Elections and the Economy in the Midst of a Pandemic

Since Ghana adopted democracy in 1992, elections have been a mainstay feature in the country and on December 7, 2020, the country will once again head to the polls to elect a new leader who will steer its affairs over the next four years.

At the beginning of the year, one thing that was certain was that the country will elect a new leader this year but one thing that nobody envisaged was the COVID-19 pandemic which has brought economic activities all around the world to a standstill and eroded all the macro-economic gains that Ghana has made in the last three years.

The Ghanaian economy is in dire straits with public debt ballooning to GH¢258.37 billion and the budget deficit expected to widen to 11.4 percent of GDP by the end of 2020.

GDP growth is expected to slow down to 0.9 percent in the face of increasing government expenditure and shortfall in revenues.

In the midst of these disturbing fiscal situations is the December 2020 elections which puts further pressure on the government to spend more to attract more voters in a bid to retain power.

There is no doubt that elections have over the years affected the Ghanaian economy as voters see election years as periods to demand their share of national resources, which puts pressure on the government to sacrifice all the macro-economic gains it has achieved over the period and overspend.


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Dr. Ebo Turkson, an Economist and Senior Lecturer/ Coordinator of the Economic Policy Management Programme at the Department of Economics, University of Ghana

Speaking in an interview with Dr. Ebo Turkson, an Economist and Senior Lecturer/ Coordinator of the Economic Policy Management Programme at the Department of Economics, University of Ghana, he agreed that elections have in the past affected the Ghanaian economy, stating that

 

Almost every four years, we have a situation where we do very well with our macro indicators as we do a lot of fiscal tightening and begin to clear the mess of election year overspending but, we come back to the fourth year, overspend and do the same thing over again.

He said the issues that normally come up in the country’s elections are the political economy issues, where voters are looking for what could be done for them directly (or otherwise) to have an immediate real impact on their livelihoods in order to give an assessment of the performance the economy and for them to make their preference of who to vote for.

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That has been the kind of economic policies that we have pursued in election years where we have overspent our budget with the exception of 2004 or thereabout. We do so well after an election year especially in the second and third years and in the fourth year we sacrifice all the gains because it’s an election year.

Concerns of huge budget deficits in election years

Election years in Ghana have always been characterized by huge budget deficits, with the exception of 2004 when the country had just gone into a HIPC programme.

In the year 2000, the country recorded a budget deficit of 8.5 percent against a target of 6.9 percent.

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In the 2008 election year, the country recorded one of its worst budget deficits of 11.5 percent against a target of 4 percent. The situation was not different in 2012 when the country recorded a budget deficit of 12 percent against a target of 6.7 percent.

 

In the 2016 election year, not even being under an International Monetary Fund’s (IMF) Extended Credit Facility programme could stop the country from overspending. Under the watch of the Bretton Woods institution, the country still missed its budget deficit target of 5.7 percent by recording a deficit of 10.3 percent.

This year, the situation was expected to be different as the government has passed the Fiscal Responsibility Law which has set a cap on the budget deficit not exceeding 5 percent of GDP and failure to follow this law will lead to the Finance Minister being removed from office.

It was, therefore, expected that the country will stay within this fiscal deficit target for the first time in many years in an election, then COVID-19 struck with its harsh fiscal impact, leading to the suspension of the fiscal rules for this year.

Corroborating the statement, Dr. Ebo Turkson, said “over the last two years, we have stayed within this target and the expectation when the last budget was read in November 2019 was that we were going to record a deficit of 4.7 per cent in 2020, then COVID-19 hits and when a pandemic like this happens, in almost every economy in the world, fiscal rules no longer work because the government has to intervene.

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|“So, what is happening this year in terms of the expectation for the elections is much more compounded by the fact that, a pandemic has occurred and people have lost jobs, firms/enterprises have had a reduction in the demand for what they produce and sell, industries are not producing at the maximum capacity and this has had some dire consequences on incomes, so it has taken a strain on government fiscal policy in two directions.

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“One; on its expenditure in terms of having to come up with interventions that are supposed to help the average Ghanaian to be able to withstand the pandemic and also on the revenue side; given that economic activities have declined it means that governmen revenue will also decline.”

