Thursday, November 25, 2010
It is the investment climate, law and order, and institutional
professionalization that offer clear room for capacity building in the
government/public sector. Without a greater emphasis on these areas and
less emphasis on rhetorically pleasant but structurally irrelevant
so-called “government interventions”, we shall continue to beat about
the bush in this country.
And that is where the present budget fails. The tax measures seem to us
and many independent observers, to be fragmented, uncoordinated, and
unconnected to any wealth-creation agenda. The government insists that
it has not introduced any new taxes to burden the private sector. But
that is not the test. The test is whether the tax measures as presently
designed shall positively influence enterprise development, and there is
no sign that they would.
Ghana’s latest budget has been met with uproar in some quarters.
There is no dismissing or diminishing the fact that under trying
circumstances the ruling government has been working hard to balance its
books and stabilise the economy. There may be some disputes over the
precision of measurements and accounting conventions, but the evidence
does point to some clear successes on the macroeconomic front.
The strengthening cedi has of course led to a significant boost in
imports, but in real terms (accounting for inflation) the increase is in
line with recent trends in the current account, and is thus not exactly
scary (which is what you would expect if the currency had been
artificially overvalued).
The falling inflation rate may have had an effect on the growth in
non-performing loans but the rate has been far from apocalyptic (which
is what you should expect in a poorly executed disinflation strategy,
since falling inflation implies a rising of the real value of debt).
The mounting gross international reserves may not mean much in the
current context where international prices of our commodities are high,
remittances are stable, and the price of our key imports (such as oil
and cereals) have levelled for several months now. But this is an
economy very much exposed to the vagaries of the global economy. It is
therefore very good to know that if there was a sudden meltdown and a
total shutdown of foreign exchange inflows, however improbable that
scenario might be, we have enough forex savings to cover all our
obligations for 3 months at least. In terms of our short-term
obligations (which are more likely to come due) we may survive for even
far longer.
Since late 2009, quantitative easing has dramatically declined, meaning
the Bank of Ghana isn’t printing money willy-nilly to bail the
government out of its own wanton excesses.
All this is brilliant.
So why all the fuss, then?
Observers are complaining because they are struggling to see how these
macroeconomic gains are interlinked with the overall government policy
agenda, and how exactly a government that has been relatively lucky in
the external challenges it has faced so far intends to bring about the
socio-economic transformation the good people of Ghana have been waiting
for all this while.
Any careful reading of the budget cannot help but conclude that the
Administration is banking on three major items to trigger any such
transformation.
First is the so-called “multi-billion dollar framework agreements” with
China. Next is the oil mini-boom which is expected to feed some kind of
reindustrialisation of the countryside. Last, of course, is the “tax
more” agenda, though senior Administration officials have spent a
substantial amount of time trying to spin it as the “socially equitable”
tax boost agenda.
We think it would be dangerous for the Administration to put too much store on the Chinese money.
The Chinese are known for disbursing when they will and stanching when
they want. When the Bui dam project was launched the understanding was
that the country’s third major hydroelectric dam and its second largest
would be completed in four and half years.
Nearly three and half years later, we have been told, in the current
budget, that it is barely 32% complete, with no indication whatsoever as
to when we can expect the reservoir to fill up and the turbines to
start turning. Nobody is dismissing the complex topographical and
engineering challenges posed by dam-building, but in this particular
case it is clear that the delays are predominantly resource-related.
If the Administration is minded to inquire, they may call the Liberians,
Nigerians and the Chadians, and ask what the track record of
disbursements in mega Chinese deals have been. Expect the Chinese money
to trickle in over the medium-term, and thus to play far less than the
role assigned to it in the sweeping transformation we all agree this
country urgently needs.
We were impressed by the candour and wisdom expressed in the budget with
respect to the likely extent and impact of the oil-related inflows. We
were surprised though that once again the figures seem muddled, thus
taking away from government’s newfound prudence in designing oil revenue
policy.
After very wisely perching likely oil revenues at a conservative figure
of GHC584 million (approx. $390 million), which as we have said we
applaud, the government still goes ahead and indicate in its growth
forecasts that oil shall contribute, on its own, 5.3% to GDP growth. In a
$20 billion economy, that suggests that oil’s fiscal impact shall
amount to no less than $1 billion (approximately GHC1.45 billion). This
is even more problematic because related activities in exploration and
field development have already been accounted for under their
appropriate classifications.
Simply put, the figures do not add up.
Nor is it the case that the government’s conservatism has been so
austere as to leave some leeway for such accounting confusion. The truth
is in fact that the incoming oil revenues have been overhyped for so
long a time (as regular followers of IMANI’s commentary might
appreciate) that we have lost our perspective with regard to the real
facts on the ground.
When the Jubilee field development plans were first drawn up the concept
was to have 60 wells of which more than half were to be production
wells.
