What Are their Business Plans For Ghana? (Part II)

Monday, September 29, 2008 

By Bright B. Simons & Franklin Cudjoe 

– X = Y + Z + W

We wrote in an earlier article that the political programs of all the political parties are, or should be, significantly restricted by the financial figures they are able to produce in support of their pledges.

For example, if a political party pledges that it shall expend X dollars on its political program, two figures must immediately be demanded: the domestic revenue mobilization component (Y) and the external input component (Z). Obviously, X = Y + Z.

The plausibility of the Y figure, without doubt, can easily be determined by looking at the IRS and CEPS figures for the current dispensation (a task made easy by the availability of Revenue Agencies Governing Board reports). In doing this, the concerned observer ought to make room for plausible GDP growth, as this impacts on domestic revenue gain. Nevertheless, the compound growth of domestic revenue yields is unlikely to exceed 30% of present day totals over the course of the forthcoming 4 years. The impact of the oil find is discussed separately.

The Z figure comprises of domestic debt (loans from local sources and treasury bills), and credit raised on the international markets (through government bonds or direct loans from the global private sector), as well as donor grants and multilateral/bilateral loans and the proceeds of state enterprise diversitures. All these components are predictable to a reasonable degree. Or at least it is easy to objectively question the assumptions on which they are based, thus furthering non-partisan analysis and public interest discourse.

Other income receipts such as dividends paid to the state as a result of state interests in operating enterprises and royalties from natural resource (mining etc.) concessions fluctuate more erratically, but their overall contribution to the state budget tend to be minimal and it is possible to make educated estimates into the future.

Thus a political party should be able to take account of these ‘major numbers’ when drafting its manifesto if the citizenry is to be assured of its competence to deliver, since they are the product of basic calculations.

For instance, the Z figure cannot be tampered with capriciously since any loan element impacts on the national debt, which in turn impacts on interest rates. Interest rates affect sustainable GDP growth and the rate of inflation. Thus if the Z component of a party’s financial plan in its manifesto is much too high (especially in comparison with the Y component – the domestic revenue component), one can only expect that the national debt will skyrocket leading to adverse outcomes that may undermine the party’s ability to deliver its program. The grant element (‘free’ money from donors, as it were) is easily projected based on past figures (especially so in recent times due to the emergence of the multi-donor budget support system), thus the flexibility of a political party to raise funds resides primarily in the loan elements of the Y and Z component. However as we have mentioned above, the loan element impacts on national debt (and, when concentrated in the Z –domestic- component, may also crowd out the private sector).

Another revenue element that is likely to come up frequently in debates during manifesto discussions is the projected inflow of oil proceeds. The first two years of the next government will not see any flow of oil revenue. From 2010 to 2012, the remainder of the next term, oil production will average about 100,000 barrels a day. The historical mean of oil prices suggests 100 dollars as a prudent projection.

This implies that the gross oil proceeds for the forthcoming – 2008 to 2012 – term of the next government will be 7.5 billion dollars. Value addition is unlikely to occur in Ghana between 2010 and 2012, thus we must use the Brent crude figures adduced above for our analysis. We must not add auxiliary economic activities since these have already been factored into the gross oil proceeds (the oil companies will only pay out of what they earn to any spin-off sectors). Let’s bear in mind also that the rise of increasingly autonomous supplementary service industries will be a delayed rather than immediate development.
 Lastly, gas output, from what we have been told, is likely to be negligible over the period under discussion. 7.5 billion dollars thus seem a rigorous projection. We must then consider total government receipts from these gross oil proceeds. If royalties have been negotiated at 15% and a further 25% is charged as corporate tax, then 40% of the above-stated proceeds will accrue to government. It is highly doubtful that the oil industry will pay 40% of gross earnings in a new contract to a government that is new to the sector (all this notwithstanding any provisional agreements already in place – we assume that a new government can renegotiate any pre-existing arrangements). 30% of gross will be generous, but we will use that figure all the same. This implies that the revenues accruing to the next government from the oil sector during its tenure is highly unlikely to exceed 3 billion dollars. We must consider oil a special category of revenue component and label it W.

In that sense the manifesto programs of all aspiring political parties are constrained by the elementary first-order equation: X = Y + Z + W, on the revenue side (better informed analysts shouldn’t hesitate to maul our calculations). Civil Society and Media must ensure that our politicians, in their pronouncements going forward, show the discipline imposed by this constraint.

Bright B. Simons is Director of Development at IMANI. Franklin Cudjoe is Executive Director at IMANI. Both are affiliates of www.AfricanLiberty.org