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An open letter to the Minister for Finance and Financial Planning

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Opinions of Monday, 19 October 2020

Columnist: Papa Sam Blankson

2020-10-19

Minister for Finannce, Ken Ofori-Atta

Can we afford a Ghana with: no unhealthy roads, respectable houses for the working class, free high quality tertiary training, an environment friendly free nationwide well being care system, clear cities, decentralized infrastructure, full employment, a social security web for the susceptible…? And this isn’t about politics; only a rethink of the economics we’ve all the time recognized.

25 years in the past, our nation began on a nationwide imaginative and prescient 2020 growth agenda to ship Ghana with a balanced financial system, middle-income nation standing, a way of life, and a stage of growth shut to the current stage of growth seen in Singapore. We quickly get up to the information of 2020’s arrival and oh did it include baggage; a worldwide pandemic that shook the world and claimed the lives of many; and Ghana, a lower-middle-income West African nation with a debt to GDP ratio soared to about 63% as a macroeconomic response. Nicely, together with the remainder of the world, our nation has come far. Immediately we could have progressed from the place we began, however we’re nowhere close to the place we must be. This can be attributable to a myriad of things. Key among the many many is the truth that we simply can’t appear to generate sufficient by ourselves to fund the extent of nationwide growth we aspire to. Our growth price range is constrained by how a lot tax we accumulate and ostensibly, how a lot the west is keen to lend to us. However what if these constraints are considerably self-imposed?

Presently, governments are likened to households who have to earn revenue (principally by means of taxes) for expenditure. And similar to households, governments are to tackle debt to make up for his or her price range deficits once they can’t generate the required revenue by means of taxes. When debt charges get too excessive, the debt alarm begins to beep and sounds harmful for the financial system. However is a sovereign authorities actually like a family? A authorities can subject its personal cash; households can’t. A sovereign authorities is just not like a family and doesn’t want to boost taxes or borrow to spend the cash it may create all by itself. Therefore, the query of constraint isn’t any extra about whether or not we’ve the cash for growth, it’s fairly about how a lot and how much growth we will spend on such that inflation and foreign money depreciation keep underneath management. This, in essence, is on the core of the Trendy Financial Idea.

What’s the Trendy Financial Idea (MMT)?

MMT’s elementary argument is; a sovereign authorities that points its personal foreign money and debt in its personal foreign money, and doesn’t follow a hard and fast alternate fee system, can spend as a lot as its financial system wants and by no means go broke, run out of cash, or default on its obligations.

The idea hinges on Three important arguments:

• The federal government should spend earlier than it may accumulate taxes.

• The federal government is an rate of interest setter and never a taker.

• Fiscal coverage instruments have a higher financial affect than present financial coverage instruments.

These arguments give us additional understanding of the true essence of taxes and authorities borrowing as follows:

• Tax is a fiscal software to manage inflation because it creates demand for the federal government’s foreign money. Taxes are a authorized obligation and might solely be settled within the authorities’s foreign money.

• Authorities borrowing may also be a fiscal software used to create demand for its personal foreign money. Thus, the problems of price range deficit or surplus are in themselves close to meaningless to a sovereign authorities.

Based on buying and selling economics, as of Dec 2019, Japan has a deficit of about 237% of GDP, Singapore 126%, USA 107%, France 98.1%, Egypt 90%, Canada 89.7%, UK 80.7%. Barbados 149%, Australia 124% the listing goes on and on. Ghana is at 63%. And who else has much less? Afghanistan 7.1%, Palestine 16.2%, Guatemala 27.8% Nigeria 17.5%, Burundi 13.6%, Burkina Faso 22.6%, Venezuela 23%, Liberia 32%. Why are the economies with the least debt to GDP ratios not essentially essentially the most strong?

The idea, previously Mosler Economics, was based and is constantly developed by Warren Mosler; a 40 12 months veteran of financial economics and financial operations. Presently, it’s an financial college of thought with robust proponents like professor of Economics at Bard School USA, Dr. L Randall Wray, Prof. Invoice Mitchell, Economics professor on the College of Newcastle, Australia, and Dr. Stephanie Kelton, a professor of Economics and Public Coverage at Stony Brook College who served as chief economist within the US Senate price range committee and because the Chief Economics Advisor for the 2016 Bernie Sanders presidential marketing campaign.

