COVID-19 economic shocks and fiscal policy options for Ghana

Komla D. Dzigbede (Binghamton University, State University of New York, Binghamton, New York, USA)
Rahul Pathak (Baruch College, City University of New York, New York, New York, USA)

Journal of Public Budgeting, Accounting & Financial Management

ISSN: 1096-3367

Article publication date: 2 November 2020

Issue publication date: 24 November 2020

3267

Abstract

Purpose

This article examines the fiscal challenges the coronavirus pandemic poses in African countries, using Ghana as a case study and summarizes the country's immediate monetary and fiscal responses to the pandemic. The article also discusses the potential impacts of coronavirus-related shocks on the Ghana economy and policy options the national government may pursue to counteract the pandemic's adverse long-term effects.

Design/methodology/approach

The article uses daily and monthly economic indicators to assess the immediate impact of the pandemic on Ghana's economy. The article also uses latest data from the Ghana Living Standards Survey (GLSS) to simulate potential shocks to the economy related to the coronavirus crisis and examines the outcomes from a potential government response that expands spending on an existing direct social assistance program.

Findings

The authors find that the coronavirus pandemic is associated with a significant increase in Ghana's poverty measures over time, and an expansion in government spending under an existing cash transfer program would partly offset the economic shocks related to the crisis and improve outcomes for poverty and inequality. The authors also argue that other well-targeted expenditure and revenue policies will support long-term economic resilience.

Research limitations/implications

The research suggests that a temporary expansion of the existing program of direct cash payments to poor households may be an effective social protection policy, as are well-targeted revenue and spending policies that support economic recovery and long-term fiscal sustainability.

Practical implications

The findings imply that while the pandemic might cause severe shocks in the economy, well-targeted spending and revenue policies that are anchored in sound macroeconomic management can promote economic resilience and long-term fiscal sustainability.

Social implications

Public managers must ensure that national policy responses to the coronavirus pandemic consider socio-economic indicators, such as poverty and income inequality.

Originality/value

The authors present research that uses novel household-level data and an evidence-based microsimulation framework to articulate potential public policy strategies that can guide national responses to, and recovery from, the coronavirus pandemic.

Keywords

Citation

Dzigbede, K.D. and Pathak, R. (2020), "COVID-19 economic shocks and fiscal policy options for Ghana", Journal of Public Budgeting, Accounting & Financial Management, Vol. 32 No. 5, pp. 903-917. https://doi.org/10.1108/JPBAFM-07-2020-0127

Publisher

:

Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited


1. Introduction

The coronavirus pandemic has wreaked tremendous havoc in countries around the world, resulting in the loss of human lives and severe disruption to economic systems and livelihoods, and to date, it remains unclear when the pandemic will end and what the full scale of devastation will be across countries. As of September 30, 2020, more than 33.5 million confirmed cases of coronavirus infections have been reported worldwide, including more than 1 million deaths, and the number of new cases continues to rise exponentially in new and shifting hotspots of the pandemic (World Health Organization, 2020a). Additionally, the International Monetary Fund (IMF) has projected a drastic contraction in global economic growth and predicted even more austere growth outcomes for low and middle-income countries, especially in sub-Saharan Africa (International Monetary Fund, 2020).

African countries have coordinated massive public health interventions in response to the COVID-19 pandemic, including national emergency declarations with curfews and strict lockdown restrictions, training of medical personnel, provision of essential medical equipment and supplies for health workers, setting up specialized wards in hospitals to care for coronavirus patients, strengthening surveillance, diagnostics and clinical care through rapid testing, contact tracing, quarantining, isolation and treatment, as well as public health information campaigns, all with the goal of slowing the spread of the coronavirus and mitigating its unimaginable death toll in countries (World Health Organization, 2020b).

The coronavirus pandemic has also caused African countries to react with aggressive public policy strategies to mitigate the negative impacts of the crisis on national economies. The swath of monetary and fiscal policy responses to the pandemic have included central bank policy rate cuts and quantitative easing, relaxation of debt and deficit rules, expenditure reprioritization, appropriation of extra-budgetary funds for pandemic response, cash transfers, food relief and other direct social assistance to vulnerable households and support for small and medium-sized businesses (Collaborative Africa Budget Reform Initiative, 2020; Dafuleya, 2020). While these policy responses are necessary to moderate the immediate economic shocks from the coronavirus pandemic, the measures may have longer-term fiscal implications in many African countries and affect the depth and pace of economic recovery and sustainable development in the aftermath of the pandemic.

