The use of domestic resources for development purposes is becoming more and more important as access to foreign resources becomes increasingly difficult. It is the current global financial crisis and the subsequent recession that are generally expected to make access to foreign resources more difficult. Ironically, however, these are possibilities of the global recession affecting the mobilization of domestic resources. Domestic resource mobilization refers to the generation of savings from domestic resources and their allocation to socially productive investment. (Culpeper, 2008). Such resource mobilization can come from both the public sector and private sector. The public sector does this through taxation and other forms of public revenue generation. The private sector mobilizes resources through household and business savings, working through financial intermediaries to convert these into productive assets. The global recession will affect the capacity of the public sector to mobilize tax revenues if it affects the incomes of residents or has an impact on trade with outsiders which will affect trade taxes.
It is observed that many African countries have pursued a number of reforms While African economies were initially thought to be immune to the worldwide financial and economic downturn, the crisis is now ripping them apart as more jobs dry up, factories shut down, inflation soars and the cost of living goes up. Africa is turning out to be one of the worst-affected regions in the world since the global economy began to fall apart in 2008. (Obeng, 2009) Many professionals and experts around the world believe that economic recession can only be confirmed if GDP (Gross Domestic Product) growth is negative for a period of two or more consecutive quarters. The roots of a recession and its true starting point activity rest in the several quarters of positive but slowing growth before the recession cycle really begins. Often in a mild recession the first quarter of negative growth is followed by slight positive growth then negative growth returns and the recession trend continues. (Recession.org, 2009)
What is Economic Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity over a period of time. During recessions, many macroeconomic indicators vary in a similar way. Recessions are generally believed to be caused by a widespread drop in spending. Governments usually respond to recessions by adopting expansionary macroeconomic policies such as increasing money supply, increasing government spending and decreasing taxation. Most mainstream economists believe that recessions are caused by inadequate aggregate demand in the economy and favor the use of expansionary macroeconomic policy during recessions. Monetarists would favor the use of expansionary monetary policy while Keynesian economists may advocate increased government spending to spark economic growth. Supply- side economists may suggest tax cuts to promote business capital investment. Laissez- faire minded economists may simply recommend that the government not interfere with natural market forces. (Shukla, 2009).
According to National Bureau of Economic Research (NBER, 2009) recession is defined as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale- retail sales. It can also be associated with falling prices known as deflation due to lack of demand of products. Economic recessions are often portrayed as short- term events. However, as a substantial body of economic literature shows the consequences of high unemployment, falling incomes and reduced economic activity can have lasting consequences. Thus, economic recession can lead to scarring- that is, long lasting damage to individuals economic situations and the economy more broadly.
Difference between Economic Depression and Economic Recession Economic Depression is downturn of substantial proportions in the economy of a nation that may last for years. Typically, during economic depression, businesses find it difficult to make profits compelling them to reduce salaries and staff as well as Gross Domestic Product (GDP) falls and unemployment rises. These causes loan repayments to be difficult leading to increasing home repossessions. Economic Depression also witnesses crises in commerce, industry and finance with steep fall in prices, credit squeeze, low productivity, vanishing investments and increasing bankruptcies.
Economic Crisis of lesser intensity is referred to as a recession which is more common occurrence and considered typical of a business cycle. Recession marks a downward trend in business and is caused by an imbalance between the quantity of goods generated and the consumers ability to buy them. If recession continues for long it can turn into depression. Recessions are the result of reduction in the demand of products in global markets. Economic downturn is characterized by lack of confidence in business. (Shukla, 2009). There is general economic decline during recession with the economy experiencing tremendous setbacks. The purchase of the people comes down due to low salaries or lack of sufficient income. This results in slump in market with goods and services not being availed of by people. Production slows down and in turn prices go up.
Causes of Economic Recession
An economic recession is primarily attributed to actions taken to control the money supply in an economy. There are various factors that flush an economy into the weird state of recession but inflation is the main factor which contributes more towards the situation. Inflation is a condition of an economy when the prices of goods and services rise immensely over a period of time. The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money. This may be because of increased production costs, high energy costs and national debts. When the prices of goods reach their ever high stage, people tend to cut on overall spending, luxurious spending, restrict themselves towards basic necessities and thus save more and more. As a result, GDP (Gross Domestic Product) declines when people begin to cut expenditures in order to cut down costs. This makes the companies to cut their costs as well and they chuck out workers which brings unemployment. It is these combined factors that manage to drive the economy into a state of Recession.