 

The implementation of the 2020 Budget from Jan-June, as presented in the mid-year budget shows a lower revenue performance against the programmed target and higher expenditures compared to target, significantly influenced by the impact of the COVID-19 pandemic.

Total Revenue and Grants amounted to GH¢22 billion falling short of target by 26.0 percent, while Total Expenditures including arrears clearance amounted to GH¢46.35 billion, exceeding the target by 11.5 percent.

These developments for the period resulted in an overall fiscal deficit of 6.3 percent of GDP compared to a programmed deficit target of 3.1 percent of GDP.

Total Expenditure (including clearance of arrears) for the year is now estimated at GH¢97.7 billion, about 13.7 percent higher than the 2020 Budget estimate of GH¢86.0 billion. Total Revenue and Grants have also been revised to GH¢53.7 billion in 2020, representing a 20 percent decrease over the original 2020 Budget target of GH¢67.1 billion.

Dr. Turkson said before the beginning of the year, the expectation was that for the first time, the Fiscal Responsibility Act was going to constrain government’s spending in an election year and all Ghanaians were waiting to see that until the pandemic struck.

Addressing huge budget deficits in election years

The major cause of huge budget deficits in election years has got to do with the pressure that electorates put on the government in such periods. Electorates expect to receive freebies from the government in election years, see their roads tared and see lots of development works going on in their communities.

Dr. Turkson, therefore noted that to solve this problem, the electorate must be made to understand that a government cannot use just four years to solve all of their problems.

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The electorate must know that a party cannot use just four years to make any major transformation and that rather, we should look at the future impact of what is going on now. If the electorate will become a little bit sophisticated to know that, yes things are difficult now, but we are ready to sacrifice to maintain all the macro-economic gains in order to attract more investors to expand production by creating jobs, we will be able to solve our problems and surmount our development challenges.”

 

Temptation to overspend

In the midst of the pandemic, the finance minister, Hon. Ken Ofori Atta went to Parliament to ask the house to suspend the fiscal rules for the 2020 year, a submission which was subsequently approved by Parliament.

As a result of the revisions to the country’s total expenditure and revenue for the year 2020 due to the pandemic, the country’s fiscal deficit target is now projected to widen to 11.4 percent, which is way above the 5 percent target.

With this year being an election year, many are wondering if the government would be tempted to overspend and even exceed the already high 11.4 per cent fiscal deficit target now that fiscal rules have been suspended.

Reacting to this, Dr. Turkson exclaimed that “I will be very surprised if the government does that because the government is well aware of the implications of that.

"Once we get over this pandemic and elections, the economy must recover as soon as possible and the recovery of the economy will depend on the extent to which the government keeps to the programmed deficit target."

When we revised the target for this year, we are looking at a deficit target of 11.4 percent because of the pandemic which is very high and has its own repercussions.

So, the government shouldn’t use this as a blank cheque to overspend. I will be very surprised if they don’t keep within the estimated 11.4 percent. We will need about two years or more to recover from the disruption caused by the pandemic. So, if we keep within our target then our recovery will be much faster than we even expect.”

 

Government’s relief programmes– Right or Wrong?

In the wake of the COVID-19 pandemic, we have seen the government roll out a lot of relief programmes to citizens, ranging from free water, subsidized electricity, free meals for students, and financial support to small and medium enterprises.

These decisions have left many scratching their heads, considering the difficult fiscal position and rising debt situation the country finds itself in. They argue that this was not the best time for the government to be giving out freebies.

Dr. Turkson, however, disagrees with this school of thought as he believes there were lots of people who have been severely affected by the pandemic which requires that the government steps in to support them.

For instance, if you have two parents who work in private schools and have been laid off because these schools have been closed due to the pandemic, you begin to wonder how they are going to feed their family. Those who work in the hospitality industry have been badly hit and I will support any government intervention that will try to help such disadvantaged households and firms to cope with the pandemic.”

With the country’s debt situation, he said, “this was not the time to talk about debt because in the face of a pandemic, you should even be thankful you have access to money we can borrow to close the financing gap.