The academic literature emerging on governments' responses to the coronavirus crisis in African countries and other nations highlights the implications for long-term fiscal sustainability. Research on government responses in Nigeria notes that the expansion in government borrowing to fund various coronavirus-related interventions has squeezed the government's fiscal space and may have long-term implications for fiscal sustainability (Ejiogu et al., 2020). Similarly, the research on South Africa predicts that increased government borrowing related to coronavirus expenditures will severely constrain the government budget for many years into the future and limit the nation's ability to provide the basic social needs that existed before the coronavirus crisis (de Villiers et al., 2020). Likewise, the research evidence on South Korea explains that the government's budgetary responses to COVID-19 provided the necessary inputs to combat the pandemic in the short term, but these responses may have long-term consequences for fiscal sustainability (Kim, 2020).

This article focuses on Ghana as a country case study in Africa and examines the immediate shocks to the nation's economy from the coronavirus pandemic using the latest data on multiple economic and financial indicators. We also examine the mix of monetary, financial and fiscal policies that the national government undertook in response to the pandemic and consider the extent to which these necessary policy strategies raise renewed concerns about fiscal sustainability after the immediate threat of the pandemic subsides and attention shifts toward economic recovery. As part of our analysis of the implications for future budgetary policies, we undertake a microsimulation of COVID-19 economic shocks and the likely impacts of potential government policies related to the pandemic. Specifically, the article uses the latest data from the Ghana Living Standards Survey (GLSS) to simulate a consumption shock to the economy due to the coronavirus crisis and assess the likely distributional effects of this shock on government revenues, poverty and income inequality. The article also simulates the distributional effects of increased government spending related to the pandemic from expanding direct social assistance under the government's Livelihood Empowerment Against Poverty (LEAP) program. The goal of these simulations is to understand the likely extent of a coronavirus-related shock to the economy and examine potential policy strategies the government may use to counteract the adverse effects of the coronavirus crisis. The simulations show severe impacts of the coronavirus pandemic on household poverty, with more adverse impacts over time on households that have children and elderly individuals. The simulation results also show that the policy option of expanding government spending on direct social assistance under the LEAP program can be an effective social protection strategy to moderate the impacts of potential economic shocks induced by the coronavirus pandemic. In a similar vein, the article discusses how the COVID-19 pandemic might affect Ghana's budget in the long-run and how the national government should react in terms of revenue and spending policies and when managing international financial support, to enhance fiscal sustainability. Overall, the article offers an evidence-based framework for policymakers in Ghana and other African countries that are grappling with formulating effective policy responses and solutions to the coronavirus pandemic while ensuring resiliency of economic systems toward future economic shocks.

The next section describes the incidence of the coronavirus pandemic in Ghana and the immediate economic and financial shocks to the economy due to the pandemic. Section 3 examines the combination of government monetary, financial and fiscal policies in response to the pandemic. Section 4 discusses potential policy options to counteract the pandemic's effects over time and the implications of these policy options for future fiscal sustainability. Section 5 concludes and discusses the insights for policymakers in Ghana and similar countries.

2. COVID-19 and immediate shocks to Ghana's economy

On March 14 2020, Ghana recorded its first cases of coronavirus infection, and by September 30 2020, the cumulative number of confirmed cases spiraled to 46,482 cases, with one out of every 155 confirmed cases resulting in the death of an infected person (World Health Organization, 2020a). Figure 1 shows the 7-day moving average of confirmed cases in Ghana and the corresponding trend in neighboring countries, namely Benin, Burkina Faso, Cote d'Ivoire, Nigeria and Togo. Among its neighbors, Ghana was most severely affected mainly in the months of July and August. Also, Table 1 presents the regional distribution of confirmed cases in Ghana and shows a major concentration of the cases in the Greater Accra and Ashanti regions which host, respectively, Accra and Kumasi, the two largest and most densely populated cities and the hub of major urban economic activity in the country.

