The economic outcomes of the 2000 and 2008 election years bear several similarities. In particular, significantly large fiscal deficits were recorded in both years. These large fiscal deficits occurred on account of spending excesses that have become a characteristic feature of hotly contested presidential and parliamentary elections in the Fourth Republic of Ghana. Moreover, high private consumption and investment expenditures in these years-themselves election-induced - exacerbated the public spending excesses resulting in among others:

accelerated depreciation of the cedi;

rising inflationary expectations; and

large depletions of international reserves.

There were important differences as well in terms of causes and severity. The crisis in 2000 was triggered by severe adverse price developments in the tradables sector in 1999. The rate of inflation reached 40 percent by year-end and in the foreign exchange market the cedi went into a free fall, losing half its value against the US dollar.

In contrast, the realized terms of trade were generally favourable to Ghana over the period preceding 2008. As the global financial crisis unfolded in the second half of the year, however, prices of the key export commodities, cocoa and gold, picked up and remained high in international commodity markets even as on the side of imports, the price of oil fell over the same period.

Thus, macroeconomic instability in election year 2008 was primarily due to election year spending excesses. The key difference was that the spending excesses of 2008 exacerbated a persistent trend deterioration of fiscal discipline noticeable from 2006- what CEPA had described as a phenomenon of "stubbornly high and widening fiscal deficits."

The World Bank Economic Governance and Poverty Reduction Credit (EGPRC) blame the Kufour Administration for the spending excesses that created the crisis:

Lack of transparency and accountability has provided an enabling environment for the deterioration of fiscal management. The overshooting of the budget deficit went largely unnoticed till late in 2008. Indeed, poor access to information in a timely manner prevented large deviations from planned expenditures being brought to the public eye, and even to the notice of political parties, International Financial Institutions (IFIs) and Development Partners (DPs). Transparency and accountability provide citizens with a means by which to be informed, to participate in public life in an informed manner and to pressure Government for improved outcomes. Without access to information, people lack the means to exercise the roles and rights that define citizenry and promote social accountability.....Some civil society organizations (CSOs) in Ghana have experience in conducting independent budget analysis, but their information basis has been weak. (emphasis added).

Moreover, in the campaigns promises were made where the objective reality called for stabilization.

The difficulties of the domestic situation are compounded by an extraordinarily challenging external environment. Additional foreign borrowing is excessively expensive and large foreign direct investment (FDI) unlikely. External demand for Ghana's non-traditional exports and remittances are expected to suffer in 2009, as a result of the ongoing global recession. The World Bank classifies Ghana among the group of countries that are most exposed to the global crisis and with the lowest fiscal room to cope. (EGPRC, paragraph16, emphasis added). The World Bank therefore concludes that there is a strong macroeconomic rationale for providing swift counter-cyclical (to the global recession) external financing for Ghana.

In CEPA's Assessment and Critique of the 2009 Budget Statement and Economic Policy-the document which is being launched today-it is contended that the economic program for 2009 presented to and approved by Parliament with its social democratic principles (and the explicit provision of GHc42 million in support) was consistent with a strategy of Growth with Macroeconomic Stability. Paragraph 3 of the Letter of Development Policy to the President of the World Bank dated June 12, 2009 states:

The NDC Government in power is implementing a social democratic agenda to promote "A Better Ghana" in which real opportunities for gainful employment, prosperous enterprise and social and economic welfare of all our people are priorities. Government is taking actions to mitigate the global recession, stabilise the economy, safeguard the gains from growth and accelerate poverty reduction. (emphasis added)

A short piece "Prudence can win" in The Economist (May 30-June 5, 2009) cites the IMF as source for an explanation as to why, in spite of the global financial crisis, some African countries can, even unaided by the international donor community, spend their way out of the looming recession. Essentially the explanation is that "with buoyant commodity prices in the boom, instead of overspending in good times some African countries, such as Tanzania and Mozambique, wisely built up their reserves. This is standing them in good stead now that the times are tough".

Unfortunately, Ghana is not in this privileged group.

Response of the BWIs - pro-cyclical stabilization program In a letter of January 7 2009, the World Bank alerted the incoming Administration of the severity of the domestic financial crisis and hurried it "to request additional and extraordinary assistance from both the World Bank and the IMF." The response of the World Bank was to reprocess its seventh Poverty Reduction Support Credit (PRSC-7) into the EGPRC-described as "a more focused operation than the broader set of reforms supported by the Multi Donor Budget Support (MDBS)". (ibid paragraphs 49 and 50).

