ROLE OF THE GOVERNMENT

In the 1990s, the government continued to play a decisive role in the direction and pace of economic development in Ghana. Under the Economic Recovery Program initiated in 1983, the Rawlings government tried to shift the burden of economic growth from government to the private sector through a dual strategy of cutting government spending and promoting private production. In particular, the government tried to boost export production through currency devaluations, tax incentives, and government-funded development projects. At the same time, budget deficits were almost entirely wiped out. These measures caused drastic cutbacks in recurrent government spending coupled with widespread privatization, while the government incurred further loans (and thereby debt) to balance the country’s budget.

 

The Economic Recovery Program

In 1983 the government launched the Economic Recovery Program (ERP) under the guidance of the World Bank and the IMF. The overriding purpose of the ERP was to reduce Ghana’s debts and to improve its trading position in the global economy. The stated objectives of the program focused on restoring economic productivity at minimum cost to the government and included the following policies: lowering inflation through stringent fiscal, monetary, and trade policies; increasing the flow of foreign exchange into Ghana and directing it to priority sectors; restructuring the country’s economic institutions; restoring production incentives; rehabilitating infrastructure to enhance conditions for the production and export of goods; and, finally, increasing the availability of essential consumer goods. In short, the government hoped to create an economic climate conducive to the generation of capital.


The ERP was carried out in roughly three phases. Beginning in 1983, the government focused on reducing its expenditures while creating incentives for private production. Initial expenditure cuts and improved tax collection brought the budget deficit down from 6.3 percent of GDP in 1982 to 0.1 percent by 1986, relieving government pressure on the banking system, while a series of cedi devaluations boosted export activity. During the second phase, which lasted from 1987 to 1989, the government moved to divest itself of many assets through privatization and to institute radical foreign exchange reforms to devalue the cedi further.  Although privatization was sluggish, the hard-currency black market was nearly eliminated with the introduction of foreign exchange bureaus in 1988. In the ERP’s third phase, the government intensified monetary reforms and reduced private corporate taxes to boost private-sector growth.
By the end of 1991, ERP efforts had improved the country’s international financial reputation because of its ability to make loan repayments (although not wipe out foreign debt) and its first entry onto the international capital market in almost two decades. Critics maintained, however, that the ERP had failed to bring about a fundamental transformation of the economy, which still relied on income earned from cocoa and other agricultural commodities. Critics also contended that many Ghanaians had seem few, if any, benefits from the program.


In addition to its focus on stabilizing the country’s financial structure, the ERP also aimed to promote production, especially in the export sectors. In 1986 the government began to rebuild infrastructure through a US$4.2 billion program, more than half of which was provided by external sources. This amount was divided roughly equally among infrastructure repair, energy imports (oil for machinery), and export industries. Increased imports financed by the IMF, the World Bank, and other sources made possible the rehabilitation and repair of some key parts of the infrastructure through the supply of spare parts and inputs for industry, mining, utilities, and agriculture.


Although the ERP was geared primarily toward restoring the country’s international economic standing, it came under popular criticism inside Ghana for ignoring the plight of those not involved in the export sector. The overwhelming shift in resources was toward cocoa rehabilitation and other export sectors, not toward food production. Government employees, especially those in state enterprises, were actively targeted, and many lost their jobs. Farmers suffered as the percentage of the total budget devoted to agriculture fell from 10 percent in 1983 to 4.2 percent in 1986 and to 3.5 percent in 1988, excluding foreign aid projects. Although cocoa contributed less to Ghana’s GDP than food crops, cocoa nonetheless received 9 percent of capital expenditures in the late 1980s; at the same time it received roughly 67 percent of recurrent agricultural expenditures because of its export value.
In response to criticism of such policies, the government initiated the US$85 million Program of Action to Mitigate the Social Costs of Adjustment (PAMSCAD). Beginning in 1988, the program sought to create 40,000 jobs over a two-year period. It was aimed at the poorest individuals, small-scale miners and artisans in particular, and communities were to be helped to implement labor intensive self-help projects.
As part of PAMSCAD, ¢10 billion was slated in the 1993 budget for the rehabilitation and development of rural and urban social infrastructure. The new program, organized through PAMSCAD and the new district assemblies, was designed to focus on improving water supply, sanitation, primary education, and health care. An additional ¢51 billion was set aside for redeployment and end-of- service benefits for those who had lost their jobs in civil service and parastatal reorganizations.


In the early 1990s, the government was committed to continuing the policies of the ERP. New agreements were concluded with the World Bank to continue credit arrangements on condition that Ghana review and revise its various economic laws and regulations and support private sector development. In particular, the government agreed to revise or to repeal existing laws and regulations affecting private investment that undermine the spirit of deregulation, economic liberalization, and exchange rate reforms. The government also agreed to develop and to strengthen the institutional framework that would facilitate private investment. Key priorities for 1992 and afterward included giving new impetus to state enterprise reform, broadening the scope of banking-sector reforms, liberalizing the administrative framework, and strengthening public-sector management. Basic education and primary health-care services were to receive attention over the long term as well.

 

State Enterprises

State-owned enterprises in Ghana date to the colonial period and especially to the post-World War II era. For example, the British organized a number of public utilities, such as water, electricity, postal and telegraph services, rail and road networks, and bus services. To foster exports of coffee, palm kernels, and cocoa, the Agricultural Produce Marketing Board was founded in 1949. In addition, the colonial government established the Industrial Development Corporation and the Agricultural Development Corporation to promote industries and agriculture. In the mid1970s , the National Redemption Council under I. K. Acheampong also emphasized state enterprises. The Acheampong government established a number of new enterprises and partly or wholly nationalized a number of foreign-owned companies, including the Ashanti Goldfields Corporation and Consolidated African Selection Trust. Intermittent efforts to improve performance and efficiency often led to the transferral of duties and functions to alternative state bodies but not to the wholesale privatization of ownership rights and assets.