Monthly data on the real sector as well as monetary and financial indicators show the adverse reaction of the economic system to the coronavirus pandemic in Ghana. Figure 2 tracks the latest monthly trends in the real sector of the economy using the Bank of Ghana's composite indicator of economic activity (CIEA). The CIEA gauges economic activity on a monthly basis using multiple components, including commodity imports and exports, sales of key selected companies in the country, employment growth, tourist arrivals, port activity, cement production, domestic value-added tax collections and deposit money banks' credit to the private sector (Amoah et al., 2003). The trends in the CIEA show a drastic deceleration in economic activity in March and April of 2020, when the disruptive effects of the pandemic reflected strongly in the economy, and as growth in economic activity slowed down by 7.5 percentage points in nominal terms and 7.8 percentage points in real terms, compared with the corresponding period in the previous year. The index in subsequent months showed some recovery in economic activity.

Though the number of cases in African countries remained low in the early months of the pandemic relative to the count in many countries in Asia, Europe and North America, African countries were not immune to the economic ramifications of the pandemic due to disruptions in international trade and exports. The world price of cocoa, Ghana's major export, dropped massively in April 2020 (−1.9%) and even more in June 2020 (−5.8%), on a year-on-year basis, after many months of steady prices in international commodity markets. Similarly, the international price of Brent crude oil witnessed a major decline in terms of year-on-year change, starting in February 2020 (−13.9%) and continuing through March (−49.7%) and April 2020 (−62.8%), and this adverse trend posed severe challenges for Ghana's domestic economy, given that the country is a net exporter of crude oil and relies on commodity exports as a source of foreign exchange and revenues to sustain growth, like many other African nations. Table 2 tracks the immediate reactions in the external sector of Ghana's economy arising from the global coronavirus pandemic.

Other high-frequency data sources also provide useful insights into the economy's immediate reaction to the coronavirus pandemic. Figure 3 traces mobility patterns in the country using data from Google mobility reports and shows that, in April 2020, there were significant declines in physical mobility related to work, retail and recreation and grocery and pharmacy when compared with a baseline defined as the corresponding week during the period spanning January 3, 2020 and February 6, 2020. Concurrently, mobility trends for places of residence increased substantially as stay-at-home orders and lockdown restrictions gained force in major economic activity locations throughout the country. The mobility related to workplaces did not return to normal and witnessed another decline in September 2020 in response to the threat of another spike in coronavirus infections. Other proxy data on economic activity, such as mobile money transactions, increased markedly, both in the number of transactions (31.4%) and value of transactions (44.4%), at the end of March 2020, when compared with transactions in the same month of the previous year, perhaps due to a substantial shift toward remote cashless transactions (Bank of Ghana, 2020c).

3. Immediate government policy responses to the COVID-19 pandemic

Between March and September 2020, the Government of Ghana coordinated several policy responses to mitigate the spread of coronavirus infections in the country and reduce its negative impacts on the economy. The nation closed its borders to restrict travel into the country and set lockdown restrictions in the nation's largest cities, Accra and Kumasi, and after two weeks, the government eased the restrictions partially as contact tracing, testing, isolation and treatment of infected persons seemed to improve nationwide (Collaborative Africa Budget Reform Initiative, 2020). However, coronavirus virus infections spiked in July and August as reopening of the economy gained momentum.

Monetary policy response to the coronavirus crisis between March and September 2020 included a major cut to the policy rate on March 18 2020, from 16.0 to 14.5%, to signal risks in the economic outlook arising from the likely negative impact of the pandemic on exports, imports, taxes and foreign exchange receipts (Bank of Ghana, 2020a). The policy rate is the main policy tool the central bank uses to signal monetary policy's stance and anchor short-term market interest rates and expectations to maintain stability in the general level of prices and support economic growth and development (Bank of Ghana, 2020b). Additionally, the Monetary Policy Committee implemented a suite of macro-financial measures to enhance the resilience of the financial sector in the light of the pandemic, including a reduction in the primary reserve requirement from 10 to 8% to give more liquidity to banks to support lending to critical sectors of the economy, and a reduction in the Capital Conservation Buffer (CCB) from 3.0 to 1.5% to give banks more financial space to support economic activity (Bank of Ghana, 2020a). At the September 2020 meeting, the Monetary Policy Committee maintained the policy rate because of a balanced outlook on growth and inflation (Bank of Ghana, 2020d).

