The Impact of Integrated Financial Management System on Economic Development: The Case of Ghana

P61∼80 The Impact of Integrated Financial Management System on Economic Development: The Case of Ghana ∗ Mohammed Aminatu* Abstract The Integrated ...
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The Impact of Integrated Financial Management System on Economic Development: The Case of Ghana ∗

Mohammed Aminatu*

Abstract The Integrated Financial Management System (IFMS), which was introduced to developing countries in the 1990s, is one way to manage finance effectively. However, the implementation was a failure in most countries due to factors such as a lack of capacity building and over ambitiousness of these nations. Ghana has recently gone back to this system, dubbing it the Ghana Integrated Financial Management System (GIFMIS). This study looks at the impact of GIFMIS by making use of both qualitative and quantitative data. Regression analysis was used as a statistical tool to analyze data accumulated over the last ten years by the Ministry of Finance and Economic Planning. This study looks at the impact of GIFMIS on Ghana’s economic development by looking at gross domestic product (GDP), economic growth, and resource allocation to major sectors of the economy. It is noted from the analysis that some sectors of the economy contribute immensely to GDP growth whereas other sectors have an adverse effect. Analysis results also showed that GDP growth does not have a direct impact on economic growth. Keywords: IFMS(the Integrated Financial Management System), GIFMIS(Ghana Integrated Financial Management System), economic development, Ghana

I. Introduction 1. Background Africa possesses almost half of the world’s natural resources. These include minerals, rich forest reserves, large water bodies as well as good climatic conditions. However, it is also one of the most impoverished areas in the world that lacks technical know-how to manage its resources for sustainable development. The problem has led to political upheaval, poor leadership within government and private institutions resulting *

M. A. Graduate School of International Studies, Korea University; E-mail: [email protected]; Tel: +002330208808034.

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in corruption, as well as a lack of transparency and accountability. In spite of these problems, it is still possible for the continent to adopt strategies and measures that are used in developed and other emerging economies to enhance its development. As emphasized by the Gershenkron (1962) hypothesis, the more backward a country’s economy is, the more likely certain conditions occur. This implies that countries lag in development can learn or catch up with their developed counterparts by following in their footsteps. Putting this into proper context, Mikhail Gorbachev, the USSR leader once said, “If you don’t move forward, sooner or later you begin to move backward.” One major issue affecting the development of African economies is their poor financial management systems in various institutions. Though these institutions are not strong and vibrant, the few mechanisms in place are either ineffective or unsustainable, which tend to have serious effects on economic growth. A good performing financial system leads to an increase in social value or efficiency within these systems. Thus, activities that provide private gains to individual sectors of the system but overall reduce its efficiency do not improve economic performance. The financial management system has not been a success in Africa. Why it was unsuccessful and its attendant effect on the socio-economic development of the continent is unknown. This study therefore, aims at examining the impact of the IFMS on the financial industry in Africa using Ghana as a case study. Much attention will be directed towards the public sector. The study will seek to address how the IFMS affects economic development, what role the public sector can play in adopting and implementing the IFMS, and finally, how the IFMS can still be utilized to enhance transparency and accountability in governance.

II. Financial Management System Many African countries struggle when it comes to reforming public financial institutions. Studies indicate that institutional systems and processes that deal with various aspects of public finances are weak and non-transparent. Often they are incapable of drawing adequate budgets, monitoring public expenditures, using public funds and investments efficiently, and providing reliable data for macroeconomic modeling. Whenan investigation identifies problem areas and weaknesses, implementing reforms becomes a problem. The necessary adjustment processes are complex and often deal with interrelated issues to solve this problem, and it is therefore important to adopt the financial management system. The financial management system is based on the concept of a budget preparation sub-system, which may or may not be based on the Medium-Term Expenditure Framework (MTEF). Under the MTEF, the national budget is derived from a multi-year rolling plan which is updated annually. There is also a budget execution and expenditure management sub-system to monitor and account for revenues and public expenditures. Important elements typically include accounting, payroll, cash management, commitment control, aid and debt management systems. To ensure consistency, the introduction of a uniform Chart of Accounts to record receipts, expenditures and commitments is used. Other related expenditure control mechanisms could therefore focus on public procurement

