Government cannot borrow its own money. If government needs more money (which is IOU), it has to issue more, stated, the Chief Executive of Gold Coast Financial Holding, Mr. Kwame Ofori Asomaning.
Buttressing the above point, Mr. Ofori Asomaning said that if Ghana government is the sole issuer of the cedi, then it does not need to “borrow” its own currency in order to spend.
He wondered how government can borrow first from the public before spending. He went on to stress that spending comes first before borrowing.
“It [government] cannot sell bonds unless it has first provided the currency and reserves that banks need to buy the bonds,” he indicated.
Mr. Ofori Asomaning made the statement during the 3rd BTA/Gold Coast Business Summit organised in Accra recently. It was on the theme: “Ghana’s Debt In Perspective—What is the Way Forward.”
According to him, government spends first, before imposing taxes.
“They do not “need” tax revenue in order to spend. Spending comes first before taxes,” he averred.
Mr. Ofori Asomaning, who is a lecturer at the University of Ghana Business School UGBS, stated that many people believe that government revenue was limited by what the government can tax or borrow.
“Sales of treasury securities reduce bank reserves and are used to remove excess reserves from the economy.”
Taxes, he explained, drains money from the economy, stressing that they [taxes] are not gov’t financing tools.
“Money – debt, is the fuel that runs our economic engine. The measure of an economy is money. GDP, GNP are all measured in money terms.”
According to the UGBS lecturer, the larger the economy, the more money it has than a small economy.
“To grow the economy is to grow Gross Domestic Product (GDP). GDP = Gov’t Spending + Private Investment and Consumption + Net Exports. To stimulate GDP growth is to increase one or more of the above variables.
…As debt and money are identical, a growing economy must have a growing supply of DOMESTIC debt.
…It can be personal debt, corporate debt, and also government debt. An economy without debt is an economy without money.
The cedi and T- Securities which are issued by government are simply two versions of the same thing—(IOUs,) he added.
“The cedi currency is a perpetual interest free debt security whereas the treasury securities (domestic government debt) are a time-limited interest-bearing currency.
He buttressed the above by quoting Abba Lerner, who stressed that “if government issues too much debt, it has by the same token issued too few bank reserves and cash.
Private sector financial assets and liability nets to zero. Once deposit is another loan.
The private sector, he said, most often needs outside money which money comes from the government.
“Deficit spending is an introduction of new “debt free” money government has added into the economy. When it creates money, it adds it to the private sector,” he said
Mr. Ofori Asomaning explained that government deficit is the flow of government spending less the flow of government tax revenue measured in the money of account over a given period (usually, a year).
He said deficit occurs when the government creates and spends more cedis than it receives in taxes.
“In a 2-sector or closed economy, where you have the private sector and the government sector, and the cedi is a unit of account, the net financial assets held by the private sector are exactly equal to the net financial liabilities issued by the government.”
…It is an accounting fact that for every debit, there is a credit; for every deficit, there is a surplus; for every lender, there is a borrower; for every outflow, there is an inflow.
…One sector’s deficit equals another’s surplus. In two-sector model that is, closed economy, it is impossible for both the gov’t sector and the private sector to run surpluses.
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