Fiscal policy measures to mitigate the economic impact of the coronavirus pandemic in Ghana required extra-budgetary expenditures for food relief and other direct social assistance to individuals, families and small and medium-sized businesses. In March 2020, the government committed $100 million to support pandemic mitigation efforts, including the provision of test kits, medical equipment and supplies and more hospital beds nationwide (Ministry of Finance, 2020). The government also paid $51 million to the National Health Insurance Agency (NHIA) to provide more liquidity to healthcare providers and pharmaceutical companies serving at the forefront of crisis mitigation efforts (Ministry of Health, 2020). Another significant effort in the government's response to the pandemic was the food distribution drive to serve food packages and hot meals to about one million needy people in areas under lockdown restrictions, as well as the payment of 3-months water bills for households in areas under movement restrictions (Ministry of Gender, Children and Social Protection, 2020). Similar food assistance measures have been common in other African countries, including Nigeria and South Africa (Ejiogu et al., 2020; de Villiers, 2020).

International financial support buoyed Ghana's monetary and fiscal policy responses to the coronavirus pandemic. In April, for example, the World Bank agreed to provide $100 million to improve emergency response systems in Ghana's coronavirus mitigation efforts (World Bank, 2020). Similarly, the IMF approved the disbursement of about $1 billion as a rapid credit facility and direct budget support to Ghana to tackle the coronavirus crisis. The Central Bank of Ghana also secured $1 billion under the Foreign and International Monetary Authorities (FIMAs) facility of the US Federal Reserve that allows central banks in foreign countries like Ghana to improve their foreign exchange reserves by temporarily exchanging their holdings of US Treasury securities for dollars from the Federal Reserve, but the foreign central bank would be obligated to repurchase the securities at maturity (US Federal Reserve, 2020).

Ghana's immediate policy responses to the coronavirus pandemic were extensive in scope and might have moderated the entire impact of the pandemic in the short term, but questions still remain about whether these measures were too little, or too much, or just about right, when considered in the context of their longer-term implications for fiscal sustainability and economic resilience in the aftermath of the pandemic. At any rate, these immediate governmental responses to the pandemic initiated significant shifts in the country's overall budget deficits and government debt situation and could constrain long-term fiscal sustainability. The latest government finance statistics outlined in Table 2 indicate a trend of growing budget deficits, increasing external debt and expansion of net domestic financing of government fiscal operations, which altogether might present significant risks to government fiscal sustainability.

While the long-term implications of government's immediate responses to the pandemic may not be fully known, we can consider several policy options for future budgetary policy and discuss what the government should do in terms of revenue and spending policies, and in terms of managing international financial assistance, to mitigate the adverse long-term impacts of the pandemic and support economic resilience.

4. Policy options to mitigate the long-term effects of COVID-19 economic shocks

This section discusses potential policy options related to the coronavirus pandemic in Ghana. We begin by examining the likely distributional effects of coronavirus-related disruptions in Ghana's economy using a tax-benefit microsimulation model. The goal of the simulations is to understand how COVID-19 economic shocks might affect household consumption and extend to macroeconomic outcomes, including poverty and government tax revenue. Subsequently, we simulate the distributional impacts of expanding government spending under the LEAP program as a strategy to counteract the long-term effects of the coronavirus crisis on household incomes, consumption and poverty. Finally, we look beyond the microsimulation models and discuss, more generally, how government revenue and spending policies should react over time to mitigate the adverse long-term economic impacts of the coronavirus pandemic.

4.1 COVID-19 economic shocks

The analysis of economic shocks related to the coronavirus crisis relies on the seventh round of the Ghana Living Standards Survey (GLSS7), which serves as the primary household consumption and income survey and documents changes in households' poverty and income levels. The base data from GLSS7 is uprated to 2020 prices and linked to a microsimulation framework that is an offshoot of the commonly used EUROMOD model [1]. We consider a scenario where household consumption declines by 5% as a result of coronavirus-related economic disruptions. This scenario is based on projections made by the World Bank and the International Food Policy Research Institute (IFPRI) about the extent of the economic shocks arising from the coronavirus pandemic in different regions of the world. The World Bank's Office of the Chief Economist for the Africa Region estimates that coronavirus-related economic contraction in the region will range between −2.1% and −5.1% (World Bank, 2020). Similarly, IFPRI estimated that household consumption would decline by 3.2% in Africa, 3.7% in South Asia and 4.4% in Latin America due to the coronavirus crisis (Laborde et al., 2020). Accordingly, this study's analysis simulates a scenario of household consumption declining by 5% due to the coronavirus pandemic. The uncertainties around the scale and ramifications of the coronavirus crisis persist, but arguably the 5% decline in consumption is a reasonable assumption, and if needed, household-level impacts can be extrapolated to greater or lower levels of aggregate economic shocks.