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and inventory control, reporting and auditing sub-systems to ensure transparency, accountability, and compliance with the budget or with existing regulations that govern public expenditure management. This led to research into the issue of the financial management system, which can have an effect on the economy. Levine and Zervos (1998) have argued that more developed financial systems promote or “lead” to economic growth. A well-developed financial system may assist in the mobilization of savings and facilitate investment by identifying credit-worthy borrowers, polling risk and reducing transaction costs. Other economists have, however, questioned the importance of a financial system in economic growth (Robinson, 1962; Stiglitz, 1994; Singh and Wiesse, 1998). They proposed that economic development creates additional demand for financial services, which tendsto lead to a more developed financial sector. Levine (1998) has pointed out that evidence concerning the effect of financial development on economic growth could assist governments, particularly in developing countries, in determining whether priority should be given to reforms in the financial sector. However, the view that economic growth follows financial services development is inconsistent with recent experience. The rapid growth of many Asian economies in the 1970s and the 1980s was accomplished with domestic financial sectors that could not be regarded as developed. Furthermore, many OECD countries embarked on financial reforms yet savings, growth and investment have not been accelerated. The World Bank in recent times has changed its policy recommendation regarding the financial sector in the process of economic development. In 1989 it described a developed financial sector as being a “cornerstone of a growing economy” (World Bank, 1989: 1) but in 1993 it appeared to endorse a more regulated approach in noting that “our judgment is that in some cases, government intervention resulted in higher and more equal growth than otherwise would have occurred.” Demetriades and Liuntel (1994) urged caution with the view that financial sector repression necessarily has a negative effect in all countries, and observed that, “our conjuncture is that ‘repressionists’ policies may have positive effects whenever they are able to successfully address market failures.” Others, including Singh and Wiese (1998) and Diaz-Alejandro (1985), have pointed to the risk of financial collapse and the consequent financial recession that may result from rapid financial “repression.” Hsu (1997) argued that in Japan, regulation of the financial market has accommodated the loan requirement for other sectors and reduced the risk of financial crisis in the rapid economic growth of the 1970s. Mckinnon (1993) suggested that “dualistic” banking and pricing in China that saw government intervention in credit allocation and interest controls facilitated the transition from a planned economy to a market-based system. It is evident, therefore, that both policymakers and economists are divided on whether financial sector development is a necessary catalyst for economic growth. Financial sector development promotes economic growth and can also reduce poverty (DFID, 2004a; 2004b). Demirguc-Kunt and Levine (2004) conducted a study of 150 countries and noted that a well-functioning financial system is critical to long-term growth. Empirical evidence from additional studies confirms the strong, positive link

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between national savings (aggregate income less total expenditure) and economic growth (World Bank, 2004). Macroeconomic instability, often in the form of high inflation, is known to impede financial development (Khan, 2002) as it discourages savings in financial form. Monetary policy interventions to contain inflationary pressures, usually through the sale of government debt instruments like treasury bills, tend to reduce the volume of credit available to the private sector as well as raising the cost of borrowing (lending rates are linked to returns on the ‘low-risk’ debt instruments such as government paper). The same effects are observed when public sector borrowing rises as a result of increasing budget deficits and/or increased credit requirements from state-owned enterprises.

1. Integrated Financial Management Systme An integrated financial management system (IFMS), also known as integrated financial management information system, is an IT-based budgeting and accounting system that manages spending, payment processing and reporting for governments and other entities. IFMS bundles many essential financial management functions into one software suite. IFMS can be off-the-shelf software1 or custom-made software2 depending on the size and needs of the organization that will be using it. IFMS can improve an organization’s financial management by enhancing management of cash, debt and liabilities. It also has the ability to use historical information to provide better budget modeling processes. It is also effective in reducing costs of financial transactions and leads to increased efficiency in decision making.3 The principal element that “integrates” an IFMIS is a common, single, reliable platform database or a series of interconnected databases to and fro, within which all data expressed in financial terms flow. Integration is the key to any successful IFMIS. In a nutshell, integration implies that the system has the following basic features; standard data classification for recording financial events, internal controls over data entry, transaction processing, reporting, a common process for similar transactions and a system design that eliminates duplicate data entry. Integration often applies only to core financial management functions that an IFMIS supports, but in an ideal world it would also cover other information systems within which the core systems communicate such as human resources, payroll, and revenue. At a minimum, the IFMIS should be designed to interface with these systems.

2. Financial Industry Module The purpose of the financial records module is to provide a management framework for the control of financial records as a vital resource for public sector financial management, economic policy development and planning. Again, the financial management module 1

2 3

Product that is factory-packaged and available for sale to either a company or to the general public. In the tech industry, off-the-shelf programs would be the opposite of custom software. Software that is specifically designed and programmed for an individual customer. Available at: http://www.techopedia.com/definition/981/integrated-financial-management-system-ifms (Accessed 05/08/2011).

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also assists records managers and non-records staff, including accounting and audit personnel, to manage financial records in support of public accountability and good governance. More importantly, it is to inform policymakers, and administrators associated with the financial management process, of the value of, and necessity for, the effective management of financial records. This module focuses primarily on the management of financial records in the public sector, with a particular emphasis on records created by central government agencies. It will also be relevant to local government agencies, and will have some relevance to semi-government and private sector organizations. In many countries records managers typically do not become involved in managing financial records as it is generally assumed that financial records management is the responsibility of accountants. However, accounting staff have rarely been introduced to records management principles and practices. They know what information they require and why, but seldom receive training on how it should be kept. Therefore, the care of financial records often falls into a gap between the two professions. This problem often extends through all financial management functions. The situation has important consequences for the capacity of countries around the world to manage public sector spending and to introduce measures to enhance accountability and transparency. Records managers have an important role to play in the care of financial records and this module aims to help them understand the functions and tasks involved. The module deliberately contains a large amount of material on financial management. There is considerable emphasis on the analysis of stakeholders or users on functions and processes and on information flows. Financial records are examined in this context. There are two reasons for including a high level of financial information in this module. First, in many countries there is no easy way for records managers to obtain this information, and unless they can speak the language of accountants and auditors, they will not be able to make an effective contribution. Second, financial systems are so complex that there is no way to teach records managers how to manage the records generated by these systems other than by equipping them with the tools to analyze the various components of financial systems and then to apply records management principles. The module does not seek to cover records management principles in any depth, as they are covered in detail in other modules. However, it does address records issues that specifically affect financial records. Whether in government, banks, small or large businesses or non-governmental organizations, the same concept forms the basis of today’s modern computerized accounting systems. Information technology is vastly changing the way information is captured, summarized and communicated, and the benefits of these technological advances should not be underestimated. However, the introduction of a new IFMIS should not simply be seen as a technology fix. It requires changes in management and organizational structures. It requires changes in workflows and also changes in roles and responsibilities. Business Process Re-engineering or Redesign (BPR) is therefore a critical aspect of any IFMIS reform. BPR is the main way in which organizations become more efficient and modernize. BPR transforms an organization in ways that directly affect performance since it analyses and redesigns workflow with in and between enterprises. This will require a review of all systems, functional processes, methods, rules and regulations,

