At the annual meetings of the World Bank and IMF this month, lobbyists circulated photographs of Ghana’s Finance Minister Ken Ofori-Atta sitting together with Britain’s Chancellor of the Exchequer Kwasi Kwarteng.
Before the end of the week, Chancellor Kwarteng was on a flight back to London, forced to cancel his participation in the rest of the summit because his job was at risk. Within days, the British government had collapsed, and Prime Minister Liz Truss had joined Kwarteng on the back benches.
This week Ghana’s Ofori-Atta faces a rebellion from MPs in his own party, calling for his resignation and accusing him of mismanaging the economy. The risk that London’s political drama plays out similarly in Accra must worry Ofori-Atta and President Nana Akufo-Addo.
Common shaky ground
On the surface, both men are relatively similar; Ghanaian economists and bankers in charge of the fiscus of two countries with a shared colonial experience.
However, there is a deeper layer to the symbolic ties between the Chancellor and the Minister.
Kwasi Kwarteng’s woes are universally acknowledged to have stemmed from his botched mini-budget. At a time of widespread anguish about inflation and interest rate hikes in America, the mini-budget, with its ideological flourish of “the largest tax cuts since 1972” and unfunded growth pills, rang of neoliberal excess.
Interestingly, the heaviest backlash came from the markets. A Conservative Prime Minister and her Chancellor didn’t expect the blowback to come from the financial heartlands.
After all, caps on bankers’ bonuses were to be scrapped, and the highest tax rate (for the top 1.1%, roughly a third of whom work in financial services) was to be brought down from 45% to 40%. Planned corporation tax increases were dropped.
And a raft of regulations bogging down business was to be cut’ more free zones, with even fewer taxes and regulations, created. A Conservative newspaper, the Daily Mail, crooned: “A Tory budget at last!”
Surely the grandees of the historic square mile of central London, the fount of global capitalism, would jump on board? The charm offensive of the Chancellor, himself a JPMorgan alum and longtime finance guy, must have seen to that?
Analysts deciphered the consequences of a mini-budget to include a massive spate of borrowing at a time of rising interest rates, an undoing of the Bank of England’s efforts to tackle inflation, and a squeeze of middle-class incomes (in the ~£60,000 to ¬£120,000 band), with potential effects on demand.
The market took a longer horizon and broader-demographic perspective. That aligns with the increasingly nuanced view of the link between pro-growth tax cuts and market benefit that has emerged from the vast literature on the Trump tax cuts.
So, the markets revolted.
Yields on long-term government securities, a measure of investors’ sense of the state’s creditworthiness and likely cost of future borrowing, rose by a staggering 150 basis points. The pound sterling sank immediately.
Lunging for stability, the blindsided Bank of England announced a £65 billion program to buy back government bonds caught in the rout, reversing an earlier plan to sell £80 billion more into the market. Only the wholesale repudiation of the Kwarteng-Truss mini-budget could calm the markets.
Off the straight and narrow
It is mainly the short-lived tenor of Britain’s most recent episode of fiscal adventurism that marks it out from Ghana.
In their six years in power, the ruling party in Ghana has sought to transform the country’s finances into a rollercoaster capital market play. It has devised various unprecedented fiscal devices to do so.
It has securitised future tax streams, grabbed the cash up-front and splashed on massive capital and welfare projects. The securitisation extravaganza has touched taxes meant to fund the educational sector, energy sector levies and road taxes.
As future revenue streams have been packaged into products on the capital markets and sold and spent upfront, the government’s budget has become rigid, unable to respond to international pressure. The government’s love for fiscal gaming encouraged support for a domestic debt securities market (GFIM) in Ghana.
At its birth in 2015, total trade turnover hovered around cedis 5 billion in local currency units. In the first nine months of this year, trade volumes exceeded cedis170 bn.
Even adjusted for inflation, it has grown ten times, but almost all securities traded are government-issued. This means they reflect more than anything the government’s unrelenting use of the capital markets to fund a degree of fiscal expansion never before witnessed. And not just domestically.
From tripling Eurobond issuances, to opening up domestic debt to foreign investors, Ghana’s government took capital market liberalisation to every possible extreme. At one point, Ghana ranked number five worldwide for foreign ownership of domestic debt.
International capital maestros like Michael Hasenstab, at the height of his “Emerging Markets Bond King” reputation, piled in. In 2017, Ghana rode on the back of such powerbrokers to launch Africa’s largest-ever dollar-denominated domestic bond.
Bills, bills, bills
All this fiscal brinksmanship came at a cost: debt servicing.
Today, Ghana is on course to spend nearly 60% of all government revenue just dealing with debt. This is up from about 10% a decade and a half ago when the international community forgave a chunk of Ghana’s debt pile from previous decades of excesses.
Now, Ghana’s capital market friends have brought out the whips. They have shut her out of the market and are dumping the bonds they bought previously.
Their actions have finally driven Ghana to the IMF for much-needed disciplining. Inflation is hovering around 40% and the cedi has plunged from about 5.8 to the dollar at the beginning of the year to more than 14.5 to the dollar.
It seems that the government’s bubbly enthusiasm for capital market devices, and the massive hoard of fees and commissions (some shared by companies founded by the Finance Minister and his deputy), have not been sufficient to keep the love story going.
These days, far from endearing politicians to the markets, neoliberal fiscal adventurism is a sure way to invite their painful censure.