Table 3 reports the results of introducing a 5% consumption shock for all households. The first two columns report the original metrics and output parameters. The third column summarizes the potential changes arising from the consumption shock. The results show a one-and-a-half percentage point increase in consumption poverty that disproportionately affects households with children. The consumption shock also increases the average normalized poverty gap and consumption inequality, as measured by the Gini Index. A unilateral consumption decline shifts the median consumption threshold by 5.2% (GHS 106) for households in the bottom 20% quantile and 4.1% for households in the top 20% quantile. The consumption shock also introduces an estimated decline of 5.6% in indirect taxes, which may or may not correspond to actual budgetary outcomes, given the mismatch created due to tax evasion and informal sector transactions that are beyond the purview of tax authorities but may be captured in consumption surveys [2].

4.2 Government spending on direct social assistance programs

We also simulate a government spending option that doubles cash payments under the existing Livelihood Empowerment Against Poverty (LEAP) program in response to coronavirus-related economic shocks in Ghana. The LEAP program started in 2008 as a flagship social protection program for the extreme poor, with a focus on enrolling the elderly, disabled and households with vulnerable children (Ministry of Gender, Children and Social Protection, 2020). The option of doubling cash payments to the extreme poor is based on similar policy responses to the coronavirus crisis from some developed as well as developing countries (e.g. United States, India and Kenya). Ejiogu et al. (2020) discuss a similar expansion of Nigeria's cash transfer scheme as a government response to the COVID-19 pandemic. According to a recent report, about 34% of 126 countries that have introduced or adopted social protection and job programs have relied on cash-based programs (Jerving, 2020). In Ghana, the LEAP program pays beneficiaries between GHS 64–106 per month (approximately US$ 11–18), so a temporary doubling of that amount is a reasonable assumption that matches the policy responses in other developing countries.

Table 4 presents the simulation results from doubling LEAP cash transfers to households with extreme poverty (approximately an increase of $US11–US$18 per month). Compared to the baseline, the results show a reduction of income-poverty by one-tenth of a percentage point and a large impact on households with an elderly population. It is important to reiterate here that in our model, the impact of cash transfers is only captured in incomes, but it would eventually have a substantial consumption impact that cannot be estimated given that cash transfer is primarily an income-supplement measure. A temporary expansion of the LEAP program significantly reduces income inequality, primarily because this program is targeted toward bottom quantiles of the income distribution who are living as subsistence farmers, laborers and in the bottom rungs of the informal sector. The program's expansion tends to improve the median income of the bottom 20% of the population by 19%, and the impact dampens with upward movement in the income distribution. This also underscores that the LEAP program in Ghana is well-targeted, which is often not the case with means-tested programs in middle and low-income countries. Furthermore, the extra payments to LEAP beneficiaries increase the government's social assistance expenditure but also tend to increase indirect tax collection because of increased economic activity at the bottom of the pyramid as well as multiplier effects that may partly offset the budgetary costs of the program expansion.

4.3 Revenue and expenditure policy options

COVID-19 induced economic shocks have disrupted budgetary processes and revenue and expenditure planning in most countries since governments are uncertain about revenues at a time when spending pressures are increasing. The impacts are particularly intense on developing economies that rely more on indirect taxes such as sales tax and VAT because consumption and business activity have slowed down in these economies. In Ghana, government revenues are under severe strain due to a fall in international commodity prices and a decline in domestic business activity. Concurrently, coronavirus-related expenditures on health infrastructure, healthcare supplies, direct social assistance and government absorbing the cost of utility bills have stretched government spending. Many countries around the world, including Ghana, are cutting down on public investment, such as capital spending, to balance budgetary pressures. However, these cuts could pose a severe challenge for long-term economic recovery since capital spending is growth-inducing and facilitates significant job creation, particularly in low-income countries (Gasper et al., 2020). Finding a balance between revenues and expenditures during these critical times would be difficult. When governments consider such spending cuts that are critically needed to ease short-term budgetary pressures, they should focus on reducing government operational costs rather than decreasing program spending on other human development-related items such as education funding. Also, appropriate tracking and auditing mechanisms for extra-budgetary spending are essential to ensure transparency and accountability. On the revenue side, governments should plan for more systemic reforms in the tax systems to deal with the prolonged impacts of the coronavirus crisis rather than temporary fixes in government revenue architecture. Importantly, governments must ensure that future revenue and expenditure policies are grounded in a well-functioning long-term macroeconomic management framework to ensure that related outcomes, such as the national debt, are sustainable over the long-term.