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legislation, banking arrangements and related processes. New procedures will have to be established and standardized throughout government. New job descriptions will have to be formalized. The arrangements and systems for internal and external control of public financial management will have to be improved.4 To be clear, BPR is a continuous process, one that has to be institutionalized. To ensure that BPR remains a critical focus long after an IFMIS is put in place it can be integrated into a government’s internal control and internal audit functions as part of the risk management process. This will provide a formal framework for identifying risks, errors and potential instances of fraud, as well as a framework for responding to those risks.

3. Types of Financial Management Systms One system is not universally superior to the other. It depends on a number of country-specific factors. The degree of institutional development or contractual environment in the country (Tadesse, 2002) is a major factor. Financial integration may serve as a transitional phase in the evolution of a nation’s financial system, from relational bank based, to arm’s length in a market-based financial system. The degree to which the financial system of a country is relatively bank or market oriented depends. 3.1 Bank Oriented System In a bank-oriented financial system savings are largely transferred directly from those who generate them to those wishing to use them by the intermediation of banks. Banks are good monitors and are able to identify good projects, allowing stage-financing and encouraging risky investments. Bank-based systems outperform market-based systems in countries with weak institutional environment and in economies dominated by small firms. Germany, which has a tradition of universal banking, has a bank-oriented financial system. Bank-based systems promote growth in economies characterized by traditional, standardized, non-complex industries. It can therefore be argued that bank-based financial system architecture is more fitting to emerging economies.5 3.2 Market Oriented System In a market-oriented financial system, specialized financial institutions, including banks, financial markets and market intermediaries, cater to different financial needs. Capital markets are better for encouraging and funding innovation, we well as diversifying and managing risk. Market-based systems fare better in countries with a strong contractual environment and outperform bank-based systems in countries dominated by large firms. Britain, which has a functional specialization, represents a market-oriented financial system. Due to the size and nature, it works better in countries dominated by complex, knowledge-based industries. Developed economies are more fitting for this system. 4

5

In Pakistan, the move to a new IFMIS necessitated a complete reorganization of the supreme audit institution. Solomon Tadesse, Perspectives on Financial Integration and Financial System Architecture in Emerging Markets, 2005, Available at: http://webuser.bus.umich.edu/stadesse/FinancialIntegration.pdf (accessed 10/ 09/2011).

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III. Case Study of Financial Services Industry of Ghana 1. Types of Financial Services Industry The financial services industry encompasses a broad range of organizations that deal with the management of money. In Ghana, the financial services industry is categorized into three main sectors; banking and finance (including non-bank financial services and forexbureau), insurance, and financial market/capital markets. These financial markets have been developed in four different stages; 1) Colonial Era (up to 1960) 2) Centrally Planned and Closed Economy Period (1960-1983) 3) Structural Adjustment and Transition Period (1983-present) 4) Post Adjustment Period. 1.1 The Colonial Era During the colonial era, the colonial government restricted itself to monetary stability, and monetary growth was tied to export performance. The banking system was established with the objective of providing banking services for British trading enterprises and the British Colonial Administration. The first branch of a bank opened in 1896 and was known as the Bank of British West Africa Limited (BBWA). Its main objective was to import silver coins from the Royal Mint. Whileits objective was to provide banking and currency services to expatriate companies and the colonial administration, the bank also attracted the patronage of some indigenous African customers. From 19121957, the West African Currency Board (WACB) functioned as a central bank operating a Sterling Exchange Standard through a guaranteed convertibility of the West African pound to sterling. There were no exchange controls. The WACB did not have any central banking functions. It did not exercise control over the volume of currency or issue, neither could the Colonial Administration exercise any control over the currency supply. WACB operated as a bureau, exchanging West African currency for sterling and vice versa and accounting for such activities. In evaluating the financial system of this era relative to the attributes of an effective financial system, it was found that the financial system played a passive and limited role in promoting economic development. The primary function of the financial system was to provide essential currency infrastructure and the system which was in place led to the transformation of the colonial economy from a barter system to a modern currency system. Lastly, there were virtually no non-bank financial institutions. Though there were insurance companies, they were established by British6 companies, trading houses and banks to support their trade with the United Kingdom. The focus of the industry was generally on commercial risk coverage. There was no life insurance industry. In terms of the attributes of an effective financial system, this system only 6

They became colonial masters of Ghana which was then known as the Gold coast by the early nineteenth century. Available at www.ghanaweb.com/GhanaHomePage/history/ (accessed 29/01/12).

