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Infrastructure moves to the front burner



The beginning of the major rainy season, which lasts from April to June, is the beginning of rising anger and expense for Ghanaian motorists. Heavy rains cause already poor roads to further deteriorate, exposing deep potholes that slow down traffic and increase motoring risk—not to speak of causing damage to vehicles. Rural roads are especially parlous, and non-existent in some places, limiting movement and economic opportunity for millions of people. This has stirred up resentment among citizens, with growing incidents of violent protests against poor road conditions.

The paucity of good roads is the most striking indication of Ghana’s infrastructure woes. Although the country’s infrastructure has been built up steadily from the ruins of the 1970s-80s, infrastructure provision, from roads to ports, schools, hospitals, and utility systems, has persistently lagged demand, creating a huge and constantly accumulating deficit. Compounding the insufficiency of investment is poor maintenance of existing infrastructure, which reduces its reliability, lifespan, and benefits to the economy. The cost of the infrastructure deficit is felt in reduced productivity, decreased economic growth, and a lower quality of life.

In the last few years, government capital investment, already low by historical standards, has been cut due to austerity. From 3.9% of GDP in 2013, central government capital spending declined to 3.6% of GDP in 2016, and dropped further to 1.6% of GDP in 2018. In addition to this expenditure, a number of statutory funds, including an education trust fund and a road fund, receive resources from the government for infrastructure investment. These resources have also been curtailed with the purpose of curbing the budget deficit.  

The government’s 2019 fiscal policy aims to reverse the trend of budget cuts by increasing central government capital investment to 2.5% of GDP, as well as allocating more resources to the infrastructure-dedicated education and road funds. This is not all: in April, the administration launched a US$2 billion package of infrastructure investment, which will be funded by China through an infrastructure-for-bauxite agreement. The deal requires Sinohydro, a Chinese state-owned construction company, to build US$2 billion worth of infrastructure for Ghana, which will be paid back by ferrying an equivalent amount of the country’s bauxite to China.

Three quarters of the Sinohydro investment is going into roads, reflecting the dire state of affairs in that area. Out of the country’s 72,381-kilometer road network, only 39% is classified as good, with 32% in fair condition and the remaining 29% in poor condition. The proportion of roads that is asphalted is a measly 23%. Sinohydro will construct new roads and interchanges, including the first ever interchanges in the north and west of the country, and rehabilitate crumbling roads. The non-road infrastructure that it will develop includes hospitals, housing, court buildings, and industrial parks.

Revived attention is being paid to rail transport, too, although the plans proposed are so grand as to seem incredible at times. It is no exaggeration to state that the existing rail network is obsolete and anachronistic, with most of it in disuse, as a result of which rail travel accounts for a miniscule share (less than 2% versus 97% for road) of the transport market. The Ministry of Railways Development, created by the government in 2017, proposes to rehabilitate the entire network, which is concentrated in the south, and to extend it to the north, with linkages to Ghana’s northern neighbors. A portion of the state’s petroleum revenues is being invested to revamp key sections of the network, while public-private partnerships are being considered for large-scale investments.

To expand education infrastructure, the government has secured US$500 million, by collateralizing 40% of the education trust fund, to fund new classrooms, dormitories, dining halls, and teachers’ housing in senior high schools, which have experienced an explosion in their populations since the coming into effect of the free senior high school policy two years ago. A further US$1 billion is to be raised in a similar way to boost infrastructure in basic and tertiary schools.

The increase in infrastructure investment will generate multiple economic benefits. In the short term, construction activity will provide jobs and incomes, and drive economic growth. Successful delivery of projects will enable beneficiary communities to enjoy new and improved roads, schools, hospitals, and other amenities. This in turn will support enhanced livelihoods while widening economic opportunities.

For these benefits to multiply to the point where the productive capacity of the economy is permanently strengthened, the country needs to sustain high levels of infrastructure investment for a long period of time. And it must do this without borrowing excessively, since the public debt burden is already large—58% of GDP in 2018—and expensive to service. This means the government must focus its efforts on growing domestic revenue, which is presently low (15.6% of GDP), to provide resources for increased capital investment.

It is vital also to improve the efficiency of public investment by reforming the way it is planned and executed. Due to poor planning, many infrastructure projects that are started suffer long delays before completion or may not be completed at all. As a result, the investments do not yield their full benefits. One study has found that one-third of capital projects begun by local governments do not get completed. Essentially, officials are more inclined to initiate new projects than finish ongoing ones. This practice represents an expensive waste of resources and needs to be checked.

Poor infrastructure is one of the characteristics of poor countries. As Ghana has ambitions to become an industrialized, prosperous nation which does not depend on aid, it cannot afford to spend meagerly on infrastructure, which is needed to drive the economy’s transformation. On top of ensuring that every citizen eventually obtains reliable electricity, clean water, a decent education, efficient transport services, first-class healthcare, and the like, raising capital investment in an efficient way will spur higher productivity in the economy, bolster competitiveness, and catalyze industrialization. The government would do well therefore to keep the infrastructure issue on the policy front burner.

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Revenue Blues for the Government



Times are rough for the taxman in Ghana. For a third straight year, revenue targets set in the national budget look likely to be missed. In the last two years, such an outcome meant cuts to public expenditure, especially the resources budgeted for capital investment, in a bid by the government to keep the lid on borrowing. This year, however, with the government under pressure to spend more generously to placate a restless electorate, there is a danger that borrowing could be increased to offset lower revenue, which could worsen the already high public debt and debt service cost. This would be bad for Ghana.

