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More to it than meets the eye

Feb 22, 2012, 2:03 PM | Article By: Osman Kargbo

Although the huge domestic debt incurred by the Gambia government over the last 4 years could largely be attributed to a significant drop in revenues between 2007 and 2011, owing to large erosion of tax collections from the economic and financial system, another significant cause for this vulnerable economic condition is the episodes of huge spending overruns undertaken by government over the period.

It has been discovered that the government’s fiscal deficit widened substantially  in the past four years, resulting in a sharp increase in domestic debt, as government  continued to spend more than it was generating as revenue.

“The deterioration of the fiscal balance was caused by a steady decline in government revenues and episodes of large spending overruns,” IMF’s 2012 report on The Gambia’s economy says, adding: “After peaking at nearly 17.5 per cent of GDP in 2007, revenues fell to just under 15 per cent of GDP in 2010, as collections from all major taxes were eroded away. At the same time, expenditures (excluding donor financed projects) rose from about 14.5 per cent of GDP to 18 per cent of GDP. Extra-budgetary expenditures, including realised contingent liabilities, were major factors behind the surge in government spending, particularly in 2009 and 2010. The ensuing large fiscal deficits were mostly financed with domestic borrowing.”

It is vital to note that the achievement of rapid economic growth, development and poverty alleviation is feasible with sound fiscal policy; that is, a fiscal policy that is designed and implemented with discipline, accountability and transparency.

When a fiscal policy management results in macroeconomic instability; that is, high inflationary pressures in the goods and financial markets, low GDP growth, unemployment, low per capita income and rising incidence of poverty, the problems can be traced to lack of fiscal discipline.

Despite more than thirty years of annual budgeting and fiscal management in most of the countries of the Economic Community of West African States (ECOWAS), there has always been an economic profile of low GDP growth, high inflation, unemployment, low per capita income, rising incidence of poverty, and external debt overhang.

In the absence of fiscal discipline, transparency and accountability, there is always unsustainable level of fiscal deficits with reliance on banking system credit.

In order for a country to achieve macroeconomic stability, sustainable economic growth and development, a sound fiscal policy is designed, implemented and monitored, as recommended by economists and financial planners the world over.  Thus to ensure effective design and implementation of fiscal policy or government budget, there is need to adopt a budget process that stipulates constitutionally its preparation, approval, implementation and auditing, as well as the roles to be performed by the executive and the Legislature/National Assembly as regards the budget process. 

The budget process consists of four phases, which are the preparation, approval, implementation and monitoring aspects.

The first three however deal directly with the process of preparation of the national budget, and the fourth one, which is the monitoring phase, though follows the same trend, places more emphasis on fiscal discipline, which is our focus in this article, as, has clearly been stated by the IMF report, much of the significant debt distress being faced by the Gambian economy at the moment is partly due to extra-budgetary expenditures, or  a surge in government spending, particularly in 2009 and 2010, an ensuing fiscal deficits mostly financed with domestic borrowing.

“To ensure fiscal discipline, the Legislature has responsibility for auditing and monitoring the expenditure of the Executive to ensure conformity of the actual expenditure with the approved budget/Appropriation Act. This ensures that the public gets value for the expenditure of the government,” states Prof T.O. Okunrounmu, a renowned economist and lecturer on Fiscal Policy Management. 

He explains further: “If this aspect of the budget process is not done efficiently, it allows for misappropriation of public funds, or diversion of one programme’s funds to another, constituting fiscal indiscipline.

“Members of the National Assembly/Parliament are also expected to visit sites of capital projects to confirm public expenditure dispensation as approved. The work of the legislature/National Assembly is helped by the preparation of the statement of Accounts of Government fiscal operations by the Office of the Accountant-General while the Auditor-General of the country also prepares a report to help in reviewing the report of the Accountant-General to ensure its consistency with the approved budget or the Appropriation Bill. The publication and sale of these Reports and the National Budget to the public enhances fiscal transparency as they provide the citizens with information on government economic activities.”

A country’s achievement of macroeconomic stability and rapid economic growth and development may be undermined when the level of overall deficit resulting from the fiscal operations of the government becomes unsustainable. The issue in fiscal policy management is not that the government should not budget a deficit but, according to Professor Okunrounmu and many other economists I have had the opportunity to speak with or read, the size of the overall deficit to GDP should not be more than 3% deficit. Under the proposed West African Monetary Union, one of the convergence criteria is a margin of deficit/GDP ratio of 4 per cent with restriction on its financing from the banking system.

It is also a fact that the deficit financing from domestic sources should not rely on credit from the banking system but the non-bank public, to enhance the achievement of macroeconomic stability;  that financing the budget/fiscal deficit through borrowing from external sources should be prudently utilised in order to enhance the capacity of the economy to meet the debt service obligations in future; and there is also need to ensure judicious use of public sector borrowing to enhance deficit sustainability  and the achievement of rapid economic growth and development.

This may not be the exact case in The Gambia; however, when issues of fiscal transparency, discipline and accountability are not accorded high priority through the budget process, public expenditure management is always undermined by corruption or, misappropriation of public funds, which adversely affect the potency of deficit financing, while creating problem of external debt overhang.

Therefore, a sound fiscal policy implemented with transparency, discipline and accountability will enhance the achievement of macro-economic objectives of price stability, rapid economic growth and development.