Public sector reform is key to fiscal sustainability in Ghana

• Author: Mali Chivakul/Robert C. York
• Position: IMF Monetary and Financial Systems and African departments
• Pages: 88-89

Page 88

Although Ghana began liberalizing its economy in the mid-1980s, the government has retained control of some enterprises that engage in quasi-fiscal activities.

These are off-budget activities undertaken by the central bank and some public financial and nonfinancial enterprises.

How extensive are these activities, and what are their consequences?

A new IMF Working Paper by Mali Chivakul and Robert C. York finds that quasi-fiscal activities have caused serious distortions in energy and water consumption and in the investment decisions of the affected enterprises and the private sector.

After Ghana gained independence in 1957, the government assumed control of most of the economy, and, by the early 1980s, the public sector completely dominated production.

Publicly owned enterprises were involved in almost all sectors, including finance and banking, with some serving social objectives (for example, nonmarket energy pricing) and other public policy goals (such as transportation). In 1983, the government introduced reforms-including the divestiture of 200 public enterprises-to liberalize and reduce its involvement in the economy. But at the end of 2005, the government still retained full ownership of 35 nonfinancial enterprises, including some of the largest in Ghana, with total assets valued at more than 60 percent of GDP in 2003.

Identifying quasi-fiscal activities

Quasi-fiscal activities entail a net transfer of public resources to the private sector (households and enterprises) through nonbudget channels. In contrast, explicit taxes, subsidies, and direct expenditures are included in the budget and have equivalent effects. If quasi-fiscal activities are pursued, the IMF's Manual on Fiscal Transparency recommends that they be clearly identified and the implications spelled out in the government's financial reports.

For public nonfinancial enterprises, quasi-fiscal activities include the pricing of commercial activities below market or cost recovery; the tolerance of payment arrears, unbilled consumption, or low collection rates on services provided; and barter and in-kind transactions.

For public financial institutions, they include subsidized lending and rescue operations or bailouts; the lack of remuneration on commercial banks' reserve requirements; multiple exchange rates and subsidized exchange rate insurance; and...