The elemental parts of the Trendy Financial Idea, which subsequently impressed publish -Keynesian economics, Alfred Mitchell-Innes’ credit score idea of cash, and desribes how present financial operations work in lots of central banks, will not be significantly novel. Nonetheless, the conclusions it reaches about how economies work at the moment are undoubtedly ‘fashionable’ to many.

MMT’s preferrred financial system

Probably the most preferrred scenario for the MMT could in all probability be the USA. A sovereign nation, points its personal foreign money, points debt solely in USD, which can be the biggest reserve foreign money of the world. The USA very like different developed economies Japan, Canada, Australia can by no means go broke irrespective of how giant its debt to GDP ratio is, so long as it continues to satisfy the situations outlined by the MMT. Opposite to what Obama stated in 2009, the USA won’t ever run out of cash underneath these circumstances. Whether or not the USA is aware of it or not, they’ll subject their foreign money and spend as a lot on no matter growth agenda they deem match and by no means go broke.

Strawman arguments are made by citing developed nations comparable to Greece and Italy who defaulted on their debt obligations after ‘excessively’ borrowing. The easy clap again is; Greece and Italy don’t subject their very own foreign money. Very similar to different Eurozone states, they gave up their sovereign currencies (the Drachma and the Lira) for the regional Euro issued by the European Central Financial institution (ECB). This meant that their provide of cash (the Euro) was restricted by the ‘generosity’ of the ECB. This case is nicely understood by MMT proponents. An appreciation of the coverage house and choices MMT can afford a nation will depart you with no surprises as to why Scandinavia Europe, probably the most developed and socially equitable areas on the earth, had Sweden, Denmark, and Finland as a part of the EU keep the sovereignty of their currencies. Norway and Iceland however opted out of the Eurozone fully. The UK who has since left the EU additionally stored the sovereignty of their foreign money throughout their time there.

MMT in creating economies

We will agree that conventional financial theories propounded by the West are designed to the construction of western society on the time the propositions had been made. These mainstream financial theories underpin the way in which managers of most creating economies view their economies and the form of financial coverage choices they imagine can be found to them at the moment. Whereas there is no such thing as a doubt that the present state of creating economies consists of critical self-imposed obstacles, albeit some extra so than others, creating nations can, in any case, customise MMT’s understanding and insights to their peculiarities.

Previous to discussing what welcoming this financial college of thought means for Ghana, let’s first give some context to the problems of hyperinflation in Zimbabwe and Venezuela as they’ve been used to misrepresent the substance of this idea. Firstly, although the governments of those international locations are recognized to have resorted to ‘printing’ money to spend, their economics was not what an MMT proponent would suggest. Secondly, these two international locations take care of distinct issues that Ghana doesn’t have. Zimbabwe was slapped with commerce sanctions, coupled with considerably decrease ranges of productiveness that characterised the aftermath of the redistribution of farmlands from white house owners to black Zimbabweans. This harm the productive capability of their financial system and their capacity to build up international alternate reserves they had been utilizing to help their foreign money. Within the case of Venezuela, oil accounts for 95% of its export income. Thus, a plummet in oil costs as we’ve seen in latest instances resulted in an enormous fall of their international foreign money reserves leading to political chaos and coverage that exacerbated the depreciation of their foreign money inflicting hyperinflation and a scarcity of important items that they don’t produce domestically.

What the MMT reveals about Ghana’s financial system?

1. We now have extra fiscal house to pursue growth than we all know. Opposite to what conventional economics has taught us.

2. Rates of interest on the cedi usually are not merely decided by demand and provide of the market. And that by understanding the federal government has a monopoly over the issuing of the cedi; it’s an rate of interest ‘setter’ and never the ‘taker’.

3. That debt to GDP ratio is a measure of the cash provide, which isn’t an finish in itself and that price range deficit ceilings are a self-imposed constraint, whose essence is to assist in protecting inflation and foreign money depreciation inside manageable ranges. In any case, historical past and present examples have proven us that a big price range deficit doesn’t essentially translate to excessive ranges of inflation and foreign money depreciation. Thus, the ‘how can we pay for it?’ query doesn’t matter as a lot because the ‘what are we paying for?’