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satisfied the first attribute-that is the need for an efficient medium of exchange or monetary system. Incidentally, the concept of a currency board has been resurrected in a number of countries where the need is for a unit of exchange which has a stable value. The difference between the financial system of the colonial era and today’s dollar standard is that countries on the dollar standard have been able to develop a much wider range of financial institutions able to take on additional economic roles, particularly capital mobilization and the ability to transfer assets through financial markets. The beginnings of a financial system in Ghana that go beyond a monetary system can be seen from the period following the Second World War. By 1957, there were three banks: The Colonial Bank (now Barclays Bank), the British Bank of West Africa and the Bank of the Gold Coast. In addition, the Colonial Post Office Savings Bank offered more competitive grounds for the mobilization of deposits from the non-urban areas. The Bank of Gold Coast was chartered in 1952 and capitalized by the government of the Gold Coast. It was formed with the purpose of meeting the borrowing needs of the people. The three institutions offered the traditional banking services of documentary credit (letters of credit), discounting bills of exchange, and collection of remittances. In July 1954, on the initiative of the Bank of the Gold Coast, the first treasury bill issue was made with the bank acting as agents for the flotation. The bank also guaranteed to buy the bill at all times. This was the first attempt to create market securities. The treasury bill issue was for a total of £500,000 of three-month treasury bills issued at 3/8 of 1%. Since the government budget was in a substantial surplus, the sole aim was to create a local market for government securities, rather than to finance a government deficit. After independence, the Bank of the Gold Coast was renamed the Ghana Commercial Bank and a central bank, the Bank of Ghana, started operations in July 1957. 1.2 Financial Markets and Institutions in a Planned and Closed Economy 1960-1983 During the post-independence era, the government adopted a socialist development strategy under which the state was to be in control of all aspects of economic policymaking and implementation. This period was characterized by import licensing, which was instituted in November 1961. This regime of import licensing lasted until the Exchange Act of 1961 was imposed, embracing exchange controls over the entire range of economic activities in Ghana. Quantitative restrictions on interest rates and forced-lending programs, including requirements for banks to lend to sectors of the economy, were also considered priority areas by the government. The implementation of the provisions of the Exchange Control Act together with a system of import licensing turned Ghana into a closed economy. Within the banking sector, the Bank of Ghana became the pivot of all international banking activities whether these related to remittances, letters of credit, collections, allocation of foreign exchange, travel or tourism. In response to the changing macroeconomic environment, the Bank of Ghana Act (1963) was passed. The bank was required to submit a report to the government whenever money supply growth exceeded 15 percent for any year, stating the reasons for such a rise and recommending measures to contain the associated inflationary pressures. The Bank of Ghana was empowered to set ceilings on advances

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or investments by commercial banks, and was given powers to control the banking system. New credit control measures were introduced in 1964 to control and direct the granting of credit to be in accordance with the government’s economic policy. 1.3 The Structural Adjustment (Transition) Period 1983-1995 In 1983, the government adopted an economic recovery program which included devaluation of the currency, dismantling of most price and distribution controls, elimination of many subsidies, broadening of the tax base and improvement of tax collection. The restoration of macroeconomic balance was also brought in for the development of the foreign exchange market to maintain a free and flexible rate, fiscal policies designed to increase public savings and monetary policies to reduce inflation. From 1987, there was a gradual liberalization of the financial system and all sectorial credit allocations were diminished. With the last target for agriculture to be abolished by 1990, interest rate controls were gradually relaxed and full liberalization was achieved in February 1988. In November 1990, the Bank of Ghana released control of all bank charges and fees. A foreign exchange auction was also introduced in 1986 in addition to the granting of permission for the establishment of forex bureaus in 1988 (Mensah, 1997). 1.4 Policy Framework of the Financial Services Industry Extensive government intervention characterized financial sector policies in the post-independence period. Public ownership dominated the banking systems, which were set up between the early 1950s and late 1980s. Interest rates were administratively controlled by the Bank of Ghana and a variety of controls were also imposed on the asset allocations of the banks, such as sectorial credit directives. The motivation for these policies was the belief that, because of market imperfections and the nature of the financial system inherited from the colonial period, the desired pattern of investment could not be supported without extensive government intervention in financial markets. Policies were motivated by three objectives; to raise the level of investment, to change the sectorial pattern of investment, and to keep interest rates both low and stable. Financial sector policies were characterized by severe financial repression, real interest rates were steeply negative and most of the credit was channeled to the public sector (Gockel, 1995). The government established its own commercial and development banks for two reasons. First, the belief that the operational focus of the foreign commercial banks, in particular their lending policies, was too narrow and therefore deprived large sections of the economy of access to credit. And second, the contention that sectors important for development, such as industry and agriculture, required specialized financial institutions to supply their financing needs. Dissatisfaction with the foreign banks focused on their conservative lending policies, modeled on those employed in the UK, and in particular their demands for the types of security (life insurance policies, stock certificates, bills, etc.) which were uncommon in Ghana (Newlyn and Pawan, 1954). The Ghana Commercial Bank (GCB) was set up in 1953 to improve access to credit for local businesses and farmers. It was also instructed to extend a branch network into rural areas so that people there would have access to banking facilities. It was also heavily involved in lending to

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agriculture. GCB became the largest bank in Ghana and it had 36 percent of total bank deposits in the late 1980s. The Social Security Bank (SSB) was set up in 1977. It grew rapidly to become the second-largest bank in Ghana with 18 percent of deposits in the late 1980s, providing credit, including longer term loans, for businesses and consumers. It also invested in several large businesses. Two smaller commercial banks began operations in 1975. The National Savings and Credit Bank (NSCB), formerly the Post Office Savings Bank and the Cooperative Bank, was expected to provide consumer loans and credit for small industries and cooperatives. Merchant Bank Ghana (MBG) was set up in 1972 as a joint venture between ANZ Grindlays, the government and public sector financial institutions, with the former having a 30 percent stake.

