A week ago, while addressing the media at a press briefing to announce the retention of the Monetary Policy Rate at 13.5 percent, Bank of Ghana Governor, Dr Ernest Addison, on several occasions pointed to the need for intensified fiscal consolidation by government. He did this while explaining the reason for persistent high interest rates, the inordinately steep yield curve for government debt instruments, the banks reluctance to lend to private enterprise and Ghana’s inability to get improved sovereign credit ratings.
Dr Addison stopped short of actually criticizing government for not showing enough commitment to reducing its fiscal deficit, a stance some commentators have uncharitably attributed to a desire to please his employers. This is not true; after all he has just been deservedly been given a second four term in office as the nation’s chief central banker.
Rather his stance is the result of his empathy towards government’s situation in the face of the pressures imposed on it by the effects of COVID 19. Public expenditures have been forced upwards and public revenue growth has stalled in the face of an inevitable slump in economic activity.
It is instructive that the BoG itself has not only retained its primary monetary stimulus measures introduced last year to stem the adverse effects of COVID 19, such as limited central bank financing of the deficit and a temporary reduction in the reserves and capital requirements of commercial banks and other financial intermediaries; but has also warned that government itself should be circumspect in the timing of the phasing out of its own fiscal stimulus measures.
However, changing circumstances may gradually be calling for a change of policy stance.
The effects of these monetary and fiscal stimulus measures, introduced a year and a half ago, have started to have adverse effects on both consumer price inflation and exchange rate stability due to rapid monetary expansion. Until a few months ago, the output gap created by the effects of COVID 19 on economic activity allowed monetary expansion to support economic growth without unwanted macro-economic instability but now that the output gap has been more or less bridged this is no longer possible.
Even the BoG’s own monetary stimulus measures are being swallowed by government’s domestic financing needs for its inordinate fiscal deficit, rather than facilitating increased financing of private sector economic activities.
There is no easy way out of this situation as the cold response of the public to government’s tax and levy increases, contained in the 2021 budget, shows. However, government is advised to take the requisite hard decisions now, in the early stages of its second and final term in office rather than later, when political considerations will become increasingly weighty as the next general elections draw closer.
Evidently government’s game plan is for the tax administration measures it has drawn up to dramatically improve tax collection – especially from the informal sector – to catch up with public expenditures. But until that happens, public expenditure cuts are required to achieve fiscal consolidation.
It is instructive that government churned up a 7.4 percent fiscal deficit during the first eight months of 2021, making the achievement of its 9.6 percent full year target unlikely. Therefore it is advisable it bites the bullet now, rather than later.
If not, the latent effects of the fiscal deficit will invite criticism of its economic management over issues that most critics do not even realize, derive from the size of the deficit.
Better then to be criticized for public spending cuts than for macro-economic instability that would leave people just as dissatisfied, while still leaving an unsustainable fiscal deficit – and resultant public debt – in place at the same time