Enact Fiscal Responsibility Law— To limit government expenditures

Story: Boahene Asamoah
THE Bank of Ghana (BoG) has proposed the legislation of a Fiscal Responsibility Law (FRL) to underpin the governments’ commitment to fiscal discipline and debt sustainability.
The central bank suggested expenditure targets or ceilings be embedded in the proposed FRL to limit government expenditures and promote measures to scale-up revenue mobilisation.
According to a policy briefing paper sighted by the Daily Graphic, the bank urged the government to continue with the public sector reforms and expedite the operation of the Fair Wages Commission to anchor wage bills, which was a potential source of fiscal instability in the country.
“Ghana’s success with fiscal rules will ultimately depend on government’s commitment to the process of fiscal discipline and strong governance structures to ensure that fiscal processes are followed through.”
The central bank drew attention to the need to clearly state the objectives on prudent fiscal management as well as principles on transparency and accountability as part of the proposed law.
“Experiences also suggest that critical elements which account for the success of fiscal rules include clearly defined objectives and targets, political commitment, strong institutions and effective enforcement mechanisms,” the paper stated.
The BoG also called for the establishment of fiscal rules and procedures that are clear, flexible and transparent, adding that “these must however be accompanied by sanctions for effective enforcement and applicable escape clauses during periods of adverse shocks.”
The Bank of Ghana said macroeconomic stabilisation was a necessary condition for economic growth and poverty reduction.
It said since 2001, prudent fiscal policies along with sound monetary policies had constituted the core of Ghana’s economic policies aimed at stabilisation.
The brief highlighted that economic improvement has been significant and macroeconomic stability achieved, with growth rates in Gross Domestic Product (GDP) increasing from 3.7 per cent in 2000, to 6.2 per cent in 2006.
Headline inflation declined from 40.5 per cent in December 2000 to 10.5 per cent in December 2006 as core inflation (excluding energy and utilities) remained within single digits, the bank said.
Interest rates have trended downwards, in tandem with the disinflation process.
“In addition to sound monetary management, fiscal adjustment contributed significantly to macro stability. Progress was made in institutional arrangements and the regulatory environment to ensure better fiscal management.”
It named some of them as the Medium-Term Expenditure Framework (MTEF), and enactment of Financial Administration Act, the Internal Audit Agency Act and the Procurement Act.
Over the past six years, Ghana’s economy has been anchored to prudent fiscal and monetary policy frameworks. This has contributed significantly to macroeconomic stability with steady growth.
To further consolidate the macroeconomic stability and anchor inflationary expectations, the Bank of Ghana adopted an inflation targeting regime in May last year.
“Although fiscal policy has remained committed to the stabilisation process, recent trends point to the need for further consolidation to ensure long-term fiscal sustainability,” the brief stated.
“Evidence gathered from international experiences with fiscal rules suggests that fiscal rules are enabling instruments for a country to stay on a transparent, prudent and sustainable fiscal path,” the brief stated.
It however said those measures were not sufficient but needed to be supported by good institutions as well as prudent expenditure and financial management measures that limited government spending and improve revenue generation.
“The key lesson for Ghana is that fiscal rules work best when government is fully committed to the process of fiscal prudence and ensures that long-term development prospects are not sacrificed by short-term gains,” the brief stated.