IV. Methods and Analysis A ten year exploratory data analysis was conducted based on data collected on some economic indicators over this period. These indicators were selected because it is assumed that the IFMS is likely to affect the country’s economic development when its finances are managed using this system. The independent variables involved are sector resource allocations to seven ministries, namely Food and Agriculture, Energy, Trade and Industry, Finance and Economic Planning, Education, Health, and Foreign Affairs. The dependent variables are GDP and economic growth. In addition, job creation and human resource capital will also be assessed.

1. Exploratory Analysis 1.1 GDP Growth The table below shows the annual percentage GDP growth of Ghana from 2001 to 2010. Table 1: Annual GDP Growth of Ghana from 2001 to 2010 YEAR

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

GDR (US$)

38.4

30.2

32.4

39.3

42.4

46.5

50.9

56.4

59.3

64.6

Source: Ministry of Finance and Economic Planning (2010).

The table above shows that GDP dropped from US$38.4 to US$30.22001/2002 financial year, representing a drop of 21.4 percent. This may be attributed to a decrease in cocoa prices, a fall in the price of gold, increasing inflation, unstable foreign exchange rate etc. However, since 2002 GDP has been increasing steadily, as depicted in Table 1 above and Figure 1 below. The graph plots the GDP of Ghana for a 10 year period (2001-2010). GDP was down in the 2001/2002 financial year, possibly due to falling prices of commodities and unfavorable foreign exchange rates.

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Figure 1: Line Graph of Ghana’s GDP in 2001-2010 GDP of Ghana: 2001-2010

1.2 Economic Growth Figure 2 below shows the annual economic growth rate of Ghana after resources allocation to the various sectors of the economy. It is observed that economic growth increased from 2001-2010 (4.2% to 5.7%). Growth rate increased from 4.2% in 2001 to 6.4% in 2007. It picked up in 2008, peaking at 8.4%, but dropped again in 2009. From2010, the economic growth rate began increasing again. Figure 2: Line Graph of Ghana’s Economic Growth in 2001-2010 Economic Growth of Ghana: 2001-2010

Source: Ministry of Finance and Economic Planning (2010).

One would have expected that economic growth would have dropped in 2008 due to the financial crises but it did not. This was attributed to the performance of Ghana’s agricultural and industrial sectors.

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Figure 3: Line Graph of Ghana’s GDP and Economic Growth in 2001-2010 GDP and Economic Growth

70

GDP EG

60

Q U AN TITY

50 40 30 20 10 0 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YEAR Source: Author’s construction.

While GDP increased from 2001 to 2010 it had a limited impact on economic growth (Figure 3). A number of ways of measuring national progress have been proposed, developed, and used to address this growing realization that GDP is a measure of economic quantity, not economic quality or welfare, let alone social or environmental well-being. The measures also address the concern that emphasis on GDP encourages depletion of social and natural capital and other policies that undermine quality of life for future generations. Today, GDP in particular, and economic growth in general, is often referred to by leading economists, politicians, top-level decision-makers and the media as though it represents overall progress. Contrary to this notion, a report by the World Bank showed that only long-term high rates of GDP growth, specifically, a doubling of GDP each decade can solve the world’s poverty problem (Commission on Growth and Development, 2008) 1.3 Resource Allocation Table 2 gives a summary of resources to some major ministries7where GIFMIS is directly being implemented. The Ministry of Education is most often the largest beneficiary of resources allocation. It received 42.2% of the total allocation. It was followed by the Ministry of Health (25.8%), the Ministry of Energy (12.1%), and the Ministry of Food and Agricultural (7%). The Ministry of Finance was allocated 5.4% over the 10 year period. Sixth and seventh were the Ministry of Foreign Affairs (4%) and Ministry of Food and Agriculture (3.0%). The Mean ( X ) resources allocation are as follows in terms of GH¢.8 7

8

They are termed as major according to this study since the assumption is that the use of Integrated Financial management system if used in these selected sectors can affect economic development. This is the symbol for Ghana currency.

The Impact of Integrated Financial Management System on Economic Development • 73

Table 2: Resource Allocation to Main Sectors MINISTRY 2001

2002

Food and 45.38 Agriculture

35

2003

2004

2005

2006

14.2

18

Health Foreign Affairs TOTAL

4.22

6.99

16.54 20.05

2008

2009

2010

87.1

80.03

95.67

567.96

75.86 89.19

41.93 39.44 64.29 68.21 120.61

Energy 2.07 6.52 14.9 18.82 41.18 51.59 Trade and 7.2 8.69 10.27 14 21.02 21.76 Industry Finance and Economic 13.92 23.47 23.12 27.94 44.91 58.49 Planning Education

2007

TOTAL MEAN

%

256.87

83.89

7.0

317.24

329.78

144.57 12.1

60.02

72.3

65

35.61

3.0

90.57

146.68

125.05

64.33

5.4

27.76 34.66 42.95 82.79 113.22 1,264.90 1,693.74 1,729.45 502.17 42.2 11.55 14.49 24.53 47.87 563.76 21.8

47.42 51.17 53.05

67.86

752.23

921.93

726.87

307.44 25.8

72

73.11

105.38

52.84

103.53 118.72 151.33 196.77 290.05 383.76 1126.17 2894.78 3305.03 3338.4 1,190.85 100

Source: Ministry of Finance& Economic Planning (2010).

Ministry Food and Agricultural Ministry of Energy Ministry of Trade and Industry Ministry of Finance and Economic Planning Ministry of Health Ministry of Education Ministry of Foreign Affairs

GH¢ 83.57 million GH¢ 144.57 million GH¢ 35.61 million GH¢ 64.33 million GH¢ 307.44 million GH¢ 502.17 million; and GH¢ 52.84 million

Figure 4 shows the resource allocation as percentage with the Education Ministry the largest beneficiary, and with trade and industry receiving the lowest resources.

