IEA urges next govt to prioritise economic stability, structural reforms

By Daniel NONOR, Accra

The Institute of Economic Affairs (IEA) has made key policy suggestions in its recent brief targeted at the incoming government, urging comprehensive reforms to stabilize the economy and address persistent structural weaknesses.

The IEA has also made far-reaching recommendations on a roadmap for achieving sustainable growth and macroeconomic stability in the years ahead.

The brief referred to the economic challenges in recent years, with growth rates dropping from 5.1% in 2021 to 2.9% in 2023. Despite a slight recovery to 4.7% in the first quarter of 2024, the International Monetary Fund (IMF) projects the country’s overall growth for the year to be just 3.1%.

Inflation, which surged to 54.1% in 2022, has moderated to 22.8% as of June 2024, but remains high by international standards, severely impacting the cost of living.

 The fiscal deficit has improved, moving from -12.0% of GDP in 2021 to a projected -4.7% in 2024, largely due to the Domestic Debt Restructuring Programme (DDEP) and a suspension of external debt servicing.

Nevertheless, the IEA stressed that the public debt-to-GDP ratio remains alarmingly high at 82.9% as of 2023, emphasising the unsustainable nature of the current fiscal trajectory.

Against these backdrops, the IEA stated that, “Ghana’s recurrent economic crises and the frequency of IMF bailouts this being the seventeenth in the country’s history clearly demonstrate serious policy failings, which have increased the country’s vulnerability to shocks.”

The institute therefore called for a fundamental shift away from the orthodox free-market policies that have guided economic management in recent decades, arguing that these have failed to address the structural weaknesses inherent in the economy.

Fiscal Discipline and Debt Management

The Institute also emphasised the need for entrenching fiscal discipline and ensuring debt sustainability. The institute emphasizes the importance of fiscal consolidation, which involves a careful balance between revenue-enhancing measures and expenditure rationalization.

 The brief further suggests, “Revenue measures should focus on stemming losses by closing loopholes in the tax system, including trade mis-invoicing, property tax under-collection, transfer pricing, money laundering, and tax fraud. Additionally, consideration should be given to imposing windfall taxes on booming sectors like extractives, banks, telcos, and ICT.”

On the expenditure side, the IEA called for a significant reduction in recurrent spending, particularly on government emoluments and goods and services. The institute noted that reducing waste and improving efficiency in government spending would create fiscal space for increased capital expenditure, which is crucial for spurring economic growth. The brief also advocates for lowering the current Fiscal Rule of a 5% deficit-to-GDP ceiling to a tighter rule of 3%, in line with ECOWAS criteria, and introducing a debt-to-GDP ceiling of 60%, which is considered sustainable for Ghana and other similar economies.

To reinforce fiscal discipline, the IEA recommended  establishing an independent Fiscal Council. This body would be tasked with evaluating and monitoring fiscal policy, ensuring that the government adheres to prudent fiscal management practices.

Monetary policy and inflation management

The IEA also noted  the need for stronger monetary policy management, particularly in the context of controlling inflation and stabilizing the exchange rate. The brief argues for stricter enforcement of the 5% ceiling on the Bank of Ghana’s lending to the government, with reinforced parliamentary oversight to prevent fiscal slippages.

Additionally, the Institute advocated for an improved inflation management strategy that goes beyond the current Inflation Targeting framework, which primarily focuses on demand management.

The IEA suggested that“Inflation management should include measures that directly target supply and cost drivers of inflation, such as food prices, fuel prices, utility tariffs, transport fares, and the exchange rate, through collaboration between the Bank of Ghana and the government.”

The institute also emphasized the need for better coordination between monetary and fiscal policy to create a low-interest-rate environment that would spur investment and economic growth.

It further suggested building up foreign reserves to at least six months of import cover as an important step to strengthening the exchange rate and improving the country’s external balance.

Economic growth, employment, and infrastructure development

On the issue of economic growth and employment, the IEA’s brief underscored the erratic and unbalanced nature of Ghana’s recent growth, which has been heavily dependent on capital-intensive sectors like extractives that generate limited employment.

To address this, the Institute called  for structural reforms aimed at alleviating production and supply constraints, enhancing productivity, and improving the overall business environment.

The IEA recommended that “Pro-growth fiscal policies should be implemented by rebalancing recurrent and development expenditure and increasing public investment to at least 10% of GDP, supported by additional revenue from natural resources.”

The institute also suggested  the establishment of development finance institutions to fund long-term investments in strategic sectors like agriculture and manufacturing, which have the potential to create significant employment opportunities.

Furthermore, the IEA noted the importance of infrastructure development in driving economic growth. The institute called  for substantial increases in budgetary allocations for infrastructure, coupled with the involvement of the private sector through Public-Private Partnerships (PPP) to reduce the burden on the government budget.

Energy security and sustainability

On energy security , the IEA,  noted that unstable power supply and high energy costs have been significant been an impediments to Ghana’s economic growth. The Institute thus advocated for a diversified energy mix that includes renewable sources like solar, wind, and biomass, as well as improvements in energy transmission and distribution to reduce losses and enhance efficiency. The IEA also calls for a reassessment of past Power Purchase Agreements (PPAs) to reduce the financial burden on the government and ensure future agreements are transparent and cost-effective. Additionally, the institute recommended the revamping of the Tema Oil Refinery (TOR) with private capital to reduce reliance on imported refined products, save foreign exchange, and create jobs.