By the 1980s, state enterprises were suffering along with most businesses in Ghana, but they were also held to blame for the economy’s general condition. In particular, many were heavily subsidized and were draining much of the country’s domestic loan capital. Under pressure from the World Bank and in accordance with the principles of the ERP, in 1984 the government began to sell state enterprises to private investors, and it initiated the StateOwned Enterprise Reform Program in 1988.


In 1984 there were 235 state enterprises in Ghana. The government announced that twenty-two sensitive enterprises would not be sold, including major utilities as well as transport, cocoa, and mining enterprises. In 1988 thirty-two were put up for sale, followed by a further forty-four in 1990 under what was termed the Divestiture Implementation Committee. By December 1990, thirty-four enterprises had been either partially or totally divested. Four were sold outright, a further eight were partially sold through share issues, and twenty-two were liquidated. Divestiture of fifteen additional enterprises was also underway, and by 1992 plans were afoot to privatize some of the nation’s banks.


Joint ventures were set up for four enterprises, including two state mining companies, Prestea Goldfields and Ghana Consolidated Diamonds. In 1992 the Divestiture Implementation Committee considered resource-pooling programs to enable smaller domestic investors to buy up state enterprises. Such pooling would accelerate the program, but more importantly, it would enable the Provisional National Defence Council (PNDC) to deflect charges that it was auctioning off the nation’s assets to foreigners.


The government also introduced a performance monitoring and evaluation system to improve state enterprise productivity and efficiency as well as to provide incentives for strong performers and disincentives for weak performers. By 1989 fifteen enterprises had responded positively, turning a combined pre-tax loss of ¢418 million from the previous year into pre-tax profits of ¢19 billion, following a 9 percent cut in costs and a 30 percent increase in sales. In early 1992, the chairman of the State Enterprises Commission announced that the government would pass legislation requiring state-owned enterprises to register as limited liability companies by 1993 to stimulate competition and to improve their performances.

 

Budgets

Major policies of the ERP and conditions of IMF funding were that the budget deficit be reduced and that resources be directed from recurrent to capital spending. Consequently, the government achieved a budget surplus each year between 1986 and 1989 and simultaneously boosted the percentage of spending for development projects. During the mid-1980s, budget deficits as a percentage of GDP consistently declined, falling from 4.7 percent in 1982 to 2.7 percent in 1983 to 0.3 percent in 1987. To accomplish this, the government cut spending and reversed its budgetary priorities, raising capital investment at the expense of increased current consumption in order to promote future growth. The government allocated 62 percent of the budget to physical infrastructure and about 33 percent to the country’s productive sector. At the same time, spending on social programs, including health, education, and welfare, declined drastically to between 4.7 and 5 percent. As a percentage of GDP, expenditures on health care fell from 1.2 percent in 1970 to 0.26 percent in 1980-83; during the same period, spending on education dropped from 3.9 percent to 0.85 percent.
The 1993 budget, consistent with ERP policies and objectives, aimed to stimulate private-sector growth through lowering taxes on commerce and corporations and by internally balancing accounts. The previous budget reduced the tax rate for commerce, printing, and publishing businesses from 50 percent to 35 percent, bringing these sectors into line with agriculture, manufacturing, real estate, construction, and services, the taxes on which were cut in 1991.


Relief for the financial sector was less generous. The tax rate was reduced from 50 percent to 45 percent to encourage more lending and better terms for borrowers and to reduce the 8 percent to 9 percent gap between deposit and lending rates of interest. The government also reduced the withholding tax on dividends from 15 percent to 10 percent, in line with 1991 cuts from 30 percent. The annual standard personal exemption for individual taxpayers was set at ¢150,000 (US$380), up from the previous ¢126,000. This figure reflected a 19 percent increase, 1 percent above Ghanaian inflation the previous year. The top marginal rate of tax was raised from 25 percent to 35 percent, payable on earnings over ¢14 million, compared with the previous level of ¢3 million. Finally, import taxes were reduced or abolished, including duties and sales taxes on all building materials. The super sales tax on luxury goods, introduced in 1990, was also abolished. A maximum rate of 10 percent was set on such imports.
Tax evasion and corruption, both of which are rampant throughout Ghana, severely affected the government’s ability to collect taxes in all categories. In December 1993, the Ghanaian parliament passed the Serious Fraud Office Bill.  This act empowered the fraud office to investigate fraud and embezzlement crimes against the state. Despite this action, it is unlikely that the authorities will be able to stop tax evasion or other white collar crimes anytime soon. (Country Report 1, 92))


Reform of the tax base and prudent fiscal management contributed to budget surpluses and dramatically reduced government recourse to the banking sector. By the early 1990s, nonetheless, Ghana still relied heavily on external grants to achieve its twin goals of running balanced budgets and increasing necessary capital expenditures. Moreover, compared with the rest of sub-Saharan Africa, total government revenue as a proportion of GDP continued to be relatively low. It was less than 16 percent in 1990 (including grants), compared with an average of 19 percent for sub-Saharan Africa as a whole. In 1993, revenue raising efforts aimed to secure income equivalent to 22.2 percent of GDP. By 1992 the government’s financial position had weakened. From 1986 to 1991, government finances were in surplus. In 1992, however, tax receipts from all sources of revenue were below projected levels, and with national elections in view, the government relaxed its tight controls on spending. Despite inclusion of foreign funding as a source of revenue, the deficit for 1992 was estimated at ¢177 billion but fell to ¢119 billion in 1993. To rectify the situation, the government proposed to raise taxes on gasoline, kerosene, diesel fuel, and liquefied petroleum gas by as much as 60 percent.

>