Unmasking the real causes of the economic crisis

…was COVID-19 a blessing in disguise?

By Korsi   DZOKOTO

Ghana’s economic crisis, which began in 2022, has been marked by severe challenges such as volatile macroeconomic conditions, soaring inflation, and a depreciating currency. The government’s inability to manage these issues has eroded business confidence, slowed economic growth, and left the country struggling to meet its financial obligations. While the government has consistently blamed external factors like the COVID-19 pandemic and the Russia-Ukraine conflict for the crisis, a closer examination reveals that these explanations are merely a smokescreen to conceal long-standing fiscal mismanagement and policy failures.

The true origins of  the  economic crisis

The Ghanaian government’s insistence that the country’s economic crisis is a consequence of external factors like the COVID-19 pandemic and the Russia-Ukraine war diverts attention from a much deeper issue: years of systemic fiscal mismanagement. Long before these global disruptions, Ghana’s fiscal health was deteriorating, laying the groundwork for the economic crisis that erupted in 2022. By 2019, the nation’s economy was teetering on the edge, plagued by poor revenue mobilization and inefficient expenditure management, both of which left the country exceedingly vulnerable to any shock—external or internal.

Chronic revenue mobilization failures

One of the fundamental issues that undermined Ghana’s fiscal health was its chronic failure to mobilize sufficient revenue. For over a decade, the government’s ability to generate revenue did not keep pace with the country’s economic growth. Despite a marginal increase in total revenue and grants as a ratio of GDP from 11.2% in 2006 to 15.0% in 2019, this figure remained significantly below the levels necessary to sustain public spending and investment. By 2019, Ghana’s revenue-to-GDP ratio was only 15%, which compared poorly with other Sub-Saharan African countries where the average was 20.5%. This stagnation in revenue growth severely limited the government’s fiscal space, making it increasingly difficult to finance essential public services and infrastructure projects.

This inadequate revenue mobilization was the result of several factors. Firstly, the tax base remained narrow, with a significant portion of the economy—especially the informal sector—being untaxed or under-taxed. Secondly, there was a persistent reliance on volatile sources of income such as commodity exports, which exposed the economy to fluctuations in global market prices. Additionally, the government’s tax policies were often short-sighted, focusing on immediate revenue gains rather than long-term sustainability. For instance, tax holidays and exemptions granted to multinational corporations and foreign investors, though intended to attract investment, ended up eroding the tax base and depriving the government of much-needed revenue.

Inefficient and rigid expenditure management

While the government’s revenue mobilization efforts were faltering, its expenditure management was equally problematic. A significant portion of government spending was directed towards rigid expenditures—earmarked funds, compensation of employees, and debt servicing—that left little room for fiscal flexibility. This rigidity in the budget not only limited the government’s ability to respond to economic challenges but also drove the country deeper into debt.

By 2019, the sum of these rigid expenditures exceeded total government revenue by 23.3%, meaning that even before the government could allocate funds to critical areas such as infrastructure, education, and healthcare, it had to borrow extensively just to cover these obligatory expenses. This situation created a vicious cycle: as the government borrowed more to meet its obligations, debt servicing costs ballooned, consuming an ever-larger share of the budget. Consequently, any attempt to reduce the deficit or stabilize the economy was met with the challenge of rising interest payments, further constraining the government’s fiscal space.

This rigid expenditure structure was not a sudden development but the result of years of policy decisions that prioritized short-term political gains over long-term economic stability. For example, high spending on public sector wages, often influenced by political considerations rather than economic necessity, contributed to the growing rigidity of the budget. Similarly, the proliferation of earmarked funds—special funds designated for specific purposes, often immune from cuts—further reduced the government’s ability to reallocate resources in response to changing economic conditions.

The cost of ignoring warning signs

The precarious fiscal situation in 2019 was not unforeseen. Various institutions and economic analysts had been sounding the alarm for years, warning that Ghana’s fiscal trajectory was unsustainable. As early as 2017, warnings were issued about the dangers of the country’s growing fiscal rigidity and the need for bold fiscal reforms to prevent an impending crisis. However, these warnings were largely ignored.

The Institute for Fiscal Studies (IFS), for instance, had cautioned the government about the need to address the growing rigidity in the budget by reducing earmarked expenditures and managing public sector wages more effectively. The IFS had also advised the government to focus on broadening the tax base and enhancing revenue collection to reduce the deficit and curb the rising debt levels. Yet, these recommendations were either partially implemented or ignored altogether. The Earmarked Funds Capping and Realignment Act, 2017 (Act 947), which was meant to impose a cap on earmarked expenditure, did temporarily ease some of the rigidity. However, the savings were quickly consumed by new spending programs like the Free Senior High School (Free SHS) initiative and the Nation Builders Corps (NABCO), which, while socially beneficial, added new layers of financial burden without corresponding increases in revenue.