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“There is no point in keeping our debt low when people are struggling to make ends meet in such a difficult time; so I’m all for it. With our rising debt, what we need to do as a country is to sit down and clearly ask ourselves that in every cedi that we borrow to expend, are we being very efficient and forward looking with that expenditure and that is what is critical. Once the economy’s growth is shrinking, expenditure is increasing and revenues are declining even with the same amount of debt, the debt-to-GDP ratio will increase, but that should not be too much of a concern for now.

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If you take the league table of countries that have the highest debt, Ghana is nowhere near the top thirty. A country like Japan has more debt than many countries but it is not poor so we should be asking: what went into the debt? Was it incurred to expand the productive base of the economy, was it incurred to contain an unforeseen occurrence like COVID-19?”

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Politics and the economy– mutually unexclusive

While economics is concerned with studying efficient utilization of scarce resources and how policies can be used to influence the economy at both the micro and more often at the macro level, politics is the theory and practice of influencing people through the exercise of power. These two areas may look different on paper but there is a strong link between the two.

The Economics lecturer pointed out that there was a very close relationship between politics and economics, stating that “economist seek to inform policy on all the right things we have to do in the management of the economy but the politician will call the final shot.

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“We have something we call the political economy of economic policy. The politician knows very well what the right policies are but the choice of these policies are very difficult to make because of its political cost. So, if you have a politician who is mindful of winning an election and at the same time also doing the right thing for the economy to grow, there is a balance but in our part of the world more than often the politics outweighs the economics.”

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Thus, politicians make decisions that will help them stay in government, an action which comes at a cost to the well-being of the economy.

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“Ideally, what should have happened is having a politician that is pursuing sound policies that the average Ghanaian will be happy about but in the dispensation where majority of the people cannot comprehend issues about what is good for the economy, they normally begin to ask questions like the economy is doing well but I am not feeling it in my pocket. So, people will prefer freebies and prefer seeing their roads tared even though it might not be necessary at that moment.

 

He further revealed that people would like to be given money as freebies during election periods, forgetting that the money the politician is giving out will feed into government expenditure (both directly and indirectly) which at the end of the year may cause a huge fiscal deficit which will lead to tightening later on and that is when they (the electorate) will feel the pinch. 

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“In Africa, it is difficult for the electorate to comprehend the impact of sound economic policies. So, you sometimes cannot blame the politician because to them the objective function is to win the election and that is what they will do (that is, overspend to satisfy the electorate to win their votes).”

 

Parallel Party Policies?


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 The two main political parties in the country have different ideologies. While the NPP believes in capitalism which involves putting the private sector at the forefront, the NDC leans more to socialist development.

The economist, however, believes that although the two parties may have different ideologies, the policies they both pursue are not different from each other.

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“I used to think some couple of years back that these two parties had different ideologies but I think that is not the case now. Their foundations could be based on different ideologies but I don’t think they still pursue those ideologies as at now. When you see them arguing over some policies, that this is my policy, then you tend to believe that they do not practice their ideologies as that school of thought would normally prescribe.

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“They seem to be arguing over the same type of policies which shouldn’t be the case. The focus of the two parties has now been on private sector led social development and it seems that is the focus these days. Following from the economic reforms in the early 1980s we tended to call for minimal intervention of government, but now that state-led intervention of development is coming up lately (because of what happened in East Asia where they used the state led development paradigm to quickly develop their countries), our two major parties have shifted their focus.”

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Development Plan disregarded?

A bane of the country’s development process since independence has been the practice where one party starts something and it’s voted out of power, another party comes in, abandons it and starts its own plan. Although, the 40-years development strategy was developed and commissioned to solve this menace, it has been difficult in getting the two main political parties to commit to this plan.

The Coordinator of the Economic Policy Management Programme at the Department of Economics, University of Ghana, believes the situation has even improved now, compared to historical antecedents.

“There were instances in the past where an elected government will totally cancel the intervention started by its predecessor and start something totally different. At times the initiatives are even the same but they will change the name.”

He said this was due to the fact that the country’s development path was driven by party manifestoes rather than a national development plan.

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I think the parties have all lost it because it is the national development plan that should inform their manifestoes. If Ghana has a 40-years development plan, what are the immediate objectives of the plan? If that plan is there, what these two parties are supposed to tell us is which alternative they will use to deliver that objective, but that has not been the case.

