Dr. Mahamudu Bawumia, an eminent economist and Vice Presidential hopeful of the opposition New Patriotic Party (NPP), has likened Ghana’s current economic situation to a wooden cargo truck popularly called the “boneshaker”.
The boneshaker has a legendary reputation of rattling the very essence of its passengers due to the absence of any form of cushioning, except for its wooden structure.
“It feels like we are travelling in a ‘boneshaker’. Government appears to have overestimated Ghana’s capacity to borrow,” Dr. Bawumia told an awestruck audience at a highly attended public lecture organised by the Central University College (CUC) on Tuesday.
“At this rate, the country will be on its knees before the end of the year. It is clear that we are not only travelling in a boneshaker but it also has no shock-absorbers,” he said.
The former Deputy Governor of the Bank of Ghana cited a plethora of inefficient policy choices including excessive borrowing, fiscal indiscipline and general mismanagement by the Mahama Administration as the cause of the economic predicament currently bedevilling the country.
The Mahama Administration has conceded the difficulties dogging the economy as it grapples with uncontrolled budget deficit, rapidly devaluing local currency, energy crisis caused by government’s inability to expend scarce resources to import either crude oil or gas to fire its power generating plants and a huge wage bill held in arrears.
Dr. Bawumia’s analysis re-echoes an earlier warning issued by the International Monetary Fund (IMF) which calculated that if the status quo remains, the Ghanaian economy may collapse by August this year.
“The Ghanaian economy is in a crisis. It is time for serious action. If government does not take the right decisions and soon, then Ghana would likely have to approach the IMF for a bail out before the end of the year. At the end of the day, the obvious lesson is that, we cannot run away from fiscal and monetary discipline no matter how hard we try.”
By the end of 2008, Ghana’s total public debt was approximately GH¢9.5 billion (33 percent of GDP). However, in the space of five years, the public debt saw an unexplained and dramatic leap to GH¢49.9 billion (57.7 percent of GDP) by the end of 2013.
“This also represents an increase in the stock of debt by 426 percent over a five-year period (i.e. an average increase in the stock of debt by 85 percent a year). This is a frightening rate of accumulation of debt by any standard,” the economist explained.
Frightening Public Debt
He said Ghana’s debt stock would cross the 60 percent of GDP level, which is beyond the limit for developing countries to venture, creating a situation for a possible classification of Ghana as a Highly Indebted and Poor Country (HIPC).
“Ghana is headed back towards the debt unsustainability that led to HIPC. However, HIPC debt relief will not be available again and the earlier we recognize this, the better for all of us,” Dr Bawumia said.
He described as frightening, the rate of debt accumulation of the National Democratic Congress (NDC) administration, given the reliefs received during the HIPC era.
Debts Without Projects
Several critics have wondered where all the accumulated debt have been channelled to as they argue that no significant infrastructural projects have been undertaken by the NDC government in the past six years of its rule.
“It is not clear exactly what developmental projects all this $20 billion borrowed has been used for. The increase in government debt over the last five years is an amount that can build at least 15,000 km of tarred roads. It is an amount that could have built 6,000 senior secondary schools even at the high cost of GH¢6.0 million each. It is an amount that could have built hundreds of first class hospitals. It is an amount that could have solved Ghana’s energy and water problems,” Dr. Bawumia said.
It is estimated that the increase in Ghana’s debt has a corresponding effect in terms of the quantum of interest the government would have to cough up to service its loans.
Interest payments in 2014 would amount to some GH¢6. 604billion. This is three times more than allocations to the Ministry of Roads and Highways, the Ministry of Trade and Industry, the Ministry of Fisheries, the Ministry of Food and Agriculture, the Ministry of Water Resources, Works and Housing and the Ministry of Transport whose total budgetary allocation is about GH¢2.062 billion.
The interest payment is also expected to gross more than four times Ghana’s oil revenue.
Depleted Foreign Reserves
The economist estimated that the actual international reserves available to government for any external payment is equivalent to less than two weeks of import cover from about 3.3 months of import cover by December 2013.
Available data indicates that Ghana’s gross international reserves increased from $2.03 billion in 2008 to some $5.6 billion (equivalent to 3.3 months of import cover) at the end of December 2013. However, by February 2014, the country’s gross international reserves have strangely declined to $4.8 billion.
“The low level of net international reserves means that the central bank’s capacity to effectively intervene in the foreign exchange market has been severely compromised. It also indicates that the ability of the government to meet its obligations is limited. When one examines the state of our public finances and net international reserves position, it is difficult not to conclude that the ongoing ‘dumsor dumsor’ problem (electricity blackouts) may be more financial than technical,” Dr Bawumia noted.
Cedi Depreciation
Dr. Bawumia stated that bad economic management was responsible for the fast depreciation of the Ghana Cedi, slamming the measures adopted by the Bank of Ghana to check ‘dollarization’ and saying it would not work.
According to him, Ghanaians have resorted to thinking in U.S Dollars because they simply cannot trust the government to keep the cedi stable, given its unbridled spending that does not match with productivity.
“There is a vast empirical literature that supports the view that dollarization is a reaction by rational economic players to expected depreciation of a currency. It is not the cause of depreciation. Ghanaians have over the years learnt the hard way that they cannot trust the government to keep the cedi stable. Cedi depreciation has become a fact of life and therefore Ghanaians have come up with coping strategies to deal with exchange rate depreciation, including the holding of foreign currency,” he stated.
“If a trader thinks in dollars and prices in cedis, how would you know? Once they receive the cedi equivalent of the black market dollar price, they would immediately buy dollars to save either from forex bureau or black market. People will buy dollars if they want dollars. There is not much a government can do about this once people lose confidence in the cedi,” he stated.
“Even in the revolutionary days of military enforcement of foreign exchange laws, the black market thrived. We have come to learn that price controls, exchange controls, interest rate controls, and import controls don’t generally work. Governments should rather focus on pursuing policies that would stabilize the cedi and make the dollar irrelevant in domestic transactions. The lesson here is that, trying to solve the problem of cedi depreciation by focusing on de-dollarization is attacking the effects of a problem and not its causes; it is ultimately an exercise in futility.”
Dwarfs And Single Spine
The Mahama administration has often attributed its difficulties with solving the economic problems to what it described as a huge wage bill, but Dr. Bawumia explained that the empirical evidence is in the contrary, citing bad economic management again as the cause of the government’s difficulties.
“The current economic difficulties can therefore not be attributed to the Single Spine Salary Structure which had been 99 percent implemented at the end of 2012.”
Dr. Bawumia also scoffed at some spiritual explanations for the economic woes of Ghana.
Anita De Soosoo, the Women’s Organiser of the NDC and the Deputy Director of the National Disaster Management Organisation (NADMO) recently attributed the economic woes and the cedi’s depreciation to dwarfs and spirits. Dr Bawumia said those explanations have provided “comic relief”.
“Where were the dwarfs when the cedi was stable? It looks like they go into hiding whenever there is discipline and sound economic management.”