A conspiracy of the political elite has over time, in the name of
“fast-tracking”, led to the emaciation of this sound plan. Today the
master plan features 17 wells, nine of which are production wells.
Indeed, our understanding is that even of this number, one of the gas
injection wells was not completed. Thus, to hit the so-called “optimal”
production level of 120,000 barrels per day, each well will need to
produce in excess of 12,000 barrels per day for this extent of output to
be feasible. You don’t need to have hassled in the oil sands of Texas
all your life to know that this is far from conservative.
Consider the average production per well (measured in barrels) in the
following countries: Saudi Arabia -4370; Norway – 3782; Iraq – 1204;
China – 47; and Russia – 179. Sure, the age profile of our wells is
lower compared with the case in some of these countries, but it is
obvious how aggressive the targets set for Jubilee are. The current
5000+ barrels per well per day estimate for the field is thus not
exactly ultra-conservative. Nor is there any suggestion that more wells
shall be sunk over the course of 2011 or even by 2012.
Moreover, the GNPC has been oddly silent on how the associated gas shall
be handled and no word from the Ministry of Energy whether financing
has been found for the gas processing plant itself, even though the GNPC
is expected to receive more than 70% of the incoming oil revenues over
2011 and may thus be in a stronger position to attract additional
funding from investors. Typical of what energy policy has become in this
country since oil was discovered, transparency and policy clarity
remains as elusive as a feathered banana.
For all the reasons adduced above, we are unconvinced of the impact of
oil on the economy in the short-term as far as significant
socio-economic improvement in the country is concerned.
That leaves us, finally, with the “revenue mobilisation agenda” detailed in the budget.
We agree with most of the comments that have been passed by other independent observers.
In our present context, what are needed are signs that the government
intends to embark on a rationalisation of its expenditure through
greater specialisation in those areas that improve upon its capacity to
enhance citizens’ welfare and lubricate wealth-creation. Rather than tax
the citizenry to its knees, the government ought to find more creative
means to divest itself of some of the responsibilities it has
historically performed abysmally.
More private sector participation is needed in health and education so
that the middle classes are removed from the government’s burden. A
significant proportion of what the Civil Service does now can be
outsourced to more efficient private contractors. Much of the
bureaucracy in local government, the administration of social services
and even the Foreign Service can be thinned down considerably.
Underperforming state-owned enterprises like Tema Oil Refinery should
benefit from open, transparent, well thought through, public-private
partnerships.
The combined effect of these various actions should be a dramatic reduction in government outturn.
It shall be feasible to reduce government expenditure by 40%, keep taxes
at the present level (thus provide tax relief of 10% in real terms for
2011) and employ a wider variety of creative tools to draw in more
resources for enterprise development and law and order, which should
ultimately boost taxes, help expand infrastructure, and thus enrich the
investment climate for accelerated growth and socio-economic
development.
Some of these creative mechanisms include a total refocusing of the
Ministry of Trade & Industry on development financing, in which this
Ministry works actively with the Foreign Ministry to serve as a bridge
for international and regional development finance institutions
interested in investing in individual SMEs. Anybody who has attempted to
do business in this country, and the authors of this article have
first-hand experience, know that government institutions are more a pain
than a help. Only the politically connected in this country have any
hope in hell of enterprise support.
It is the investment climate, law and order, and institutional
professionalization that offer clear room for capacity building in the
government/public sector. Without a greater emphasis on these areas and
less emphasis on rhetorically pleasant but structurally irrelevant
so-called “government interventions”, we shall continue to beat about
the bush in this country.
And that is where the present budget fails. The tax measures seem to us
and many independent observers, to be fragmented, uncoordinated, and
unconnected to any wealth-creation agenda. The government insists that
it has not introduced any new taxes to burden the private sector. But
that is not the test. The test is whether the tax measures as presently
designed shall positively influence enterprise development, and there is
no sign that they would.
Furthermore, in an economy where the rural economy remains impervious to
taxation, “broadening the tax net” is mere rhetoric. What ought to
happen is economic stimulation so that “the kind of economic activities
that are taxable” predominate. There was nothing in the proposed tax
measures that can remotely help to achieve this.
On the contrary, measures like abolishing tax holidays for certain
potentially high-growth industries and the retirement of privileges such
as the two-year concession for bonded warehouses (which can be critical
for food security and trade flexibility) send all the wrong signals to
domestic investors and militate against the creation of taxable
employment.
Furthermore, punitive middle-class taxation fails to ensure equity
because of the structure of the economy in which the formal sector is
criss-crossed by trading and service-provision usually by the same
white-collar workers that are presumed to form a significant portion of
the middle-classes. When you increase their airfares, they pass it on to
their customers and clients, or cut down on investment plans.
Hence, the fuss over the 2011 budget, friends, hence the fuss.
Courtesy of IMANI (www.imanighana.org) and AfricanLiberty.org