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“Over the years, one of the best policies that I have heard been pursued by a government of this country is the one district one factory (1D1F) programme. It is at the centre of the structural bottlenecks our economy faces and the fact that Ghana has not been able to develop to a level that we sort to do after independence is because of our failure to get this very important intervention right. The 1D1F is similar to the Import Substitution Industrialization plan that was pursued by Dr. Kwame Nkrumah, the only difference is that the 1D1F is private sector led while Nkrumah’s ISI was public sector led.

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If pursued, the 1D1F policy among other things is expected to reduce the country’s dependence on imported goods which is one of the reasons why the local currency has not stabilized over a long period of time. So, if we are able to produce the import substitutes of equal or even higher quality, then there will be no need to import lots of things.”

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Under the 1D1F policy, the country has seen one of the biggest car manufacturing companies in the world, VW, set up its assembling plant here in Ghana to sell to the Ghanaian market and also export to other African countries.

Dr. Turkson believes these were some of the interventions the country needs to speed up its development but unfortunately the policy that gave birth to this milestone was embedded in a party manifesto rather than a national development plan, which presents the risk of it being canceled when another government is voted into power.

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“The fact that VW has come to Ghana and it’s producing here reduces the amount of forex that we send outside to import cars and we are going to export to other countries as well which will be export revenue for Ghana which will improve our trade balance and this is exactly what we need to stabilize our domestic currency and be able to maintain the macro stability to attract foreign investors to create jobs. This is the way the eastern Asian tigers went and if we get it right then we will be making remarkable progress but the unfortunate thing is, all of this is coming from a party manifesto."

If this was a national development plan, supposing there is a change in government, you expect the next government to continue with it. The planting for food and jobs is also another good policy which has led to growth in the agricultural sector but you find all of these policies embedded in party manifestoes and that is the bane of our politics and why Ghana has not been able to move forward. We should see institutions and policies as belonging to the country and not a party.”

Political stability yielded any dividend in economic development?

Political stability is considered as one of the major factors necessary to sustain economic growth. Over the years Ghana’s political stability has been one of the main attraction for Foreign Direct Investment into the country, with the World Bank and other notable institutions all indicating that Ghana remains one of the most attractive investment destinations in Africa due to its political stability.

A recent report by the Eurozone indicated that Ghana still remained a safe bet for investment despite the fact that elections were coming up in a few months’ time.

But, although the country has enjoyed political stability over a long period of time, it remains unknown how the country has been able to leverage this to quicken its economic development.

Commenting on this, Dr. Turkson said  “we have been able to change from one government to the other without any disruptions and that is good for us. This does not only bring in investment but also allows for the government and other economic actors to plan. Disruptions in politics can bring a huge cost especially when it leads to civil strife or unrest or wars.”

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“Our political stability is putting us out there as the best showcase in Africa and as we go to the polls in December, I hope we will maintain this enviable status because this is what investors want to see and if we are able to continue this political stability over a long period of time, we will attract all the global giants into this country and this would ensure that our educated labour force will get jobs to do.”

He further said, although the country has not been able to leverage on this too much to enhance its economic development, it was however working for the country in terms of attracting investors, something which should excite the country.

Post-election and post-COVID Recovery strategies

In the midst of the pandemic, one thing that will be key is how various government’s roll out policies and measures to quicken their economic recoveries post the pandemic and Ghana is no exception.

With elections coming up soon too and the pandemic showing no signs of ending soon, Dr. Ebo Turkson said any party that would emerge victorious post-election and post-COVID should focus on three main things.

“Domestic resource mobilization is quiet key and we should make sure that we are able to equip our domestic resource mobilization agencies like the Ghana Revenue Authority (GRA) to be able to widen our tax net and also ensure we are able to increase tax revenue by being efficient. We should also focus on improving the capacity of the domestic resources mobilization agencies (both human resource and logistics) for them to be efficient at collecting our taxes and that is why I am happy that a whole lot of digitization is going on to ‘rope’ in as many people as possible into the tax net.

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"We also need to accelerate our infrastructural development which is also key. If we are going to reduce the cost of doing business in the country and be an attractive investment destination, then we need to invest in infrastructure. We should also ensure that whatever policy that we are pursuing currently to reduce our dependence on imports and at the same time promote exports should continue, regardless of who wins the election.”