ࡱ> lnkq` :bjbjqPqP .f::1T%    * 666J8,|J8h" T8V8V8V8V8V8V8$=:h<z86( ((z8668+++(66T8+(T8++r3664 9)t468084za=T*a=44a=65 ]#+U%& z8z8$+v 8((((JJJ. JJJ.JJJ666666 Financing Accelerated Growth with the 2006 Budget Nii K. Sowa( Mr. Chairman, ladies and gentlemen, it gives me great pleasure to be here to share with you a few thoughts on the economy of Ghana. Let me first begin by congratulating the Minister of Finance and the Government for the effort they have made in presenting the budget, for the first time, before the start of the year. Not only does this satisfy a constitutional requirement, it also makes economic sense. The situation in the past when provisional arrangements had to be relied on to appropriate resources for the first quarter is not very satisfactory. In my opinion, the advantages for reading the budget before the start of the year far outweigh the old method of reading it in February or March. While not much happens in the last quarter to derail real sector activity, caution should be exercised on the fiscal front, as the history shows a usually expansive fiscal outlay in the last quarter. Mr. Chairman, in recent times the economy of Ghana has shown remarkable resilience in terms of macro stability. The fiscal has been quite contained, monetary growth has been gentle and external sector performance has been modest in the face of rising world oil prices. The consequences of these macro situations have manifested themselves in low rates of inflation, low rates of interest and a very stable exchange rate. The 2006 Budget Statement provides abundant evidence of the stability of the economy. This is corroborated by remarks from Ghanas donor partners at the just ended Consultative Group Meeting held in Accra. What Ghana needs now is growth. The policy goal of the 2006 budget is about investing in people, investing in jobs. We will do so first by promoting policies that increase demand and opportunities for people to be employed. We will them buttress this with programmes and incentives that ensure that those that will be employed are properly trained and equipped to take up jobs and perform at their productive best. Finally, we will ensure that people will work and earn, buy, sustain their basic life needs of food, clothing, shelter and also put a little aside for their sunset years. Mr. Chairman, ladies and gentlemen, these are noble words but do not provide the impetus for growth. Indeed, the budget rightly focuses on the business of government and in providing the enabling environment for the growth to take place. Ghanas blueprint for growth is the GPRS which has been re-christened Growth and Poverty Reduction Strategy. The GPRS II itself intends to focus on agriculture as the lead sector for growth with the private sector leading. The 2006 Budget has been carefully nested to the GPRS. Thus in talking about financing growth with the 2006 budget, one would have to rope in efforts at financing the GPRS II. At the last Consultative Group Meeting, it was revealed that of the 1.9 billion dollars that is needed to finance the GPRS II for 2006, 1.2 billion dollars has been secured from Ghanas trading partners. There is thus a gap of about 700 million dollars left to fully finance the GRPS II for the next year. So can the objective of attaining a 6 percent growth for 2006 be realized? Would that growth be sufficient to get Ghana to the middle income status by 2015? Long-term sustainable growth requires the coordination of the various forms of finance budgetary finance, bank finance, securities finance, and donor support. These forms of finance are not mutually exclusive but rather complement and enforce each another. Each type has its advantages and limitations and each is associated with an important set of functions and rules of the game. In a balanced economy with long-term sustained growth objective, we must develop all of them in complementarity. Budgetary finance is relatively straightforward: it realizes the government's fiscal policy objectives and helps facilitate the development of market credit, enterprise credit and social credit by capitalizing on the role of the government and the use of its sovereign credit standing; allocation of resources is through budgetary revenue and expenditure approach. Budgetary finance can be considered a rudimentary form of direct financing that requires no repayment. However, given the needs of the country and the persistence of structural deficits, budgetary finance has very real limitations and certainly cannot be expected to achieve all desired goals. In 2006, the total resource envelope for the budget is projected at about 39 trillion. Domestic revenue is projected at about 26 trillion, amounting to an increase of about 10 per cent over the expected revenue outturn for 2005. Tax revenue from the IRS, CEPS and VATS is projected at 24,186.7 billion and accounts for 21.5 per cent of GDP. The 2006 tax revenue projection constitutes a growth of 12.4 per cent over the expected revenue outturn for 2005. It is noteworthy that in 2005, by the end of the half-year only the IRS had exceeded its target. Other revenue agencies were by then not up to their target. If this trend continues in 2006, it will create financing problems for the budget. Another weak link in terms of revenue mobilization is in non-tax revenue. In 2005 the target was missed; and in 2006, it is even less likely that the lower programmed target will be realized. With regard to external grants inflows, disbursements are projected at 5,099.3 billion of which HIPC assistance from multilateral sources is programmed at 1,205.4 billion. Project and programme grants are projected at 2,505.9 billion and 1,388.0 billion, respectively. Mr. Chairman, matching the projected revenue with the projected expenditure leaves a gap, the equivalent of 2.1 per cent of GDP. Financing this deficit will have implication for both macro stability and the growth objectives of the Government. But as said earlier, budgetary finance is usually to create the enabling environment for the growth to take place. My Chairman, by comparison, the second form of finance, bank finance, operates through the intermediation of banks in compliance with relevant regulations requiring asset security, capital and interest repayment. Importantly, there is a significant multiplier effect that bank finance brings to project realization. However, it is an indirect form of financing in a market economy, and its effectiveness is predicated on the premise of