PERCENTAGE ALLOCATION (%)

Figure 4: Percentage Allocation of Resources in 2001-2010 50 42.2

40 30

25.8

20 10

4.4

7

12.1 3

5.4

Trade and Industry

Finance & Economic Planning

4.4

0 Food & Agriculture

Energy

MINISTRY Source: Author’s Construction.

Education

Health

Foreign Affairs

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To further identify the various impacts made by each sector to the economy, we conduct basic statistics analyses with the independent and dependent variables designated as: • • • • • • • •

Ministry of Food and Agriculture Ministry of Energy Ministry of Trade and Industry Ministry of Finance and Economic and Planning Ministry of Education Ministry of Health Ministry of Foreign Affairs The dependent variable is The Gross Domestic Products (Y).

X1 X2 X3 X4 X5 X6 X7

Table 3: Descriptive Analysis Variable X1 X2 X3 X4 X5 X6

DESCRIPTIVE STATISTICS (INDEPENDENT VARIABLES) Count Percent Mean SE Mean StDev CoefVar 10 100 83.9 21.0 66.3 79.01 10 100 144.6 61.2 193.5 133.87 10 100 35.61 9.11 28.81 80.91 10 100 64.3 14.7 46.5 72.20 10 100 502 235 743 147.86 10 100 307 121 383 124.57

Skewness 2.33 1.45 0.46 0.68 1.13 0.65

Note: Author’s construction.

From Table 5 it is observed that the resources allocated to the Ministry of Foreign Affairs have the most closely related figures. It is followed by the Finance and Economic Planning, Food and Agricultural, Health, Energy and Education respectively. This measure of dispersion is mainly due to increases and decreases in the resource allocations to each sector as a policy decision. 1.4 Summary GDP, as we have seen, has been increasing steadily within the period under review except in 2002 where it declined. However, there have been fluctuations since 2001. It can therefore be observed that the level of economic growth did not grow as high as that of GDP’s increase. Therefore, increases in GDP cannot be seen clearly in economic growth, if at all. Furthermore, the percentage of resources allocation is very wide. It is hoped that these differentials should be reflected in their individual contribution and impact on GDP.

2. Further Analysis To further examine the impact of each ministry in terms of its contribution to GDP, we used Minitab 15 and MS Excel as statistical tools to perform inferential

The Impact of Integrated Financial Management System on Economic Development • 75

analysis of the data. The variables were used to conduct Multiple Linear Regression analysis and the results are shown in Figure 5. Figure 5: Multiple Linear Regression Analysis. Analysis of Variance Source DF Regression 7 Residual Error 2 Total 9

SS MS 1446.04 206.58 2.22 1.11 1448.26

F 185.69

P 0.005

Regression Analysis: Y versus X1, X2, X3, X4, X5, X6, X7 The regression equation is Y = 22.1+0.0069X1+0.0182X2-0.270X3+0.2169X4-0.0098X5+0.0140X6+0.302X7 S = 1.05474

R-Sq = 99.8%

R-Sq(adj) = 99.3%

Note: Author’s construction.

Test of Hypothesis Ho: Resource allocation has no significant impact on GDP H1: Resource Allocation has a significant impact on GDP We test at α = 0.05 From the inferential analysis of Ho (P-value < α = 0.05), we conclude that the resource allocation has a significant impact on GDP. The Regression Equation (Figure 5) that emanates as a result is shown below Y = 22.1+0.0069X1 +0.0182X 2 -0.270X 3 +0.2169X 4 -0.0098X 5 +0.0140X 6 +0.302X 7

… [Model 5.1], such as the P-value of the Regression ANOVA, R2_Adjusted (i.e. 99.3 percentage), have pointed out that the Regression Model is capable of explaining an overwhelming large variation in the data. It is observed from Figure 5 that the intercept is highly positive and of higher magnitude than the absolute coefficients of the regressors. Assuming all regressors could not contribute to GDP, the total GDP, Y, will be US$22.1 billion. This model can be used to forecast the probable contribution of each ministry to GDP and the total GDP from the day resource allocations were made by the central government. This model will serve as a guide for policymakers and analysts as to what can be expected in terms of Ghana’s GDP in a particular year. It is deduced from Figure 5 that the Ministry of Food and Agriculture, X1, has added US$0.0069 billion to GDP (millions), keeping other things constant. In the same vein, a unit increase in the Ministry of Energy allocation, X2, will add US$0.0182