4.4 Foreign aid resource management

The results from the simulations in this study provide insights into how coronavirus-related shocks to the economy would create enormous challenges in Ghana and similar African nations. These challenges may require sustained financial assistance and foreign aid to rebuild low-income economies. Health financing is an essential policy arena that would require cross-country collaboration and entail treating healthcare as a global public good rather than fragmented country-based structures. International organizations are responding in ways that are feasible given their resource constraints, but the changing world order may threaten the sustenance of these international development initiatives. For instance, a reduction in funding to the World Health Organization by countries such as the United States would directly affect what happens to health spending and other initiatives in developing economies. Ghana has received substantial help from the IMF and the World Bank as well as other donors like the European Union [3]. As the pandemic continues and governments grapple with their budgets for future fiscal years, donors might offer some flexibility in how developing economies like Ghana use development assistance funds so that in the short term, governments can prioritize resources in the areas that have the most critical need.

5. Summary and conclusion

Around the world, the early days of shutdowns due to the coronavirus pandemic led to widespread livelihood losses and business closures and increased poverty and hunger, in addition to the human costs of the health catastrophe. In the low and middle-income countries of Africa, the coronavirus pandemic has been relatively less severe in terms of the number of infections and deaths, at least in the initial months. However, preventive measures such as shutdowns and curfews have already created significant challenges that may undo decades of economic and social progress in these countries. Furthermore, the disruptions in global supply chains, shrinking demand in high-income countries and fall in commodity prices aggravate the economic impact on African nations. This article uses Ghana's case to illustrate the economic challenges posed by the coronavirus crisis to the countries of the global south.

The first part of the article examines the timeline and nature of Ghana's crisis and the corresponding policy response. In Ghana, the government response has been substantially effective in controlling the number of cases and deaths in the initial months, but the cases grew exponentially in July and August. Ghana performed effectively on several fronts, like using community health workers for outreach, testing and managing shutdowns. Ghana also benefitted from a favorable demographic structure of a younger population – a feature that has also helped other countries in Africa and Asia. The Bank of Ghana also undertook several proactive monetary policy measures working in alignment with the Ministry of Finance and its medium-term fiscal policy goals, and international organizations provided financial support to mitigate the short-term economic impacts of the coronavirus crisis.

The long-term impacts of the coronavirus pandemic in Ghana are still unclear but declines in household consumption and income are inevitable and would affect poverty levels and income distribution. Therefore, the second part of the article examines the household-level impact of the economic slowdown using the GLSS in conjunction with a tax-benefit microsimulation model (GHAMOD) that simulates the impact of such scenarios. We find that the consumption and income shocks introduced by the pandemic would contribute to an increase in poverty and economic inequality in Ghana, and it is a trend that might hold in other African countries. The article also simulates the impact of expanding the LEAP direct cash transfer program for poor households and argues that a temporary expansion of cash payments, while increasing government expenditure over time, may be an effective tool to mitigate the impact of income and consumption shocks introduced by the pandemic. Finally, the article discusses several other policy options and argues that well-targeted revenue and expenditure policies, when coordinated effectively within a monetary-fiscal policy macroeconomic framework, can support long-term fiscal sustainability and ensure resilience toward the lingering effects of the coronavirus pandemic as well as future crises.

The COVID-19 crisis is unprecedented in its scale, impact and duration and would significantly change the trajectory of global governance and the fight against poverty. The World Food Program (WFP) estimates that an additional 130 million people would face starvation around the planet as a result of the pandemic, in addition to the existing 135 million that already do (Beasly, 2020). In countries such as India and South Africa, immensely strict lockdowns have left millions of workers in the urban informal sector without food or housing – pushing them to the margins of survival. In past economic crises, affected countries had channels of support in the form of borrowing or aid, but the truly global nature of the economic crisis arising from the coronavirus pandemic, where high-income countries are hit harder and accumulating large debt themselves, might significantly disrupt the financial flows that provided avenues for resilience to low and middle-income countries. In this environment, cash-strapped governments might be tempted to cut spending on education, social protection and welfare programs after the health emergency subsides, but such policy responses would rather further deepen economic problems. Instead, well-targeted spending and revenue policies anchored in sound macroeconomic management are needed to enhance economic resilience and sustainability.

