Last week’s presentation of government’s proposals for the mid year review of the 2021 budget, presented to Parliament by Finance Minister Ken Ofori-Atta, contained only minimal adjustments to the broad fiscal framework underpinning the full year budget.
Consequently it has been criticized by many for not containing fresh approaches towards improving the economy and the consequent living standards of the populace. This disappointment is made all the more intense when compared – incorrectly – against the sweeping changes made in last year’s mid year budget review. Unfortunately those critics have forgotten that the circumstances are entirely different; last year the arrival of COVID 19 and its socio-economic implications required an almost entirely new budget for the second half of the year, whereas this year, the circumstances are basically unchanged since the full year budget was announced. Indeed, the time gap between the full year budget and the mid year review has been shorter than usual too, since the full year budget was released just four months to the review, rather than the usual eight months, because of the electoral cycle.
Beyond this we see the retention of the original 2021 budget’s fiscal framework as recognition that it is working effectively, thus eliminating any reason for major change; economic growth is accelerating, the exchange rate is stable, inflation is well within target, interest rates have fallen, and international reserves are at a long term high.
To be sure there are two dark spots: the sharply rising public debt – which is largely, although not entirely due to COVID 19 – and the contraction in credit financing of private sector economic activity which indeed is both the biggest threat to Ghana’s ongoing economic rebound and a major reason why microeconomic performance of businesses and households are not improving as much as macroeconomic performance is.
Indeed the latter problem – of business financing – attracts the most policy attention in the mid year review and rightly so.
Actually, Ghana’s political leadership is simply acting true to form in this; the #fix the country campaign has persuaded government to focus on providing jobs and entrepreneurship opportunities to the disgruntled youth.
This should have been done long ago but better late than never and the youth should see this as a victory and a reward for their efforts in protesting loudly despite dubious efforts by government to shut them down.
The Bank of Ghana has correctly identified financing constraints as the biggest constraint to the country’s ongoing economic rebound as the banking industry’s outstanding loan portfolio has actually contracted in real terms over the past one year due to a combination of higher credit risk due to the economic effects of COVID 19, consequent deteriorated loan asset quality and increased availability of high yield risk free government securities as an alternative to increasingly risky lending to the private sector.
To resolve this challenge – and at the same time resolve the political challenge posed by the ire of the country’s youth – government is focusing on alternative financing modes such as the about to commence Development of Ghana, GIRSAL and the Venture Capital Trust Fund among others.
But even as we commend government for this, we wish to point out that, with the notable exception of the VCTF, all these efforts focus on debt rather than equity financing. To be sure this conforms with Ghanaian business culture – the inordinate size of the public debt reflects this too.
However excessive business debt – at high coupon rates and with short loan tenors – have proved to be the bane of business success, which accounts for the banks poor loan asset quality in the first place. There is thus the need to focus more on promoting and facilitating equity finance.
We therefore call on government to give more attention to providing logistical, technical and fiscal support to the Ghana Stock Exchange (including the largely ignored equities segment of the Ghana Alternative Stock Exchange) private equity, venture (and angel) investing, as well as new concepts such as crowd funding in its equity form.
The mode of business funding and the consequent implications for business mortality are as important as the quantum of such funding. As we seek to solve the one challenge let us similarly seek to improve the other.