At the beginning of this month it was reported that Ghana was seeking help from the International Monetary Fund (IMF) because of its worsening economic situation triggered by its plummeting currency.
The Ghanaian unit, the Cedi had fallen as much as 40 percent against international currencies because of a large current account deficit – it’s spending more foreign exchange than its making and ballooning budget deficit – the government is spending more than it collects in revenues.
It is not a crime to ask for IMF help but it often suggests that your accounts aren’t quite what they are supposed to be.
Ghana and Uganda are not unlike each other in several ways.
When Uganda was being feted as East Africa’s shining economy a few years ago, Ghana was receiving the same accolades on the west coast. Ghana – rich in Gold and Cocoa recently started producing oil. The theory was that Ghana, which had established a level of fiscal discipline would get more value for money when the oil came out of the ground. So was the thinking about Uganda.
But with oil around the corner, with the prospects being hyped by the oil companies, the government in Accra went haywire, raised public servants’ salaries, borrowed against future oil revenues and indulged in huge public works investments.
Not only are the oil revenues not flowing as fast as first anticipated but these huge government expenditures are gobbling them up as soon as they gash out of the ground.
As if that is not enough last year Ghana issued a $750m bond on the international market whose interest payment in foreign currency, is putting added pressure on the Ghanaian treasury.
The parallels between Ghana and Uganda cannot be ignored.
Uganda too is about to start production in the next five years or so.
There is much need for the money to shore up our education and health services, build transport and energy infrastructure, not forgetting any number of vanity projects that are bound to start popping into people’s heads.
The government insists that when the oil money starts flowing the first call on the cash will be to finance infrastructure projects rather than go towards beefing up recurrent expenditures. Salaries constitute a huge portion of recurrent expenditures in the budget and are an easy target for politicians – you boost salaries and votes come in.
Ghana’s politicians fell for this quick fix and now salaries account for two in every three cedis of revenue collected.
Insisting on infrastructure development can still lead to higher salaries but not instantly. By lowering the cost of doing business more taxes can be collected and these will find their way to the payroll.
Even in our everyday lives it is amazing how people lose their heads when they happen upon a windfall. They indulge in frivolous purchases, unplanned expenditures and value-for-money judgements go out the window.
It is no different for governments.
But in addition look forward to huge projects with little to no economic justification, padded with huge “commissions” and hidden costs.
Ruling elites, despite what they sell to the public are looking first and foremost to retaining power, more resources either via higher revenues, foreign aid or windfalls beyond enriching themselves are employed to this end.
The details of the Ghanaian situation are not bound to show that political expediency rather than official incompetence is at the back of why the country’s economy does not look so rosy any more.
A fate we should not think we are immune to.
The Norwegians are the benchmark of how oil revenues can be employed for the benefit of the people without jeopardising the economic environment.
Norwegian oil revenues are stored away in an investment fund. Government has only access to four percent of the almost one trillion in fund assets annually to support the budget. This ensures that that the Norwegian kronor does not fluctuate unnecessarily with oil prices and also that the nation will benefit from its oil fields well after they have dried up.
Of course Norway had the advantage of already being a rich country by the time the oil came around, but we and Ghana, of course can derive some useful lessons from how they have employed their oil industry’s earnings.
For Ghana it will get worse before it gets better. Under an IMF program they will be forced to cut down on government spending, which could entail restructuring of the civil service, removal of subsidies and the cut back crucial social services, in effect making life harder for the common people.
My father told me there are two kinds of people in the world those who learn the easy way, from the experience of others and those who learn the hard way through their own experience. Let’s fall in the former category and take important lessons from Ghana’s apparent false dawn.