Public anxiety over the national debt has heightened recently. This is quite justified as the debt is mounting, while politicians from the country’s main parties—the ruling New Patriotic Party (NPP) and the opposition National Democratic Congress (NDC)—engage in recriminations over who bears greater responsibility for the problem. A decade ago, in 2009, the stock of debt stood at GH₵13.3 billion, equal at the time to US$9.3 billion. By the end of 2016, the debt had soared to GH₵122.3 billion, equivalent to US$29.2 billion. As at June 2019, the debt stood at GH₵203.9 billion or US$38.7 billion. In per capita terms, each Ghanaian owed GH₵568 (US$397) in 2009, but this increased to GH₵4,319 (US$1,032) in 2016 and GH₵6,733 (US$1,280) in June 2019.

For economists, a country’s indebtedness is more meaningfully assessed by comparing its stock of debt to the value of its total annual production of goods and services, otherwise known as Gross Domestic Product (GDP). The idea is to see how much of the national income would need to be spent to eliminate the debt in one fell swoop. Appraised this way, Ghana’s debt climbed from 27.2% of GDP in 2009 to 56.8% of GDP in 2016, and reached 59.2% of GDP in June 2019. The International Monetary Fund (IMF) is projecting the ratio to hit 60.5% of GDP by year-end.

Behind the debt build-up is the simple fact that the country has been living substantially beyond its means for a long period of time. This means there have often been wide gaps between government revenue and expenditure, which are financed by loans taken from domestic and foreign sources. Loans sourced from abroad have a particularly ruinous effect on the debt dynamics because the domestic-currency value of foreign debts rises whenever the local currency, the cedi, depreciates—which happens to be the norm. This is a big problem; as more than half of the debt stock is foreign-currency-denominated.

Between 2015 and April 2019, Ghana undertook a financial assistance program with the IMF with the goal of reducing its budget deficit—the gap between state revenue and expenditure—and debt-to-GDP ratio, and stabilizing the economy. The program achieved many things, including cutting the deficit from 7.4% of GDP in 2014 to 3.9% of GDP in 2018. The debt-to-GDP ratio kept up its rise, however, in part because, though declining, the budget deficits were still high, on average, and the exchange rate continued to depreciate, even if at a slowing pace.

What has also added to the growth in debt since 2018 is the issuance of special resolution bonds by the government (worth GH₵11.2 billion (US$2.1 billion) as at June 2019) to plug shortfalls between the assets and liabilities of nine insolvent banks that have been brought under state control. The Institute for Fiscal Studies, a fiscal policy think tank, estimates that without these bonds, the debt-to-GDP ratio would have declined in 2018 to something lower than it was in 2016. The government says it needed to issue the bonds to facilitate the takeover of the insolvent banks, and that the exercise helped to safeguard the deposits of 2.7 million customers.

A major concern with the debt burden is the high cost of servicing it. In 2018, debt interest expenditure ate up 33% of the government’s total revenues. This compares with 15% in 2009. What this means is that, after servicing its debts, the country has less money left than in the past to spend on public programs, including infrastructure investment to boost growth, improve the quality of life, and create jobs for a restless, youthful population. Such a situation has tended to push the government to seek further loans to build the sorely-required new roads, power stations, and water systems, effectively ensnaring the country in a vicious cycle of debt and rising debt service cost.

When Ghana was caught in a similar, though less crushing, debt trap at the turn of the century, it turned to the IMF- and World Bank-sponsored debt-relief program known as the Heavily Indebted Poor Countries (HIPC) initiative. HIPC offered to cancel a huge portion of the external debts of poor countries owed to the IMF, World Bank, and Western bilateral creditors, provided the beneficiaries implemented macroeconomic reforms and applied the debt-service savings to reduce poverty in their countries. Much of Ghana’s external debt was wiped off under HIPC, which was followed by additional debt forgiveness via another Western-sponsored scheme, the Multilateral Debt Relief Initiative (MDRI). The debt ratio fell over this period (2000-2006) from 79.2% of GDP to 18.6% of GDP, and debt interest spending declined from 38% to 12% of total government revenue.

This time, unfortunately, debt forgiveness is not an available course out of the quagmire, for two reasons at least. First, a country can access debt relief only once under the HIPC program. Second, unlike two decades ago when more than 90% of the country’s external debt was owed to the multilateral and bilateral creditors that backed the debt relief initiatives, these days just about half of the external debt is owed to such creditors, with the other half owed to commercial creditors, including investors in international bond markets, where Ghana has issued billions of dollars of Eurobonds since 2007.

So what should be done about the debt? Basically, borrowing needs to be curbed by running lower budget deficits, which would limit the growth of the debt stock. Lower deficits entail raising more government revenue while moderating expenditure, including the public sector wage bill, which soaks up 41% of the government’s income. The revenue situation is quite acute, with the country able to mobilize just 15.8% of GDP as fiscal receipts in 2018. This is much less than is raised by most of its lower-middle-income peer countries, which collect 25% of GDP, on average, in annual government revenue.

In 2019, the government hopes to improve revenue collection to 17% of GDP, and following poor collections in the first half of the year, it hiked taxes in July to help it reach the target. The country could further boost its revenue ratio by strengthening weak tax administration, which has allowed tax evasion and avoidance to thrive, and by curtailing extensive and costly tax exemptions. Raising additional revenue will enable brick-and-mortar investment to be increased, which will generate the economic growth required to make debt sustainable. That is a future that all Ghanaians should vote for.

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