Elections and the economy—will this time be different?

Ghanaian elections are notorious for wreaking disaster on the economy. Since 1992 a typical election year has seen the incumbent government put on the cloak of populism by ramping up spending to make voters happy and secure their endorsement at the ballot box. The splurge invariably leaves the economy in dire condition, with large budget deficits, runaway inflation, and a tumbling currency. A period of belt-tightening always ensues after the election, lasting until the next one, when fiscal caution is yet again thrown to the wind. As the country heads to the polls in December 2020, one question perturbing the minds of most economists and analysts is whether this time will be different.

According to President Nana Akufo-Addo, this time is going to be different. “We are resisting the temptation in an election year to turn on the tap, hoping that the work we have done will take us through without having to do that,” said the president at an African investment forum in Johannesburg in November. His words were reaffirmed by finance minister Ken Ofori-Atta in his 2020 budget speech two days later, when he pledged that “in spite of the year being an election year, let me repeat that President Akufo-Addo and his government will ensure that the perennial excessive spending during such periods will not happen in 2020.”

Ken Atta

Hon. Ken Ofori-Atta, Minister of Finance, Ghana


Promise and fail

The truth is such pre-election rhetoric is not uncommonly heard from Ghana’s leaders. In the lead-up to the last presidential and parliamentary elections in 2016, the former president, John Mahama, vowed to keep a tight grip on the public finances, which at the time were under repair through a bail-out program with the International Monetary Fund (IMF). The end-of-year fiscal scorecard showed a different outcome, however. The budget deficit, programmed and agreed with the IMF at 3.9% of GDP, ended up at 6.5% of GDP plus a mountain of payment arrears. This forced an extension of the program with the Fund by one more year, so that it was completed in 2018 rather than 2017.

Mr. Mahama was similarly guilty in 2012, when he presided over a near tripling of the budget deficit in a single year to 11.5% of GDP, Ghana’s highest on record. It was the economic ructions produced by this episode, made worse by a fall in the country’s terms of trade, which eventually led his government to sign a macroeconomic stabilization pact with the IMF in 2015.

Other past presidents also succumbed to election-year fiscal politics after they had vowed to resist the temptation. In 2008, John Agyekum Kufuor and his New Patriotic Party (NPP) administration, in which the current president served as attorney general and foreign affairs minister, incurred a deficit of 6.6% of GDP, three times the target set in the budget. This left a legacy of spiraling inflation, a depreciating currency, and declining investor confidence, undoing some of the macroeconomic gains Mr. Kufuor had secured during his eight years in office.

During the 1992, 1996 and 2000 election years, public spending and the budget deficit surged as the incumbent administrations of the time, led by ex-military leader Jerry John Rawlings, tried to woo the electorate with goodies such as subsidized petrol and development projects. The 1992 election, which ushered Ghana into the current democratic dispensation, was preceded by public service union strikes over higher wages and pay disparities. This pushed the government to increase wages—and thus the deficit—substantially, with the IMF responding by suspending an ongoing financial assistance program with the country.   


Stop-and-go stability

Elections in many countries are associated with loose fiscal policies by incumbents, which may give the economy a short-term boost but damage its performance in the long run. Economists have labelled this problem the political business cycle. Research conducted by the IMF shows that public consumption spending rises in the average low-income country during election years, only for governments to adopt more austere tax and expenditure policies in the two years after elections. Interestingly, the expenditure restraint frequently entails deeper cuts to a government’s capital investment than its consumption spending, a choice that undercuts a nation’s long-run economic growth.

Bad economic management in election years is the bane of Ghana’s macroeconomic difficulties. Some have described it aptly as “taking one step forward and two steps backwards”, alluding to the more disciplined macroeconomic policies pursued in-between election years vis-à-vis the profligacy during election season. This vice has resulted in stop-and-go economic stability, with the country unable to sustain sound macroeconomic indicators for a long period of time.

Will this time really be different?

History should teach us not to take much comfort in President Akufo-Addo’s pledge to run a more responsible fiscal policy in 2020 than the election-year norm? As an incumbent seeking re-election, he is confronted with the same political incentives as Mr. Mahama faced in 2016 or Mr. Rawlings in 1996 to use fiscal policy to his advantage. Indeed, growing public unrest over poor infrastructure and rising union strikes as 2019 came to a close are telltale signs of an increasingly demanding electorate with a year to elections. If presidential words of assurance were all that counted, the problem would not be there in the first place.

In a sense, however, this time can be viewed as different from the past. In December 2018, the government enacted the Fiscal Responsibility Act, which capped the annual budget deficit at 5% of GDP. This means that for the first time in Ghana’s history, election-year fiscal policy will be carried out within the context of a statutory limit on public borrowing. Moreover, the finance minister would be liable for sanction by parliament if the deficit ceiling is breached. A second development is the formation of a Fiscal Responsibility Advisory Council, whose work is to advise the president on responsible fiscal policymaking. These reforms no doubt place the government in a good light relative to its predecessors in terms of commitment to fiscal discipline ahead of elections.

Nevertheless, even though commendable, the measures are not foolproof. For example, the government could circumvent the budget deficit rule, which applies to cash borrowing alone, by accumulating arrears—that is, engaging in extra consumption but delaying payments. Excess spending could also take place via off-budget channels, such as the recent practice of using statutory earmarked funds to borrow large sums of money from the financial markets. In addition, it is doubtful whether the fiscal council, which has neither a statutory mandate nor guaranteed autonomy, would be an effective body of restraint on the government if fiscal policy starts heading in the wrong direction. All of this leads to the conclusion that the jury is actually still out on whether this time will be different.


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