a well-developed credit culture and infrastructure, as there are public and market constraints within economies that are transiting towards fully developed market economies. Maximization of national economic development necessitates the strategic use of bank finance as a public policy tool as well as a commercial medium. The culture of banking in this country has not transcended beyond the basic level. Most developed economies are moved by credit. Our system of banking has been more of deposit mobilization. In the past, such mobilized resource has been used more to support budgetary finance. Thus, instead of bank credit being used to generate growth, it has rather been used to support macroeconomic stability. Recent reforms initiated by the monetary authorities coupled with fiscal prudence by government should be able to move credit more towards growth. The continual reductions in the prime rate, the lowering of the secondary reserve requirements and the removal of the mandatory lock-up of funds in long-term bonds, should all help the banks into moving to more aggressive banking necessary to engender growth. If growth is to come from private sector activity, then a lot more attention should be paid to small and medium scale financing. This sector is however clogged with informal operators with no proper collateral for accessing credit. The 2006 Budget proposes to establish a fund for micro finance activities. Mr. Chairman, such funds have not been properly utilized in the past. The history has been Government or its agents dictating to the implementing financial institution the terms for the granting of the facility. It is not unusual for the fund to get to the implementing institution with a list (mostly politically generated rather than by best use) and an instruction of the rate of interest to charge. Interestingly, in most of such instances, the initiating government agency is ready to share the interest with the implementing institution without willing to bear any risk of default. Mr. Chairman, in my opinion if the small scale operators lack collateral to be able to access credit, then credit should be made available to them by properly appraising their projects and charging them the real cost of capital. Subsidizing the cost of capital will not allocate resources for the best use. Mr. Chairman, the third form of financing is securities finance or capital market finance. This is a direct form of financing in a market economy; it envisages widespread and direct participation by the public. However, securities finance remains significantly constrained by public sentiment and its availability and costs are susceptible to wide market fluctuations. By definition, securities investors directly assume market risks, so this form of finance relies on the existence of a relatively large number of investors with the sophistication, means and ability to shoulder such risks. Unfortunately, such a large class of citizenry with those qualities is an element generally lacking in developing countries. Market Capitalization:GDP RatioEXCHANGEGDP (US$) MARKET CAP. (US$)% TO GDPUSA - NASDAQ11,004.12,844.225.8%USA - NYSE11,004.111,329.0103.0%UK - LONDON SE1,797.82460.1136.8%S. AFRICA - JSE.159.9260.7163.1%MALAYSIA BUR.103.2161.0156.0%SINGAPORE EX.91.3173.8190.3%THAILAND SE143.2119.083.1%JAPAN - OSAKA SE4,294.21,951.545.4%GHANA SE7.51.419.33% Market capitalization on the New York Stock Exchange alone is bigger than the gross domestic product of America. The figure for the London Stock Exchange, Johannesburg Stock Exchange, Thailand Stock Exchange, and the Osaka Stock Exchange show similar trends for their respective countries. In Ghana, market capitalization on the GSE is only about 19 percent of GDP. Mr. Chairman, the capital market in Ghana offers a potentially rich source of finance for the accelerated growth the country yearns for. The over-subscription of two IPOs in 2004 gave credence to the fact that there is a huge chunk of idle resource out there to be tapped. The downturn experienced in 2005 is not unusual of stock markets. The 2006 budget proposes a number of measures to support the development of the capital market in Ghana: The floatation of medium-term government securities on the GSE to promote the development of the bond market. The passage by Parliament of the Long-Term Savings Act The setting up of the Venture Capital Fund Introduction of an unlisted securities market at the GSE to enable indigenous Small and Medium Scale Enterprises (SMEs) raise equity on the market to support their expansion programmes or clean their balance sheets, by replacing debts with equities. The extension of the tax-exempt status of capital gains on the Ghana Stock Exchange by 5 years to the end of December 2010. While these measures are laudable, there is the need to re-conscientize the Ghanaian on capital market activity. Public distrust is not allowing people to open up their companies for others to participate in. There is the need to educate people to understand the workings of the system in order to get the most out of it. Mr. Chairman, there is another form of financing which unfortunately we have been relying on for far too long. This is finance from Ghanas development partners. For a very long time a huge chunk of Ghanas development budget looks to outside aid for support. It is time Ghana weans itself from this kind of finance. A lot of internal resources can be tapped by judiciously using our natural resources. It is embarrassing to applaud when a donor gives us about $50 million while we lose about $475 million through imprudent exploitation of our natural resources. Mr. Chairman, ladies and gentlemen, the economy of Ghana is on a stable path; what it needs now is growth. Getting the needed growth will require an appropriate coordination of all the sources of finance available. In addition to the budgetary finance which is designed to create the enabling environment for growth, the 2006 budget also offers some incentives to encourage the exploitation of other sources of growth. It is up to Ghanaians to take up the challenge. Thank you. ( Dr. Nii Sowa is an Economic Consultant and CEO of Economic and Development Policy Research Initiative (EDPRI), a not-for-profit policy research and training initiative. This papered is prepared for presentation at a Databank organized seminar on the 2006 Ghana Budget at the Accra International Conference Centre, 15th November, 2005.     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