On the basis of the agreed institutional division of labour between the World Bank and the IMF, the IMF has the lead role in the area of macroeconomic policy and management. Its response was a programme under its Poverty Reduction and Growth Facility (PRGF).

Thus, in spite of its own admission of unpreparedness for the task, the World Bank has succeeded in mobilizing the IMF, the DPs and the new Mills Administration to convert a strategy of Growth with Macroeconomic Stability into following a strategy of "a comprehensive program of macroeconomic stabilization and reform"-a Macroeconomic Stability with Growth - over the three-year period July 2009-June 2012. (IMF: Attachment I, MEFP, paragraph 1)

Fiscal Policy
The Deficit and its Financing

In the stabilization programme with the Bretton Woods Institutions (BWIs), the target for the overall fiscal deficit is kept at the 9.4 percent of GDP in the 2009 budget and is an important conditionality dubbed a key quantitative performance criterion.

Any expenditure over-runs or domestic revenue shortfalls that would lead to an increase in the deficit must be adjusted for by "appropriate measures" agreed with the IMF to ensure that the targeted ceiling is respected.

The ceiling is also to be adjusted upward (downward) in the event that project loan disbursements are higher (lower) than programmed. This is to allow higher than anticipated disbursements of project loans to be spent and vice versa. The ceiling is to be adjusted downward (upward) by 50 percent of lower than programmed program loans (grants), up to a maximum adjustment of Ghana cedi equivalent of US$75 million.

Illustration of Adjustment Measures

Data from the first quarter of 2009 suggest that with Treasury bill interest rates remaining high through May 2009, interest costs are projected to exceed earlier estimates for 2009 as a whole. To achieve the targeted fiscal deficit of 9.4 percent of GDP, additional fiscal savings totalling the equivalent of one percent of GDP (GHc209 million) have had to be made. The key sources of savings are the following:

the wage bill on account of the postponement of the implementation of the Single Spine Salary Structure for public sector workers, and a settlement with health sector workers lower than budgeted for;

a reduction in the allocation for domestic investment spending - most likely from the GHc42 million is placed in Contingency; and

the passage into law of the National Stabilization Levy - an additional 5 percent profit tax - effective through end-2010 in selected sectors. These corrective measures illustrate the types of adjustment measures that are required to be made whenever developments-such as expenditure overruns or revenue shortfalls - threaten to move the deficit above its targeted ceiling.

Financing the budget deficit

Resources for financing the deficit can conveniently be grouped into three categories namely:

External private inflows of loans and equity;

Net domestic financing (excluding borrowing from non-residents; does not differentiate between the purchases of non-residents and residents) in the domestic bond market; and

Loans (project and programme) and debt relief from Development Partners. Resources from the first category -the external private inflows of loans and equity-funded about 58.4 percent of the deficit in 2008. On account of the domestic and international financial crises, no resources are expected from these external sources of finance. Domestic borrowing by government could lead to inflationary pressures if accommodated by increased supply of credit from the banking system. Ultimately, the government has the power to incur an unlimited deficit because it has the power to simply print up the money needed to buy back its own obligations. This course of action, however, is a cure that might well be worse than the disease. Indeed "rolling the printing press" has been described as the worst symptom of inflation. In the stabilization program, conditionalities are used to prevent such an occurrence.

Consistent with the stabilization programme, a tight ceiling has been placed on net domestic financing of the budget. The level of such financing has been reduced from the 6.7 percent of GDP projected in the 2009 Budget Statement to a maximum of 4.8 percent of GDP. Even with "updated projections for external disbursements" this resulted in a financing gap in an amount equivalent to US$250 million.

This is expected to be covered by a Development Policy Loan from the World Bank "which would augment planned World Bank support by US$200 million in 2009, and by exceptional budget support from development partners." In the circumstances of the global recession, its dampening effect on growth and macroeconomic stability need for stimulus, in our view support for fiscal space is inadequate!

Expenditure Provisions

Given the tight planned budget deficit target of 9.4 percent of GDP total expenditure (in terms of share of GDP) is projected to decline from 42 percent in 2008 to 36.6 in 2009 - a reduction of 5.4 percentage points - essentially what is required to bring the deficit down from almost 15 percent of GDP to 9.4 percent of GDP.

The expenditure items whose outturns have been identified as critical to the overall outcome of the programme are the following:

Public Sector Wage Bill;

Energy Subsidies;

Interest Payments and the Public Debt;

Public Capital Expenditures (Item 4 and foreign-financed); and

Poverty-related Expenditures.

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