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billion to GDP, keeping other things constant. The Ministry of Finance and Economic Planning, X4, will add US$0.219 billion to GDP, while a unit increase in the ministries of health, X6, and foreign affairs, X7, allocations will respectively increase the GDP by US$0.014 billion and US$0.302 billion. The Ministry of Foreign Affairs performed remarkably well. Despite being the sixth least recipient of resource allocations it had the biggest contribution to GDP. This is because, as indicated, we look at returns on investment and this sector deals with the country’s international relations. This is the sector where donors and investors channel their funds in case they want to have any dealings with the economy. The effectiveness of this sector to the outside world therefore makes it a major contributor to GDP growth of the economy. The Ministry of Education, X5, received the largest resource allocation but conversely reduces GDP by US$0.0098 billion when its share is increased by one unit. This might be due to the fact that about 80% of Ghanaian students are in humanities whereas science and technical skills have few students. As a result, the potential of science to increase innovation and prevent the country from importing experts from foreign countries and saving the country millions of dollars is not utilized to the fullest. From the analysis it was observed that the Ministry of Trade and Industry, X3, reduced GDP by US$0.302 billion when there was a unit increase in its resource allocation. This ministry received the least resource allocation within the period under review. This may be attributed to the fact that the industrial sector of Ghana is not well developed enough to contribute to GDP growth. Most of the industries are made up of start-ups and are even in number. In addition, the products manufactured by these companies are primary products which do not yield much return, such as tomato and chocolate factories. While there are cement companies as well as oil and gas refineries, they need to be improved and maintained. In summary, the ministries of food and agriculture, energy, finance and economic planning, health, and foreign affairs have a significant positive impact on Ghana’s GDP in the period under review. The ministries of trade and industry, and education have a significant negative impact on Ghana’s GDP in the period under review.

V. Findings, Discussions and Conclusions It is deduced from the above results that some sectors of the Ghanaian economy contribute immensely to GDP whereas others contribute in a less significant way. This may prove that modern governments must design an economic policy better suited to the needs of the country and then manage its economy according to that policy. Much of a country’s economic performance depends on the efficiency of the public and private sectors, but it can also be influenced by the government’s fiscal policies, interest rates and regulatory environment. The government itself is a major component of a nation’s economy. Public sector expenditure has an impact on the stability of the overall economy. Governments can improve their capacity to manage the economy by introducing reforms in treasury, budget preparation and approval procedures. GIFMS is critical to the success of the public sector, where the rendering of

The Impact of Integrated Financial Management System on Economic Development • 77

accounts to public scrutiny is key to accountable governance. The GIFMS will therefore make an important contribution to government, particularly in the areas of accountability, ensuring resources are tailored towards the objectives and needs of the economy. Accountability is fundamental to good governance. It is the process by which the people can measure and verify the performance of the government. Financial accountability is a critical component of accountable governance. It involves legislative control of the executive through budgets controls. Weaknesses in financial accountability are generally linked to weaknesses in public accounting procedures, expenditure control, cash management, auditing and management of financial records. An enhanced level of control over financial management is vital for governments to maintain their commitment to their citizens. Public sector financial management has been the focus of increasing attention in recent years. Reductions in public expenditure have pressured public authorities to maintain services with less money. To achieve cuts, financial managers have had to improve their financial analysis as a basis for improving efficiency and value for money. Traditionally, the financial management system in government has focused on controlling expenditure, with the main emphasis on keeping public spending down to minimize borrowing. However, private sector financial management techniques have increasingly been brought into the public sector. For example the National Audit Office often carries out ‘value for money’ audits, which look beyond whether the money was spent according to the government’s financial regulations to whether the public is getting an economic, efficient and effective service. In other words, the financial system in government is changing from systems designed to keep it from spending too much into systems that ensures the government makes the best use of resources. The financial management system therefore ensures that money is allocated in accordance with the government’s strategic priorities. This is achieved by controlling the budget approved by the legislature and is reinforced by the publication of audited accounts of what was actually spent. From the analysis, Ghana’s GDP and economic growth is moving in the opposite direction. This phenomenon has shown that GDP as a measure of progress is the ‘threshold effect.’ Postulating that, as GDP increases, overall quality of life often increases up to a point. Beyond this, increases in GDP are offset by the costs associated with increasing income inequality, loss of leisure time, and natural capital depletion (Max-Neef, 1995; Talberth, Cobb et al., 2007). An increasingly large and robust body of research confirms that, beyond a certain threshold, further increases in material wellbeing have adverse effects of lowering community cohesion, healthy relationships, knowledge, wisdom, a sense of purpose, connection with nature, and other dimensions of human happiness. This indicates that while Ghana’s GDP has been increasing at a relatively fast pace, only some aspects of the economy make progress while other sectors do not. Looking at the energy sector and its contribution to the economy with respect to the discovery of new oil reserves, oil funds have been seen as an important precursor to “Dutch Disease” and could pose a serious challenge to Ghana’s economic development. While oil money may help in the short term, the funds are not sustainable in the longer term. Humphreys and Sandby (2007) note that for such funds to be effective three things are necessary: (i) withdrawal decisions should be regulated by clear rules rather