Figures

New daily cases in COVID-19 infections in Ghana and neighboring countries, 7-day moving average

Figure 1

New daily cases in COVID-19 infections in Ghana and neighboring countries, 7-day moving average

Composite index of economic activity (January 2001–June 2020)

Figure 2

Composite index of economic activity (January 2001–June 2020)

Relative changes in mobility in Ghana – 7 day moving average

Figure 3

Relative changes in mobility in Ghana – 7 day moving average

Regional distribution of confirmed COVID-19 cases in Ghana (September 30, 2020)

RegionNumber of casesPercent of total
Greater Accra23,98951.61
Ashanti10,87123.39
Western2,9426.33
Eastern2,3955.15
Central1,9094.11
Bono East7731.66
Volta6661.43
Western North6381.37
Northern5421.17
Ahafo5221.12
Bono5061.09
Upper East3200.69
Oti2400.52
Upper West890.19
Savannah610.13
North East190.04
Total46,482100

Note(s): Ghana Health Service (2020). The data reports the cumulative number of confirmed coronavirus cases as of September 30, 2020

External sector of the economy and domestic fiscal outcomes

Jun-19Dec-19Jan-20Feb-20Mar-20Apr-20May-20Jun-20
International commodity prices
Cocoa (year-on-year change)1.311.615.324.39.3−1.91.6−5.8
Brent crude oil (year-on-year change)−17.013.05.7−13.9−49.7−62.8−54.3−35.3
Other domestic and external indicators
External debt (% of GDP)31.032.329.131.632.534.635.035.4
Budget surplus or deficit (% of GDP)−0.30.40.9−1.3−1.8−0.4−1.3−1.2
Net domestic financing (% of GDP)0.5−0.10.5−0.62.00.31.51.4

Note(s): Data are from Bank of Ghana Statistical Bulletin (October 2020). Cocoa prices are expressed in USD per ton and Brent crude oil prices are in USD per barrel

The distributional impact of a 5% consumption shock

Uprated 2020
Baselinea
After a 5%
Consumption shock
Difference to baseline
Share of poor population (consumption-based)22.4623.971.51
Poor households out of
‐Male-headed households24.9426.461.52
‐Female-headed households16.2917.771.48
‐Households with children25.0826.741.66
‐Households with older persons30.9332.061.13
Poverty gap (average normalized poverty gap)b8.599.390.8
Poor households out of
‐Male-headed households9.8410.710.87
‐Female-headed households5.476.10.63
‐Households with children9.5710.460.89
‐Households with older persons12.6513.620.97
Gini (household consumption)0.44430.44690.0026
Quantiles of distribution and median
‐20th2029.781923.22−5.2%
‐40th3521.943345.85−5.0%
‐50th4389.474172.44−4.9%
‐60th5337.945097.89−4.5%
‐80th8743.148386.89−4.1%
Indirect taxes (millions of GHS)211021.37199129.00−5.6%
Social assistance (millions of GHS)1326.671326.670.0%

Note(s): Authors' simulations based on Ghana Living Standards Survey and SOUTHMOD microsimulation tool

aBaseline is uprated to the overall average Consumer Price Index from the Ghana Statistical Service (January 2020 to April 2020)

bFGT unidimensional-poverty measures. See Foster et al. (1984)

The distributional impact of expanding LEAP cash transfers

Uprated 2020
Baselinea
One-year
Doubling of the LEAP paymentsb
Difference to baseline
Share of poor population (income-based)51.9951.89−0.10
Poor households out of
‐Male-headed households51.5151.38−0.13
‐Female-headed households53.1753.14−0.03
‐Households with children54.0353.93−0.10
‐Households with older persons59.1558.91−0.24
Poverty gap (average normalized poverty gap)c35.7935.36−0.43
Poor households out of
‐Male-headed households35.6335.15−0.48
‐Female-headed households36.1835.91−0.27
‐Households with children36.8736.41−0.46
‐Households with older persons40.3438.96−1.38
Gini (household income)0.77930.7777−0.0016
Quantiles of distribution and median
‐20th245.43292.6619.23%
‐40th1270.371283.661.05%
‐50th2030.332036.820.32%
‐60th3078.193092.80.47%
‐80th7174.567174.560.0%
Direct taxes (millions of GHS)10477.6210477.620
Indirect taxes (millions of GHS)211021.37211571.060.26%
Social assistance (millions of GHS)1326.671550.1616.85%

