for the recent introduction of a Modified Taxation Regime, saying it’s very critical, and could unlock the binding constraint to tax collection in Ghana.
Risk–mitigating mechanisms and proper monitoring to ensure project completion
To help improve the risk profile of infrastructure investment projects, Dr. Opoku-Afari, said government must provide seed funds for financing, saying, for instance, infrastructure project preparation costs, which usually ranges between 5-10% of the total project costs.
“It is also important that we effectively monitor infrastructure projects to completion”, he added.
The International Growth Centre, in a study on infrastructure delivery and management quality in Ghana, cited the reasons for non-completion of a number of infrastructure projects by district assemblies as political, poor planning, and in the main, lack of proper monitoring. It is estimated that the country loses as much as $25 million a year to uncompleted projects.
The Role of Foreign Direct Investment
Another area of interest in re-thinking development financing, he said is the attraction of Foreign Direct Investments (FDIs) in supporting infrastructure development.
Net FDI inflows into Ghana shot up from $165.9 million in 2000 to $3.9 billion in 2019, but was almost halved in 2020 to $1.9 billion due to COVID-19 effects.
In fact, he said FDIs have increased significantly over the years, with its share of GDP climbing up from an average of 0.2% during the 1980s to 2.0% in 1990s, 4.2% in 2000s, and to 6.5% during the past decade 2010-2019 according to the World Bank, World Development Indicators Database.
He mentioned that the steady increase in Ghana reflects reforms aimed at improving the enabling environment to attract such foreign investments.
“The importance of FDIs is that it is a non-debt creating way of financing infrastructure, and so there is the need to create the right investment climate that will help attract more FDIs. Indeed there is a lot of liquidity out there and we need to provide a safe, secured, transparent, and enabling environment to attract such liquidity”, he explained.