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than general guidelines; (ii) key decisions should be made by broad bodies representing the interests of diverse political constituencies; and (iii) there should be high levels of transparency governing their operation. Any transaction that includes transfers to oil funds should be part of a transparent budget process. São Tomé, which adopted a revenue law in 2004, provides perhaps the clearest example to date of how this can be done. Increasing transparency both through additional mechanisms and beyond is perhaps the most powerful set of actions that a government can take to ensure good management of oil revenues beyond a general commitment to the principle of transparency. The experiences of Texas, Alaska, Peru and Brazil can offer many lessons, including the need to clarify precisely how a specific percentage of the rents (income) will be used to fund projects in specific sectors, that companies and government report royalties received, that government revenues are regularly published, that the number and identity of bidders for concessions are disclosed, that bidding documents are published, and that auctions are conducted. For future contracts, Ghana may also want to consider international competitive bidding to, as Collier (2006) notes, address the power asymmetry that exists between large oil companies and developing countries. As Ghana reviews its final draft of a freedom of information bill, which is currently with Justice Crabbe, it will be important to consider and/or incorporate aspects of this bill to improve transparency and accountability in its financial system. In conclusion, implanting Integrated Financial Management System measures and procedures into Ghanaian institutions will no doubt lead to better accountability. The long-term benefits of this will be an improvement in economic development and poverty reduction for the Ghanaian people. Based on the analysis above, we can draw certain conclusions. First, Ghana currently lacks adequate human resources to fully implement the IFMS. Secondly, current institutions are too weak to fully implement all the measures required by adopting the system. Implementation is resource consuming and Ghana currently lacks these resources. These problems can be overcome through the mobilization of the few resources currently available in order to implement the system, which in the long term will be beneficial to the country. In addition, technical assistance and capacity building initiatives by development partners including the African Development Bank (AfDB) can help mitigate some of these problems. In line with this objective, the government is currently developing a comprehensive national capacity building strategy to coordinate and fully implement the system. Estimates from the IMF for 2008 to 2014 showed that GDP increased from 4.7% in 2009 to 5.7% in 2010. GDP is projected to be 13.7% in 2016. In order to maintain the momentum, as indicated in its Ghana’s Shared Growth and Development Agenda (GSGDA), major focus areas of the government should be enhanced growth, macroeconomic stability and job creation, improvements in public financial management, and promoting a good business environment. Despite the prospects of increased revenues from oil and other exports such as cocoa and gold, Ghana still needs development assistance due the large deficits in its economic and social infrastructure. The GSGDA and the new Aid Policy Paper reiterate Ghana’s need for continued Official Development Assistance and budget support through the effective implementation of the GIFMIS.

The Impact of Integrated Financial Management System on Economic Development • 79

The following guidelines may help remedy the chronic problems of financial mismanagement in Ghana. First, the government should introduce reforms in critical areas such as the treasury and budget preparation. This will help it plan effectively and manage judiciously. Secondly, the government should ensure proper record keeping of expenditures in all areas. Keeping proper records of government expenditures will ensure transparency and accountability and help prevent corruption. Thirdly, concerted effort should be made into the design stage of an IFMS to capture all possible areas of government revenues such as oil and gas as well as other traditional exports like gold and cocoa. An independent body should be created and tasked with the responsibility to ensure that the rules are followed to the letter to prevent waste. Last but not least, specific realistic targets have to be set. Thereafter secondary targets can be set rather than putting them all together, since resources are limited and huge targets are not realistic. This will help avoid the mistakes made during the first implementation of the IFMS during the 1990s. Finally, these recommendations can work effectively only if there is genuine commitment from the leadership. Political leaders should ensure transparency and accountability in the implementation of the IFMS. This will go a long way to promoting growth and prosperity in Ghana.

References Antoun, M. and R Schware. “Informatics in Africa: Lessons from World Bank Experience,” World Development 20, 1992: 1737-1752. Casals and Associates. Integrated Financial Management Systems Best Practices: Bolivia and Chile, funded under USAID Contract AEP-I-00-00-00010-00, Task Order No. 01 Transparency and Accountability, 2004. Collier, P. “Financial liberalization,” In Adjustment and development: the experience of the ACP countries, edited by Guillaumont, P., and Guillaumont, S., Paris: Economica, 1994. Demetriades and Liuntel. Financial repression and financial deepening and economic growth: Evidence from India, Working Paper in Economics, 1994. Gershenkron. Economic backwardsness in historical perspective, 1962: 5-30. Gockel, F. A. “The Role of Finance in Economic Development: The Case of Ghana,” PhD Thesis, University of Manchester, 1995. IDA and IMF. Update on Implementation of Action Plans to Strengthen Capacity of HIPCs to Track Poverty-Reduction Spending, IDA and IMF, March 7, 2003, IDA/R2003-2004, 2003. Levine and Zervos. “Stock Markets, Banks and Economic growth,” American Economic review 88(3), 1998. Lynnette, M. A. Integrated Financial Management Systems: Experiences in Latin America, World Bank, Washington DC, 1994. Max, N. M. “Economic growth and quality of life: a threshold hypothesis,” Ecological Economics 15(2), 1995: 115-118. McKinnon, I. R. Money and Capital in Economic Development, Washington, DC:

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Brookings Institution, 1973. Peterson, B. S. “Making it Work: Implementing Effective Financial Information Systems in Bureaucracies in Developing Countries,” Harvard Institute for International Development, Development Discussion Paper 447, 1993. Republic of Ghana, Implementation of Growth & Poverty Reduction Strategy (GPRS II-2006-2009), 2009 Annual Progress Report. National Development Planning Commission, 2009. Republic of Ghana. Implementation of Growth and Poverty Reduction Strategy (GPRS II-2006-2009). 2009 Annual Progress Report. National Development Planning Commission, 2009. Republic of Ghana, “Public Expenditure and Financial Accountability 2009-Public Financial Management Performance Assessment Report,” Central Government I, 2010, ECORYS Macro Group, Rotterdam January 2010. Stiglitz, J. Globalization and its discontents, Penguin, Published by W. W. Norton and Company, 2003. Talberth, J., C. Cobb and N. Slattery. The Genuine Progress Indicator 2006: A Tool for Sustainable Development, Oakland, California: Redefining Progress, 2007. World Bank. Financial Sector Review, World Bank, Washington DC, 1986. World Bank. Public Financial Management (PFM) Reform database, materials on PFM automation and IFMIS, World Bank, 2008. World Bank. “External Review of Ghana 2009 Public Expenditures and Financial Management,” World Bank 1, 2009, Main Report, PREM 4 Africa Region.

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