Fiscal, Monetary and Financial Sector Development

1.
Find any one Contemporary issue

in the “regulatory sector of Ghana
published in the papers (daily
graphic ..etc ) from 1957 till 2010
which is recurrent or still relevant
today
2.State 5 reasons why it’s still relevant or
recurrent till date .
3.Give 5 Solutions
Introduction;
Ghana is a democratic country located on
the west coast of Africa with an estimated
population of about 26.6 million in 2013. It is
the first sub-Saharan African country to
become independent from British colonial
rule in 1957. The country’s economy is
ranked the 85th largest in the world with a
total GDP of US $40.7 billion in 2012 and a
per capita GNI of US$1,550 (World Bank,
2013). In the ECOWAS sub- region, Ghana’s
economy is the second largest behind
Nigeria2, accounting for 10.3% of total GDP
of the sub-region. Ghana’s economic
performance has been quite strong over the
past three decades during which the country
pursued market- led economic policies and
programmes with minimal involvement of
government in direct economic activities.
The recovery of the country’s economy from
recession in the early 1980s on the back of
the economic reform and structural
adjustment programme, and the sustained
growth since then has earned the country a
lot of commendations in terms of economic
achievement. This prompted Leechor (1994)
to describe the country’s economy as a
frontrunner in the economic reform process.
Ghana recorded about 5.2 % annual
average growth between 1984 and 2010
and became a lower middle income country
after a rebasing of its national accounts in
2010 with a change in the base year from
1993 to 2006. The rebasing pushed the
country’s annual average growth to 8.3 %
between 2007 and 2012. In 2011, the
country commenced commercial production
of oil. This development contributed 5.4
percentage points (oil-GDP) to the 15.0 %
real GDP growth in that year, with Ghana
taking an enviable position as one of the six
fasters growing economies in
1.Fiscal, Monetary and Financial Sector

Development:
Ghana’s economic management has been
characterised by fiscal deficit. Since 1992,
the country has recorded budget deficits
(with the exception of 1994 and 1995
when fiscal surplus of 2.8% and 1.7% of
GDP respectively were reported). One
common feature of the fiscal trend is the
peculiarly unbridled spending in election
years. Since 1992, when the first general
election was held to usher the country
into fourth republican constitutional rule,
there have been huge deficits in election
years (the only exception is 2004). Even
though fiscal deficit is not always bad, the
concern has been what caused the deficit
and how it is financed. Indeed, many
economists may not even worry much
about government’s decision to run deficit
to deal with severe recession by spending
on public investment such as
infrastructure, education, health and
research that would generate returns to
redeem the debts that would be
accumulated from the deficits. However,
fiscal deficits that emanate from wasteful
expenditure or simply to fund current
consumption within an environment
where infrastructure, finance and human
resource constraints disable private
businesses from stepping up production to
meet the aggregate demand that come
from the increased consumption could
stifle growth and employment.
Theoretically, there are three possible
sources of financing fiscal deficit:
inflationary financing, external borrowing
and issuing bonds in the domestic
financial market. Deficit financing through
money printing has the effect of causing
persistent price hikes. External financing
of fiscal deficit also tends to cause
external debt to grow with the implication
of not only exacerbating balance of
payments problems, but also increase the
interest payments on external debt which
in turn worsens the fiscal deficit problem
through interest payments. The option of
financing deficit through domestic bond
issue also drives up interest rates, crowds-
out private domestic investment and
hampers economic growth.: Trends of
fiscal balance and public debt in Ghana,
1992–2012
Source: Constructed from Annual Reports
and Quarterly Bulletin of Bank of Ghana
The problem of fiscal deficit in Ghana is
not limited to the last two decades. The
economy found itself in fiscal crisis during
the period prior to economic reforms in
1983. The rapid and unrestrained growth
of public expenditure in support of over-
extended public sector activity in the
1970s and early 1980s, coupled with
sluggish revenue generation on account of
limited tax base resulted in huge fiscal
deficit (Tsikata and Amuzu, 1997)
reaching a peak of 11.4% of GDP. The
decision to finance the deficits through
money printing caused a sharp rise in
money supply resulting in high rate of
inflation and overvalued exchange rate in
a controlled exchange rate regime while
domestic borrowing also caused domestic
debt to rise. As the expenditure-revenue
gap widened amid limited non-inflationary
sources of finance, deficit financing
became the principal source of the
budgetary support, causing the share of
government borrowing from the domestic
banking system, mainly from the central
bank, to increase from 49% in 1970 to
86% in 1982 (Kusi, 1991). The economic
decline that ensued in the early 1980s
compelled the country to undertake
economic reforms to resuscitate the
economy. A major element of the reform
was rationalisation of public expenditure
and revenue improving measures through
tax reforms to address the chronic fiscal
problem. The reform succeeded in
bringing the deficit under control over a
short period of time (1985-1991 and
1994-95).
The re-emergence of the deficit brings to
the fore the need for a study on the
underlying factors explaining Ghana’s
fiscal deficit problem which hit 11.8% of
GDP in 2012. This is important because
the inability of government to keep fiscal
the debts that would be accumulated

from the deficits. However, fiscal deficits
that emanate from wasteful expenditure
or simply to fund current consumption
within an environment where
infrastructure, finance and human
resource constraints disable private
businesses from stepping up production to
meet the aggregate demand that come
from the increased consumption could
stifle growth and employment.
Theoretically, there are three possible
sources of financing fiscal deficit:
inflationary financing, external borrowing
and issuing bonds in the domestic
financial market.
In conclusion , Deficit financing through

money printing has the effect of causing
persistent price hikes. External financing
of fiscal deficit also tends to cause
external debt to grow with the implication
of not only exacerbating balance of
payments problems, but also increase the
interest payments on external debt which
in turn worsens the fiscal deficit problem
through interest payments. The option of
financing deficit through domestic bond
issue also drives up interest rates, crowds-
out private domestic investment and
hampers economic growth.

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1.

Find any one Contemporary issue

1.Fiscal, Monetary and Financial Sector

the debts that would be accumulated

In conclusion , Deficit financing through

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