This set of circumstances coupled with the ability of people to get access to greater amount of loan money due to extremely lax loan practices creates a cycle of unsustainable economic activity that will eventually grind an economy to a near halted existence. (Recession.org, 2009) Recession brings with itself all major consequences which create mayhem within the economy. One of the major effects of recession is Inflation. Recession comes into effect with inflation while on the other hand; it is one of the after effects of recession. This means the commodities reach their ever highest prices and people generally cut down on costs.
Hence, inflation becomes the major effect left out by recession. Lower income is another effect of recession in the economy. As people cut down on costs, they tend to buy less which reduces the income and thereby fewer profits or no profits. The depth and scale of these crises impact on the continents productive capacity and people also highlight, even if more dramatically, the structural vulnerabilities worsened by three decades of uninterrupted application of discredited neoliberal policies of indiscriminate liberalization of trade and investment, deregulation and privatization of the public sector in Africa. s The triple alliance of financial, fuel and food crises additionally amplify the systemic fragilities of African economies and their subordination within the overriding international economic dogma, neoliberals.
Unemployment and Recession
Unemployment levels rise as a result of many firms resorting to decreasing the number of staff as a part of cost cutting. The number of people looking for employment far exceeds the number of job opportunities created. With fewer people left to contribute, the productivity in the economy is seriously affected. During a recession, its a normal tendency of people to save money. There is decline in the levels of spending by consumers due to decline in their confidence levels. This decline in confidence level may be triggered by financial or employment crisis. As a result of reduced spending by the consumer, the business firms are forced to reduce prices of the commodities to attract consumers. Such drastic measures very often lead to deflation. As the prices decrease, the spending capacity of consumer increases. This in turn improves the economy, with simultaneous increase in job opportunities.
Real Estate and Stock Market Behavior during Recession
Even the real estate industry is affected by recession. Due to implementation of fiscal conservatism, a fiscal policy advocating the reduction in government spending, people tend to avoid dealing in real estate during recession. Even the people who have lost their jobs resort to selling their homes to make up for financial instability. Due to this increase in supply of properties during the period of low demand, the prices of the properties are slashed considerably. Recession also makes the stock market fickle. During this financial crisis, some people opt to sell their investments as the last resort. As a result of many people selling off their stocks at the same time, a sharp decline is triggered in the stock market.
Recession and the Individuals
The first and the foremost peril of recession is job cutting. As the companies take to cost cutting, thousands of individuals lose their jobs. It becomes further more difficult to find a new job in this regressive phase. Even a single earning member of the family losing a job can lead to imbalance in household budget. A sharp fall in the stock market is triggered due to high exposure in equity, making the stock market a very volatile entity. Initial rise in the prices of commodities affects the consumers capacity to spend. The depth and the seriousness of the ongoing recession can be estimated by the fact that this recession has seen the most prominent fall in private consumption in last 20 years. Taking this fact into consideration, it is wise to anticipate that recovery from this economic recession will definitely take some more time. (Naik, 2009). From Dakar in the west and Dar es Salaam in the east to Cape Town in the southernmost tip of Africa, the impacts of the financial and economic turmoil are all too obvious: drastically depressed economic activities manifested in the closure of industries, job cuts, falling tax revenues, balance-of-payments difficulties and massive cutbacks in aid and social expenditure.
The entire region is plagued with a double squeeze of its trade balances resulting from both lower export volumes and values. Africas real GDP growth will plummet from an average of 6% between 2004 and 2008 to 1.75% this year, says the International Monetary Fund (IMF)s World Economic Outlook report (October 2009) titled Sustaining the Recovery. The IMF projects that poverty could also increase significantly in the sub-Saharan region as real GDP per capita contracts in 2009 the first decline in a decade unemployment rises, and the region suffers from a lack of extensive social safety nets.
