Fiscal discipline after the IMF’s exit

Data released by the Bank of Ghana last weekend reveals that government missed its fiscal deficit target for the first quarter of this year, recording a deficit of 1.8 percent of Gross Domestic Product as against the 1.4 percent targeted. This is not a major set back – both revenues and expenditures tend to suffer seasonal fluctuations and there is still plenty of time to rein the deficit before the end of the year.

However, that the deficit has created a controversy at all is an indication of how delicate the issue of fiscal discipline now is in the wake of Ghana’s exit from the International Monetary Fund’s Extended Credit Facility programme and crucial general elections looming over the horizon.

Already government’s critics – including its political opponents – are pointing to the larger than planned deficit as an indication that with the IMF gone, the incumbent administration is showing inherent fiscal indiscipline; they argue that since the IMF had declared that it would only use economic performance data up to the end of 2018 for its final assessment under the ECF, government began to take advantage of the Fund’s exit even before the official expiration of the programme. They point out that unlike in the previous two years, when the IMF was looking over its shoulder, this time around, government refused to match significant revenue shortfalls with commensurate public spending cuts.

Conversely, government’s proponents point out that actual public expenditure, during the first quarter of this year, at GHc16.5 billion was actually lower than the GHc17.3 billion budgeted and this evidences its continued commitment to fiscal discipline.

While this newspaper appreciates the restraint shown by government with regards to public spending in the face of significant revenue shortfalls during the first quarter of this year, we also recommend that it goes the whole hog and keeps strictly to the deficit target, even if this requires even deeper public spending cuts. Afterall, there are lots of areas where cuts can be safely made, especially with regards to the inordinate and still growing size of the bureaucracy itself and better targeting of social intervention programmes.

This is of crucial importance because right now, Ghana, perhaps more than any emerging market economy in Africa as a whole, is under the microscope of the international financial community. This is evidenced by the attitude of international portfolio investors during the first 10 weeks of this year, who pulled back from reinvesting in public debt securities because of their fears of impending fiscal indiscipline in the wake of the end of the IMF programme and the imminent start of the campaign season for the 2020 general elections. Such worries will be fanned by the political opposition especially if the fiscal deficit expands beyond a target that some analysts worry is already too wide, its being significantly bigger than the 2018 target.

While it is easy to dismiss those fears among the international financial community – especially with a legislative cap on the fiscal deficit in any given year set at five percent of GDP and institutional arrangements put in place to actualize it – this is not advisable. Neither the cap itself, nor the Fiscal Council established primarily to enforce it, can guarantee its successful implementation, especially with a general election season looming in which politics tends to take precedence over economics.

This newspaper understands the rationale for moving from demand management to expansionary supply side economics in a bid to accelerate economic growth and create direly needed jobs. However, government must recognize that this should not be done at the risk of a return to macroeconomic instability which would quickly undo any gains made.

Even more importantly in the short term this must not be done at the risk of the still fragile confidence the international financing community has in Ghana’s ability to maintain fiscal discipline. Their reticence during the first part of this year should be a lesson as to how much we still need their support, like it or not.