The role of government and Dr. Bawumia in ignoring warning signs and fuelling economic crisis

Before the COVID-19 pandemic hit in early 2020, Ghana’s fiscal position was already in a highly vulnerable state, marred by years of poor revenue mobilization and unchecked government spending. Despite numerous warnings from economists and financial experts, the government, under the leadership of Vice President Dr. Mahamudu Bawumia, who also chaired the Economic Management Team, chose to ignore these red flags. Dr. Bawumia, once hailed as an economic guru, oversaw the country’s fiscal strategy during this period, but rather than taking corrective measures, the government continued its reckless spending.

When the pandemic struck, the country’s financial health was already severely compromised, leaving the government with few options but to resort to drastic measures. In a bid to finance its ballooning expenditures, the government, under the supervision of Dr. Bawumia, turned to the Bank of Ghana, leading to the printing of an astounding GHS77 billion. This irresponsible monetary policy directly contributed to a surge in hyperinflation, which peaked at a staggering 54.1% in 2022.

The consequences of this inflation were dire, particularly for ordinary Ghanaians. The cost of living soared, with food prices increasing by 69% in 2022 alone, making basic necessities unaffordable for many. The narrative that external factors like COVID-19 are solely to blame for Ghana’s economic crisis falls apart when examining the government’s prior mismanagement and reckless fiscal policies. Under Dr. Bawumia’s watch as Vice President and head of the Economic Management Team, the government’s actions set the stage for the severe economic challenges the country now faces, undermining the confidence once placed in his leadership and economic acumen.

Moreover, the government’s decision to significantly increase borrowing to finance these measures led to a sharp rise in the national debt, pushing the country towards a debt crisis. By 2022, the cumulative effect of years of fiscal mismanagement, coupled with the additional strain of the pandemic, culminated in a full-blown economic crisis characterized by soaring inflation, a plummeting currency, and a loss of investor confidence.

In effect, the origins of Ghana’s economic crisis lie not in the external shocks of the pandemic or the Russia-Ukraine conflict, but in years of systemic fiscal mismanagement. The government’s failure to mobilize adequate revenue, combined with inefficient and rigid expenditure management, created a fragile economic foundation that was bound to collapse under pressure. The crisis that erupted in 2022 was the inevitable consequence of these long-standing issues, and unless these underlying problems are addressed, the country’s economic future remains uncertain

Misappropriation of COVID-19 funds amidst ample support

Despite the government’s attempts to attribute Ghana’s economic crisis solely to the COVID-19 pandemic, the Auditor General’s report reveals significant misappropriation of funds intended for pandemic relief. The government received substantial financial support, including GH?21.84 billion from sources such as the Contingency Fund, the World Bank, the International Monetary Fund (IMF), the African Development Bank (AfDB), and the sale of COVID-19 Bonds between 2020 and 2022. However, only GH?11.75 billion of the GH?18.19 billion specifically raised for COVID-19 was used for pandemic-related activities. This mismanagement of funds and diversion of critical resources exacerbated the economic crisis, exposing a deeper issue of fiscal irresponsibility. Rather than attributing the economic downturn solely to external factors like the pandemic, this situation underscores the government’s failure to effectively manage the financial support received, further invalidating their attempts to shift blame and highlighting the impact of poor governance on the nation’s economic stability.

Conclusion

The Ghanaian government’s attempt to attribute the nation’s economic crisis solely to external shocks like the COVID-19 pandemic and the Russia-Ukraine war is not just misleading but a deliberate evasion of responsibility. The real roots of the crisis lie in years of fiscal mismanagement, ineffective revenue mobilization, and reckless policy decisions—failures that were exacerbated under the stewardship of the Economic Management Team led by Vice President Dr. Bawumia. Rather than steering the economy towards stability, the leadership under Dr. Bawumia displayed a profound lack of competence, allowing unsustainable spending and ill-advised financial practices to erode the country’s fiscal health long before the onset of external challenges.

The consequences of this negligence are clear: an economy left perilously vulnerable to shocks, spiraling inflation, and a populace struggling with the skyrocketing cost of living. Until the government, including its economic leadership, acknowledges these internal failings and commits to genuine reforms, any attempts to deflect blame onto external factors will continue to ring hollow. The persistence of the crisis underlines the urgent need for accountability and the implementation of sound economic policies to restore fiscal stability and pave the way for sustainable growth.

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