Even worse, these nations have significantly limited fiscal space to take the necessary measures to protect both the larger economy and vulnerable groups affected by the downturn. The IMF also estimates that a minimum of about $25 billion in additional financing will be needed in 2009 to deal with balance-of-payments shocks in 22 low-income countries where the combined impacts of the financial, food and fuel crises have sharply reduced reserves to below the level corresponding to about three months import coverage of goods and services. The African Development Bank, for example, estimates Africa as a whole faces a resource gap of about $50 billion for this year and another $56 billion for 2010. (Obengs, 2009).
Taxation and Public Investments
Tax revenue is a major domestic financial resource in all economies. Indeed taxes account for most of government revenue in the majority of African countries, but they do not generate enough, particularly when compared to other regions. The amount of tax revenue as a percentage of GDP in Africa was 22 percent in 2002 (World Bank 2005), which was far lower than the average for developed countries. The tax ratio is considerably lower in sub-Saharan Africa (20 percent) than in North Africa (25 percent). Furthermore, there are major differences among countries in the region with regard to their tax performance. Tax as a share of GDP in 2002 ranged from more than 38 percent in Algeria and Angola to less than 10 percent in Chad, Niger and Sudan (World Bank 2005).
The tax-to-GDP ratio in a given economy is broadly determined by a set of structural features such as the per capita income, urbanization, literacy, the shares of the industrial, agricultural and mining sectors, as well as the level of trade. In sub-Saharan Africa, the main determinants of the tax-to-GDP ratio have been observed to be per capita income, trade levels, and the shares of agriculture and mining in the economy (World Bank 2005). Per capita income reflects not only the taxable capacity of the population; it also serves as an indicator for general development in an economy. A recent study by Le et.al (2008) provides an interesting insight into how African countries are doing in the area of tax mobilization. They employed a cross-country approach to estimate tax capacity from a sample of 104 countries, including several African countries, for the period 1994-2003.
They used their estimation results as benchmarks to compare taxable capacity and tax effort in the different countries. They defined taxable capacity as the predicted tax-GDP ratio that could be estimated with the regression, after taking into account a countrys specific economic, demographic, and institutional features. They also defined tax effort as an index of the ratio between the share of the actual tax collection in gross domestic product and the predicted taxable capacity. Following this they classified countries into four groups by their level of actual tax collection and attained tax effort. The analysis provides guidance for countries with various levels of tax collection and tax effort.
The Crisis and Savings Mobilization
The Bank of Ghana (2009) has indicated that at the end of the last quarter of 2008, total deposits of the banking system stood at GH¢6,949 million which was 65 percent of total liabilities compared to 63 percent in 2007. Also in the last quarter of 2008 there was an increase of 11.4 percent in the total deposits of the banking system over the previous quarters figures and this compares with an increase of 14.3 percent over the same period in 2007. The difference in the rate of increase in the last quarter of both years is judged to be not statistically significant. What is interesting about the growth of deposits in the Ghanaian banking system in 2008 is that it occurred when the share of total borrowings in the banks liabilities declined by 0.8 percentage points. The share of shareholders funds in the liabilities did not change in the period, remaining at 10.4 percent. Thus, deposits have remained fairly robust even if the banking systems holding of deposits is not very widespread.
How the Global Recession is Affecting Ghana
Higher food and crude oil prices raised the countrys current account deficit to worrisome levels just before the global financial crisis. As of 2008, Ghanas public debt was about 53% of GDP. Escalation of crude oil prices also raised production costs for oil importing countries like Ghana. This means that consumers were hurt as prices of goods in the domestic market skyrocketed due to inflation, which reached about 18% in December 2008. The Ghanaian Cedi also depreciated against all major currencies from the second quarter of 2008 due to a realignment of international currencies, debt servicing, and a surge in demand for the dollar to meet higher oil bills and food price. Since Ghanas government revenue depends on agriculture (cocoa) and mining (gold), depressed commodity markets due to falling global demand will increase pressure on government expenditures.