Does this imply Ghana is just not as broke as we imagine we’re?

Sure, we aren’t broke. We could possibly afford extra economically strategic authorities spending than we all know, with out essentially borrowing at a value. For instance, we don’t want to make use of international alternate revenue from oil exports or borrow lengthy at high-interest charges towards our tax receipts to fund most elements of our present social interventions such because the Free SHS and NHIS. For the reason that majority of those obligations are cedi denominated and may be funded by ‘printing the cash’.

Does this imply the Authorities of Ghana ought to print Cedis and spend on no matter they deem match with no financial repercussions?

In fact not. The unsuitable kind and stage of spending can in the end end in hyperinflation. Imposing the unsuitable kind and stage of tax obligation is not going to create the required demand for the cedi to maintain inflation underneath management. Additionally, growing our debt obligations in international foreign money whiles spending domestically can threaten larger than regular ranges of foreign money depreciation.

Ghana…the place do we start?

Alongside the way in which as a rustic, we’ve gathered a pile of foreign-denominated debt, which must be serviced with international foreign money. That, coupled with our skewed dependence on imported items and companies, obliges us to extend our foreign exchange reserves to guard the Cedi’s worth and place with the key buying and selling currencies. So sure, whereas we aren’t as broke as we expect, we’ve vital obstacles to beat if we’re to totally utilise the alternatives we’ve as a nation with a sovereign foreign money.

Ghana is estimated to have spent GHS 3.6billion, approx. $600million of our oil income on free SHS; $600million that might have in any other case gone into different developmental tasks that

require the importation of capital items and companies or been saved in our nationwide reserve account to help of our foreign money. Free SHS is an obligation that’s largely cedi denominated and mustn’t price us foreign exchange to finance. Different nationwide obligations that won’t require lengthy and/costly borrowing to finance are public sector salaries, NHIS claims, GetFund associated money owed and many others. Once more, nearly all of these obligations don’t require foreign exchange to settle, thus very low cost borrowing or zero expense borrowing (BoG crediting financial institution reserve accounts) must be used to settle them. This may free the foreign exchange revenue we make from exports to be deployed in direction of tasks that improve the productive capability of the financial system (native industries, transport infrastructure, new expertise and many others.)

We will begin by re-purposing our foreign exchange reserves; spend Cedis for Cedi denominated tasks and reserve foreign exchange for foreign- currency-denominated obligations. With that stated, within the not too distant future, we should always have budgetary house to amongst different options, assiduously make use of our actual assets to extend our productive capability to cut back our over-dependence on imports and the cyclical externalization of {dollars}. Over time, we shall be higher positioned to take extra management of the cedi, put extra of it into Ghanaian pockets and drive our personal growth with little interruptions from our international lenders.

In conclusion, the Trendy Financial Idea places extra coverage choices on the desk. Choices, which hitherto, weren’t imagined possible. Moreover, it causes us to re-orient our understanding of the time period “the dimensions of the general public purse”, as not being how a lot cash (income mobilization constraint) we’ve as a rustic to spend on growth. As a substitute, we come to know that, it’s how huge the purse (financial system’s actual assets and productive capability constraint) is, to carry the limitless amount of money (authorities spending & financial progress) such that the purse (financial system) doesn’t disintegrate (uncontrollable ranges of depreciation & inflation).

The “the federal government is sort of a family” metaphorical understanding of financial economics could have price us way over simply making a public alarm about our rising debt. It has price us and possibly will proceed to price us the power to expand strides in direction of nationwide growth, the power to maintain our rising youthful inhabitants expert and gainfully employed, the power to sustainably cut back the housing and transport infrastructure deficit, the power to supply high quality reasonably priced healthcare and training for our individuals, the power to speculate into analysis and growth, the power to provide Ghanaians a dignified life.

Co-authored by:

Papa Sam Blankson, MSc. Economics (Cash, Banking & Finance)/ over Eight Years Mixed Expertise in Banking & Asset Administration.

&

Anita Yankey, MSc. Finance/ BSc. Economics & Finance/ over Eight Years mixed expertise in Asset Administration and Company Communication.

Corresponding Writer:

Papa Sam Blankson / 0244928624/ psblankson0121@gmail.com

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