WHY SPEND WHAT YOU DO NOT HAVE?
The FY2018 deficit, however, is an improvement on 2017 figures. In 2017, the total projected outlook deficit is GH¢12,887.2 (6.3 percent of GDP). In percentage change, the 2018 deficit is 14.9 percent less the 2017 figure. Regarding the composition of the required 2018 financing, Gh¢8,000.3 million (73%) would be mobilised from domestic sources – bank, non-bank and other domestic instruments. The remaining Gh¢2,970.8 million (27%) will come from external sources including programmed Eurobond funds of Gh¢1,000.0 million. In comparison with 2017 projected budget outlook numbers- total financing- GH¢12,887.2 of which domestic financing is GH¢16,485.5 and external repayment of (GH¢3,598.3) shows a gradual shift to external financing mechanism. The development is particularly desirable and pleasing.
Why spend what we do not have? The question of spending beyond one's means has been a topical issue in public financial management. There is no consensus as to whether having financing gap is a desirable or undesirable thing. There are various schools with a different view(s) on the potential implications of deficit financing. We will not deviate into the scholarly debate. We leave it to the academics. But, it is worth noting that the chief concern of the opponents of deficit financing has to do with debt accumulation associated with deficit funding. Deficit budget leads to accumulation of debt that future generation would have to deal with. The proponents of deficit budgeting on the other hand often cite deficit as a fiscal policy instrument that governments “can” use to navigate economic downturns when necessary. There is merit in both positions. However, the magnitude of the impact is not necessarily the same. Debt accumulation is not desirable especially when they are not invested in project and programmes that could generate future income. Justly, it is not correct for the current generation to create debt for a future generation because of our lifestyle choices.
Given the debilitating impact of debt accumulation on economic growth and development, in the United States, all State Governments are by law required to have a balanced budget – having equivalence in revenue and expenses. You only spend what you have. The requirement of a balanced budget has ensured prudence in budgeting and allow for high prioritisation of government expenses. In essence, the balanced budget legislation has allowed for efficiency and reduced wastage in the dispensing of public resources. The balanced budget is the most desirable and most appropriate especially that governments are worried about the growing public debt.
In developing countries, however, it is tough to push for a balanced budget when tax revenue is still at minimal levels. In Ghana, for instance, tax revenue to GDP averages 18-19 percent. Indeed, there are not enough structured economic activities that generate enough taxation. In some instances, also, the massive loopholes in tax administration account for the somewhat low performance in domestic resources mobilisation. Grants have likewise dwindled due in part to slow economic activities in grant providing countries. We are also waning ourselves of aid. Given these developments, we have resorted to various debt strategies to financing our over-expenditure. In fact, the primary objective of our debt management is to assist in the mobilisation of financing to fund general budget deficit. To correctly put it “the core objective for debt management has been to ensure that government financing needs are met at reasonable costs and subject to prudent levels of risk”. The other objectives are peripheral.
So, we conduct all the scenario analysis weighing the risks and costs to prescribe some solution to government. We know, the best of the option is for government to spend what it has and not to subject itself to financing scenarios based on “risk and costs probabilities”. Maybe, our analysis of such risks and costs must have the option where rationalisation of the entire planned expenditure become a paramount option. In essence, the debt manager must be able to tell the Government to cut back on spending as it is the best debt management strategy! My wet dream, I guess!!!
Since balanced budget seems impossible for many developing countries owing to varied reasons, the characteristics of the instruments to be used to finance the deficit become important. Therefore, there is the need to look at the composition of deficit budget financing strategy critically to ensure maximisation of full benefits, if any. There is always a trade-off when the deficit financing strategy is either massive on domestic sources or external sources. I questioned the 2017 budget strategy of going heavy on domestic sources and paying down on external financing. I did that knowing the impact such an approach would have on the local economy regarding private sector crowing out, rising borrowing rates and slowing economic activities. Thankfully, 2018 is a reverse of the 2017 strategy. About 27.0 percent of the deficit financing is expected to come from foreign sources. It is still small, and below I discuss my reasons why I favour a more foreign dominated financing strategy.
Firstly, there is the need to look at what the domestic resources are used for. Local financing in recent times have mostly been used for refinancing of maturing debt thereby changing/restructuring the public debt profile. Portions are also used for purposes deemed appropriate to the government. Unfortunately, however, a significant part of the funds generated from the domestic sources are used for the financing of government’s recurrent expenditure. These expenses though necessary, do not create returns that could be used to pay down the borrowed monies when they are due. In effect, we borrow to finance consumption, and we go looking for other resources to pay down those borrowed funds when they fall due. If you care about the repayment burden, then you would think that monies borrowed must necessarily be invested in projects and programmes that can generate returns to meet the deleveraging obligations that come with such facility. As it stands today, and with the domestic resource mobilisation arrangements, I doubt if the country stands to benefit substantially from a policy of focused domestic financing.
Secondly, let take a look at the structure of foreign financing. In all modalities of external funding, there are enough valves to prevent spending on recurrent expenditure. In the instance of Eurobond, the government has to prepare a prospectus detailing out what it intends to spend the monies on. Investors are interested in the repayment of the facility, and they would want to satisfy themselves that their invested funds would be used for productive activities. No investor will want to invest in Eurobond if the government says the mobilised resources would be used for recurrent expenditure. Remember, debt financing creates repayment obligations, and we must be interested in what such monies get invested in. The other types of foreign funding in the form of concessional, commercial, export credit, and so on, there are checks and balances which ensures such resources are at best not wasteful. The critical point is that no foreign financing house feels delighted to invest in sovereign government’s project/programme when there is no credible recoverability plan. Caveat: It must be emphasised that there are no 100 percent successes though.
The third reason why the foreign-dominated source is preferred is borne out of the fact that Ghana’s sovereign credit rating has drastically improved. S&P and other rating agencies have revised their rating of Ghana. There is a positive outlook of Ghana. The government must leverage such positive perspective coupled with a stable Libor and Euribor by accessing external funding at relatively cheap cost. The macro environment presents a more conducive atmosphere for government to shift policy by taking advantage of relatively inexpensive financing in the external market. I am, however, very much aware of the challenges that foreign dominated funding comes with, but the tradeoff is definitely in favour of foreign financing.
As the government is in a hurry to transform the economic structure of the Country, become an enabler for private sector expansion and ensure sustained growth, it would require that private enterprises do not compete with the government for resources. It requires that the private companies get cheap financing at a relatively stable interest rate(s). The government policy of domestic dominant funding could slow the pace of private sector expansion. Remember, Government is still the most significant player with little or no risk and banks feel safe buying government bonds then lending to private enterprises. In the end, why must government spend when it does not have the money? Why not cut expenditure to the level of revenue? Isn’t it prudent to consider balanced budget legislation in Ghana?
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