Other problems include a tightening of donor flows and remittances, as well as expected drops in foreign direct investment. Ghanas heavy reliance on the European Union (EU), United States (US), and Asia for its export markets, remittances, tourism, and development aid magnifies the negative impact. A steep decline in these areas has wide ranging implications for the economy. For example, the total amount of remittances to individuals and households in Ghana was $1.6bn in 2007. In size, this is about 10% of Ghanas annual GDP. The direct impact of the crises on the banking system is minimal because the finance sector had little or no exposure to complex financial instruments.
According to Ghanas central bank, outstanding external borrowing by banks as a source of funding for their activities, as well as composition of existing credit lines and the industrys low net open position, indicates that the system is not over exposed. Finally, even though the global financial credit crisis has presented challenges to Ghana, its expected to return to 5% economic growth in 2010. With the discovery of oil, Ghana looks to take advantage of this opportunity in the mid- to long-term. There are also other prospects for Ghana in the coming years, which will be highlighted in an upcoming article. (Nwakego, 2009).
End-December 2009 Projected Outlook
Domestic Revenue August year-to-date receipts in respect of domestic revenue amounted to GH¢3319.3 million (15.3 percent of GDP), compared with GH¢2918.7 million (13.5 percent of GDP) recorded for the same period in 2008. The outturn also represents only 53.8 percent of the annual budget estimate. Against this backdrop the CEPA 2009 projected outturn for domestic revenue is GH¢5732.6 million, equivalent to 26.5 percent of GDP. It comprises of GH¢5047.0 million (23.3 percent of GDP) of tax revenue and GH¢685.6 million (3.2 percent of GDP) of non-tax revenue ” of which GH¢332.0 million is expected to be lodged into government accounts by the collecting MDAs, and GH¢353.7 million retained for their use. The forecast shows domestic revenue ending the year 7.1 percent below its budgetary target of GH¢6172.1 million or 28.5 percent of GDP. Total collection of taxes by the Customs, Excise and Preventive Service (CEPS) (including import exemptions) for end-year 2009 is projected to be GH¢2549.9 million or 11.8 percent of GDP, representing a 10.3 percent short fall compared with the budget estimate.
The projection covers the following tax categories: Import duty collections of GH¢876.9 million (4.1 percent of GDP); Petroleum taxes of GH¢302.2 million (1.4 percent of GDP); Import VAT of GH¢831.7 million (3.8 percent of GDP); NHIL of GH¢166.1 million (0.8 percent of GDP); and Import exemptions of GH¢373.0 million (1.2 percent of GDP). The projected outturns for the components are lower than the corresponding Budget estimate, except for NHIL collections. The end-2009 projected outturn for collections by the VAT Service is GH¢571.1 million, equivalent to 2.6 percent of GDP. This is 24.4 percent less than the Budget estimate of GH¢755.3 million or 3.5 percent of GDP. The projected outturns for the component parts, all of which are lower than the corresponding Budget projections, are as follows: Domestic VAT of GH¢440.9 million (2.0 percent of GDP); Excise duty collections of GH¢50.0 million (0.2 percent of GDP); and NHIL of GH¢80.2 million (0.4 percent of GDP).
* Bank of Ghana 2009 Monetary Policy Report Vol. 5 No. 1/2009, Accra. * Centre for Policy Analysis (2009) Ghana Economic Review and Outlook, Accra. * Dahl, G., and L. Lochner. 2008. The Impact of Family Income on Child Achievement: Evidence from the Earned Income Tax Credit. National Bureau of Economic Research, USA. * Fjeldstad, O.H. and L. Rakner 2003 Taxation and Tax Reform in Developing Countries: Illustrations from Sub-Saharan Africa, R 2003:6, Chr. Michelsen Institute, Bergen * ISSER 2007, State of the Ghanaian Economy Report 2006, University of Ghana, Legon * Kelly R. and G. Mavrotas 2003 Savings and financial sector development: panel cointegration evidence from Africa WIDER Discussion Paper, Helsinki. * ISSER 2009, State of the Ghanaian Economy Report 2008, University of Ghana, Legon. * William A. McEachern (1998) Macroeconomics A Contemporary Introduction, Pp 106, Cincinnati, Ohio. . * www.recession.org