Note(s): Authors' simulations based on Ghana Living Standards Survey and SOUTHMOD microsimulation tool

aBaseline is uprated to the overall average Consumer Price Index (CPI) from the Ghana Statistical Service (January 2020 to April 2020)

bLEAP payments are adjusted for CPI in the model every year, but these administrative revisions were done in 2012 and 2015

cFGT unidimensional-poverty measures. See Foster et al. (1984)

The distributional impact of a 5% income shock

Uprated 2020
Baselinea
After a 5%
Income shock
Difference to baseline
Share of poor population (income-based)51.9953.531.54
Poor households out of
‐Male-headed households51.5153.141.63
‐Female-headed households53.1754.491.32
‐Households with children54.0355.611.58
‐Households with older persons59.1561.021.87
Poverty gap (average normalized poverty gap)b35.7936.881.09
Poor households out of
‐Male-headed households35.6336.731.10
‐Female-headed households36.1837.271.09
‐Households with children36.8738.031.16
‐Households with older persons40.3441.511.17
Gini (household income)0.77930.78070.0014
Quantiles of distribution and median
‐20th245.43230.75−6.0%
‐40th1270.371185.09−6.7%
‐50th2030.331903.84−6.2%
‐60th3078.192860.22−7.1%
‐80th7174.566607.00−7.9%
Direct taxes (millions of GHS)10477.6210135.50−3.26%
Social assistance (millions of GHS)1326.671326.670.00%

Note(s): Authors simulations based on the Ghana Living Standards Survey and SOUTHMOD microsimulation tool

aBaseline is uprated to the overall average Consumer Price Index from the Ghana Statistical Service (January 2020 to April 2020)

bFGT unidimensional-poverty measures. See Foster et al. (1984)

Notes

1.

GHAMOD is a tool developed by UNU-WIDER and their partners that allows for using representative household-level data in conjunction with the tax policy architecture and social benefit provisions to simulate the impact of changes in the policy and economic environment (Adu-Ababio et al., 2017). The model has several limitations. First, it is a static model and does not permit modeling the dynamic behavioral responses of households in the new economic environment defined by an economic shock. Second, the model does not account for new interventions, such as the interventions the national government undertook to mitigate the impact of coronavirus-related economic shocks.

2.

As a corollary analysis, we also consider a scenario where household incomes decline by 5%. Appendix A1 gives details about the potential distributional effects of this coronavirus-related economic shock. The income shock tends to affect older households and male-headed households the most and translates to a relatively larger increase in the poverty gap, compared to the consumption shock. Across quantiles, the income shock affects formal sector workers much more, perhaps because they tend to report incomes in surveys much more than informal sector workers. The income shock contributes to an estimated 3.3% decline in direct tax collection based on survey estimates of reported incomes and given tax rates.

3.

In September, Ghana received 87 million euros under Emergency EU Budget Support in response to COVID-19. It also received 5.9 million euros to prevent election violence and enhanced security in northern border regions. http://www.mofep.gov.gh/news-and-events/2020-10-05/government-signs-two-financial-agreements-with-the-european-union

Appendix A1

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Further reading

Bergmann, A. and Grossi, G. (2014), “Symposium on financial sustainability of the public sector: a critical issue for the stakeholders”, Journal of Public Budgeting, Accounting and Financial Management, Vol. 26 No. 1, pp. 91-93.

Dzigbede, K. (2016), “Whither are we bound? New insights on American economic policymaking”, Policy Studies Journal, Vol. 44 No. S1, pp. 14-27.

Taylor, A. and Berger, M. (2020), “When it comes to coronavirus response, superpowers may need to study smaller nations”, Washington Post, 16 May.

Corresponding author

Komla D. Dzigbede can be contacted at: dzigbede@binghamton.edu

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